Loan Note: US default rate down; reflections on proposed AIFMD changes

The US default rate takes an unexpected dip. Plus: the ups and downs of the proposed AIFMD changes; and the tone of credit is positive, says Man GLG. Here’s today’s brief for our valued subscribers only.

First look

Default rate drops, especially for larger firms
Just when the US private credit default rate appeared to be tracking predictions of a steady increase, the latest survey from law firm Proskauer has shown a surprising decrease. The question now will be whether this is a one-off blip or a sign that the asset class has already weathered the storm – much as it swiftly did in the aftermath of the first covid outbreaks.

The Proskauer Private Credit Default Index for the second quarter of this year showed a drop in the overall default rate to 1.64 percent from the previous quarter’s 2.15 percent, following two successive quarters in which the default rate rose.

The decline was particularly notable among larger businesses, with the rate dropping to 0.8 percent for companies with EBITDA at the time of loan origination of more than $50 million. The rate for such companies was 2.6 percent in the first quarter of the year.

Companies with between $25 million and $49.9 million of EBITDA saw their default rate go down from 2.0 percent to 1.6 percent, while only smaller companies saw an increase – those with less than $25 million of EBITDA saw the rate climb slightly from 2.0 percent to 2.1 percent. Of relevance here is that smaller companies are more likely to have a greater number of financial covenants.

The survey revealed a big drop in defaults for the hard-hit consumer goods and services sector, falling from 8.0 percent in the first quarter to 5.3 percent in the second. Other significant falls were seen in manufacturing (1.3 percent), healthcare/life sciences (1.1 percent) and business services (0.7 percent).

The index tracks senior-secured and unitranche loans in the US. The Q2 2023 Index included 977 active loans, representing $144.9 billion in original principal amount.

AIFMD changes a ‘mixed bag’
While describing them as a “mixed bag”, changes proposed in the Alternative Investment Fund Managers Directive review have been broadly welcomed by trade bodies.

Political agreement was reached last week on reforms to delegation and liquidity management, which the Alternative Investment Management Association and Alternative Credit Council said “remain targeted and validate established practices that both policymakers and asset managers agree work well”.

AIMA/ACC noted that asset managers will continue to benefit from the ability to delegate portfolio or risk management to third parties “albeit with more requirements on substance and greater transparency to regulators regarding delegation arrangements”. In addition, they said firms will be subject to tighter restrictions around liquidity risk management.

The agreement also includes new rules for loan origination funds (LOF) aimed at addressing financial stability concerns. The main purpose was to try and ensure that LOFs that lend on a cross-border basis would do so based on a single set of European Union rules. The upshot is that LOFs will face higher levels of regulation when it comes to liquidity risk management, leverage and retention of loans to avoid “originate to distribute” models.

New leverage limits for LOFs will likely be put in the legislation, set at 175 percent of NAV for open-end funds and 300 percent of NAV for closed-end funds.

The changes are provisional, with nothing confirmed until the legal text is finalised and published. Member states and the European Commission will then have 18 months to integrate the directive into national law.

Jiri Krol, deputy chief executive officer and global head of government affairs at AIMA, welcomed the new rules on delegation, liquidity risk management and passporting for LOFs as “relatively sensible”. However, he said restrictions such as those on leverage limits were “difficult to justify”.

“As usual, it’s a mixed bag and we hope the positive elements will outweigh the negatives,” he added.

Credit stays calm in the storm
“What comes next for credit?” is the question posed by investment manager Man GLG in its Q3 2023 Credit Outlook. On the whole, the answer seems to be positive – especially if your focus is Europe.

“Despite the rate rises, and at this stage of the economic cycle, the credit markets remain much calmer than might be expected,” reads the report. “There is a reasonably positive tone to the markets: yes, inflation remains sticky, but attractive all-in yields and low default rates are maintaining the attractiveness of credit.”

The firm says talk of the turning of the credit cycle has been around for some time, but that the resilience shown has been surprising, including in the lower-quality portions of the loan and high-yield bond markets. However, it does expect tightening monetary policy and reduced bank lending will still lead to pressure on this part of the market.

