Loan Note: Ten ways private debt is changing; the shrinking CLO universe

Ten ways in which private debt is changing – we have this and other highlights in our newly published September 2020 issue. Plus, a shrinking CLO universe and signs of hope for direct lending. Here's today's brief for our valued subscribers only.

They said it

“KLP is pleased to see that Brunswick’s third senior debt fund will have increased attention to environmental aspects of buildings through its green framework. We particularly welcome the focus on providing incentives that may increase the environmental performance of existing buildings.”

The growing importance of ESG in fund offerings is evident as Aage Schaanning, chief financial officer at Norwegian pension KLP, comments on his organisation’s commitment to Brunswick Real Estate’s latest debt fund (see here).

First Look

Download our September issue for views on a crisis 

There can be little doubt what the main talking point has been in 2020. But how has the covid-19 pandemic affected private debt? In the September issue of Private Debt Investor, which can be downloaded here, we sought to find out by getting the thoughts of 10 asset class professionals.

The articles are all fascinating views of how private debt has been shaped by the crisis so far, and what it might mean in the months and years ahead. Just a few examples: Abhik Das of Golding Capital Partners sees private debt firms providing meaningful competition to the leveraged loan market; Bev Durston of Edgehaven believes central bank intervention has distorted the traditional distressed cycle; while Dan Zwirn of Arena Investors speculates (with some scepticism) on the future of sponsor/lender relationships. One thing is for sure: things will never be quite the same again.

The issue also includes our usual wide range of features and analysis, through which we reveal the current most popular sectors, why things are looking up for venture debt, and what is attracting LPs to private debt.

A smaller universe for CLOs

“Fewer assets and a complex challenge of selecting creditworthy loans.” That’s the picture painted of the European collateralised loan obligation market in a new report from S&P Global Ratings (see here).

With the loan universe becoming a smaller subset since the viral outbreak, the report finds that the average overlap of loans in European CLOs since mid-March stands at almost 38 percent, which is nearly 3 percent higher than the average for all European CLOs rated by S&P Global Ratings, including those issued before the outbreak.

Direct lending index bounces
The first quarter may have been something of a bust, but the Cliffwater Direct Lending Index recovered some ground in the second quarter, to post a total return of 3.25 percent. Nevertheless, as of 30 June, the CDLI had about 8 percent of unrealised losses that will either be reversed in future quarters or transformed into realised losses.

As expected, senior-only loans, as measured by CDLI-Senior, outperformed the total index during the market turbulence, rising 4.73 percent for the second quarter and 4.09 percent for the trailing four quarters.

Data snapshot

Asian SMEs consider alternatives. Small and mid-sized companies in Asia Pacific obtain their funding from a range of sources, according to a data point from EY. Although bank finance is the most popular option, it accounts for less than a third of the total. Alternative assets firms account for almost a quarter.


PAG targets Asian direct lending 

PAG, the Asia-focused alternative investment firm, has added $1.5 billion to its pool of investible capital for private debt this year.

Following on from November’s $1 billion closing of its Special Situations Fund III, PAG’ $1.5 billion Loan Fund IV is the latest private debt fund to target direct lending opportunities arising from corporates in Asia-Pacific.

PAG’s debt financing types include asset-backed loans, mezzanine loans and mortgages, with terms ranging from three months to seven years. Both funds fall within PAG’s Absolute Returns strategies, overseen by Chris Gradel, the firm’s chief investment officer and co-founder.

M&G ramps up origination 

UK investment group M&G’s asset management arm M&G Investments has built up a local origination team for its Asia-Pacific expansion.

Led by Matthew O’Sullivan, who relocated to Singapore from London in 2019, the Asia-Pacific origination team has invested nearly $500 million, focusing on consumer lending and trade financing investment opportunities. Key markets in the region include Australia, Hong Kong, New Zealand, Singapore, Japan, Taiwan and South Korea.

O’Sullivan says his team is looking to enter new markets such as India and China. However, he is showing some caution as it’s not simple to understand how these economies will perform and recover from the pandemic-led disruptions.

Read more about M&G Investments’ regional expansion here.

LP Watch

Institution: New York State Common Retirement Fund
Headquarters: Albany, US
AUM: $216.3bn
Allocation to alternatives: 21.5%

New York State Common Retirement Fund has agreed to commit $150 million to Castlelake Aviation IV Stable Yield Opportunities, according to the pension’s July 2020 monthly investment disclosure report.

Castlelake Aviation IV is a closed-end aviation assets fund focused on acquiring, managing and leasing in-production, mid-life aircraft and engines.

The pension fund’s recent commitments are to vehicles focused on the real estate, corporate and infrastructure sectors within the Asia-Pacific, North America and Europe regions.

Today’s letter was prepared by Andy Thomson with John BakieRobin Blumenthal and Adalla Kim.

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