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.

MCP Master Income Trust (MXT) – Quarterly Update March 2020

Key Points

Despite material economic headwinds and current public market volatility, MXT’s portfolio continues to deliver capital stability reflected in the daily published NAV.
MXT always has and continues to exceed its Target Return (RBA Cash Rate +3.25% pa (net of costs)). Past performance may not be repeated.
MXT’s Unit Price has traded below NAV with funds associated with Metrics acquiring MXT units.
MXT’s underlying portfolio is appropriately diversified and while some borrowers are experiencing the demand, supply and / or liquidity impacts of COVID-19, loans to which MXT is exposed have covenants, controls, security and equity buffer to enable Metrics as investment manager of the funds in which MXT is invested to actively manage risk to protect capital value.
Metrics Credit Partners Diversified Australian Senior Loan Fund (~60% of MXT capital) has been upgraded by S&P to a higher investment grade rating of A- (stable outlook).

Download the full quarterly update below for further information regarding the portfolio impact of COVID-19.

Read more

02 April 2020

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