Does a slowing economy increase the risk of loan defaults in private debt?

Well-run private debt funds use rigorous scenario testing and real-time monitoring to mitigate risks. Historical net write-offs by banks peaked at just 0.68% during the GFC and were 0.04% in September 2024, demonstrating strong resilience across economic cycles.

Does a loan default always result in a credit loss?

No. Private debt investors are protected by their seniority in the capital structure. Senior debt holders get repaid first, before subordinated debt, preferred equity, and common shareholders. Covenants and controls act as early warning signals allowing lenders to engage with borrowers to mitigate financial loss.

Are all private debt managers the same?

No. Private debt managers differ significantly in scale, credit skills, and experience. Quality managers need sizable assets under management, bank-level credit skills, extensive networks, and the ability to directly originate and diversify loans across borrowers to achieve optimal outcomes.

Does commercial real estate debt put capital at risk in a property downturn?

Property owners face greater risk than lenders. With typical loan-to-value ratios of 60%, owners' equity acts as a buffer. Even if property values fall significantly, lenders can compel borrowers to restore their position or pursue asset sales to maximize recovery without necessarily incurring losses.

Are non-bank lenders lenders of last resort?

No. Competent private debt managers lend to quality companies and often compete with banks or work alongside them in lending syndicates. Post-GFC regulations requiring banks to hold more capital have created financing gaps that private debt fills for established companies with sound fundamentals.

Corporate loan market holding up

Corporate loan originator Metrics Credit Partners has added to its suite of funds with the launch of an unlisted retail debt fund, reporting that it has no loan arrears and has made no provisions.

Corporate loan originator Metrics Credit Partners has added to its suite of funds with the launch of an unlisted retail debt fund, reporting that it has no loan arrears and has made no provisions.

Metrics manages two ASX-listed credit trusts, the A$1.3 billion MCP Master Income Trust, and the higher yielding $350 million MCP Income Opportunities Trust. It also manages institutional portfolios.

The new fund, Metrics Direct Income Fund, will have a similar profile to the Master Income Trust, with investment grade loans making up about 50 per cent of the portfolio and targeting a yield of 3.25 per cent above the cash rate.

Metrics managing partner Andrew Lockhart said the group was looking for new ways to raise capital and recognised that some retail investors preferred to avoid the volatility of listed vehicles.

The Master Income Trust has 145 loans. Lockhart said there were no arrears, but in about a dozen cases Metrics has agreed not to test covenants for a period of time.

Lockhart said: “That is normal. Most covenants are based on earnings and some businesses have been impacted by the pandemic.

“We lend to ASX-listed corporates, project and infrastructure companies, commercial real estate developers and operators, and private equity groups that need acquisition finance. Some have felt little impact but in other areas there has been some impact.

“Our position is different to the banks. They are having to deal with small businesses that might not have sufficient liquidity to deal with a trading downturn and consumers who are facing unemployment risk.

“When we lend, we assess the liquidity position of the business to see how it will manage a period with no cash flow. We also assess the going concern value of the business.

“We do not have any assets that have warranted specific or general provisioning.”

Metrics was established seven years ago by a group of ex-NAB corporate bankers.

On an investor webcast in April, Lockhart said “The corporate loan market remains open. While new-money primary lending is slowing, loan transactions negotiated pre-COVID-19 are being successfully closed. The Australian corporate bond market is effectively closed at present.

“What we see coming out of this is that lenders will demand more collateral from corporate borrowers. They will want to have controls in place to secure their interests.”

Banking Day – 7 July 2020

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