Within fixed income, Man GLG expresses a “clear preference” for European credit over US credit given the downturn in commercial real estate and deposits flowing out of US banks, which “face a number of headwinds”. European banks “remain in a stronger position and can manage despite the headwinds of a slowing economy”.

The report notes that the leveraged loan and CLO markets have shown robust performance in the year to date, with the regional banking woes having been shrugged off. However, central bank policy, reduced bank lending and signs of a slowdown in manufacturing are all reasons for a cautious approach, according to Man GLG.


New head of opportunistic private credit at Nomura 
Steve Kavulich has joined Nomura Private Capital as managing director and head of opportunistic private credit, after eight years at BlackRock as portfolio manager and investment committee member.

NPC, according to its website, is a wholly owned subsidiary of Nomura Holding Company America, which in turn belongs to the global financial group Nomura, created in Japan in 1925.

Kavulich will work out of Nomura’s New York office, and said in a statement that his own strategic vision aligns with that of Robert Stark, the chief executive officer of NPC, and Matt Pallai, the chief investment officer. “I look forward to working with them and the rest of the team to further build out NPC’s investment management business in the Americas.”

NPC launched a closed-end interval fund earlier this year, the Nomura Alternative Income Fund. Kavulich will assist with the further build-out of its investment management business in the Americas, according to the statement on his hiring.

ORIX USA hires debt origination veteran 
Tatianna Yale has joined the municipal and infrastructure group at ORIX Corporation USA as a senior director. She will focus on loan origination.

Yale joins from Texas Medical Center, where she was chief investment and planning officer, implementing a financial strategy that involved infrastructure, real estate and venture capital. She worked at TMC for a little more than three years, according to her LinkedIn page.

Prior to TMC, Yale spent more than a decade at Citigroup, where she most recently worked closely with municipal issuers and non-profit clients to capture infrastructure and real estate opportunities.

Rob Wetzler, head of the municipal and infrastructure group at ORIX USA, said: “Tatianna’s expertise in debt origination and underwriting, as well as her work with state and local officials on strategic financing transactions, will be invaluable as we continue to provide customised capital solutions for our clients.”

ORIX USA’s family of companies – ORIX Advisers, ORIX Capital Partners, Signal Peak Capital Management, Boston Financial, Lument, Real Estate Capital and NXT Capital – had as of March 2023 approximately $27.4 billion in AUM, as well as $47.1 billion in servicing and administration assets and approximately $10.6 billion in proprietary assets.

Double hire for Precede
Precede Capital Partners, the London-based real estate development lending platform, has expanded its credit team through the appointments of Michael Berditchewsky as associate director and Lukas Kielius as associate. They will report to chief credit officer David Jerrard.

Berditchewsky joins from LaSalle Investment Management, where he was most recently vice-president in the debt investments team and was involved in the origination, underwriting and execution of whole, junior and development loans. Prior to LaSalle, he worked for pan-European investment and asset manager Aerium.

Kielius joins from CBRE Investment Management, where he worked as a senior investment analyst for EMEA credit strategies, helping oversee senior and whole-loan credit strategies and working across deal origination, underwriting and execution, from financing assets through to stabilisation. Prior to CBRE, he was part of the real estate debt finance team at HSBC.

Since launching in March 2021, Precede has originated and arranged loans totalling almost £1.7 billion ($2.2 billion; €2 billion).

LP watch

Institution: Quincy Retirement System
Headquarters: Quincy, US
AUM: $810.05 million

Quincy Retirement System has made a commitment of $4 million to Torchlight Debt Fund VIII, according to recently published meeting minutes.

The fund launched in May 2022 and held a first close in December 2022 on $858.25 million. The real estate sector-focused fund has a senior debt strategy that covers the North American region.

Platinum subscribers may click here for the investor’s full profile, including key contacts, allocation strategy and fund investments.

Today’s letter was prepared by Andy Thomson with John Bakie, Christopher Faille and Robin Blumenthal contributing