Mid-market lending: Aflac banks on floating senior debt

NXT Capital and Aflac had been in talks for months about the asset manager running a separately managed account of senior loans for the insurance giant by the time they sealed the deal at the end of March.

For Columbus, Georgia-headquartered Aflac it is a unique manoeuvre in the private debt market. Chicago-based NXT Capital will manage loans on behalf of Aflac’s Japan account, capitalising on rising interest rates in the US as a hedge against fluctuations in the yen.

Aflac initially allocated $500 million for a floating rate debt portfolio, with an expectation the programme would grow significantly over time, Robert Radway, chairman and chief executive at NXT, tells PDI. This total has since expanded to $600 million.

Radway, whose firm has $9 billion in committed capital, notes it was a “mutual attraction” between the two firms that sealed the deal after months of due diligence requests, establishing investment guidelines and addressing documentation.

“Typically, programmes the size of Aflac’s also have more tailored reporting requirements and therefore take longer to document and make operational,” Radway says, adding that NXT was unlikely to be the only player in the race. “I’m sure there were other firms that Aflac was exploring for this, other capabilities and other managers in the process. I’m not sure exactly who, but they have a very disciplined and rigorous process in terms of manager selection.”

But for both firms, the deal is well worth the wait. For Aflac, NXT is an access point into the private debt market, while for NXT, Aflac is a potential SMA client that will continue growing.

Aflac also likes that the asset manager led most of its transactions and has a platform that was sizeable and global enough to meet its financial needs. Aflac Global Investments, the asset management division of Aflac Incorporated, will finance the debt portfolio out of the Japan general account – Aflac Global Investments was managing more than $110 billion across Aflac Japan and Aflac US at the end of Q1.

“Aflac made a strategic asset allocation decision to utilise floating-rate assets as a core part of its hedged US dollar programme for Aflac Japan,” Eric M Kirsch, executive vice-president and chief investment officer at the insurance conglomerate, said in March.

Aflac Japan is the insurer’s largest earnings contributor, according to its fourth quarter 2016 earnings report. For the full 2016, the Japan account’s premium income was $13.5 billion, significantly above the full-year premium income of Aflac US, which was $5.5 billion. On top of the portfolio of floating-rate loans targeting the mid-market, the agreement – as with most NXT Capital deals – involved Aflac taking a minority stake in the asset manager worth $51.2 million.

Radway says the firm’s focus on secured senior debt transactions, particularly floating rate, is the most significant aspect that attracted Aflac. Like other NXT investors, the insurance company wanted to invest floating rate senior debt as a hedge against higher interest rates, as its coupon is tied to the 30-day or 90-day LIBOR index, he told PDI in March.

This preference for senior debt echoes what many larger insurance companies say they need in their private debt portfolios. Insurance companies tend to have a lower risk tolerance “given the nature of their insurance-based liabilities and therefore are more comfortable with a straight senior debt product, compared to some pension plan investors”, he adds.

Pension plans typically invest across a more diverse array of alternative asset classes, including private equity, mezzanine, distressed debt, infrastructure, real estate equity and other opportunities. “We see a typical pension more disposed towards our commingled funds, rather than SMAs,” notes Radway.

Otherwise, insurance company clients that NXT has dealt with do not differ from its pension plan clients in that both have a general appetite for private debt, though the former tend to conduct their evaluation of the company directly without the use of a consultant or advisor, Radway adds.