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.

Metrics cooks up credit PIE for NZ wholesale market

Australian corporate loan originator and fund manager Metrics Credit Partners has opened a portfolio investment entity (PIE) vehicle – the first offshore-based product for the Sydney firm.

The Metrics Multi-Strategy Private Debt (NZ) Fund is open to wholesale investors only but managing partner, Andrew Lockhart, flagged the launch of a retail PIE – either in listed or unlisted format – later this year.

“We’re hoping to do a retail product for NZ investors in the next six to 12 months,” Lockhart said.

Created along with Wellington fund-hosting specialist, Implemented Investment Solutions (IIS), the just-launched Metrics wholesale PIE would initially invest in a basket of Australian loans sourced from over 140 borrowers.

“NZ investors will be getting immediate diversification and will first receive income one-month after launch,” he said.

Over time Lockhart said Metrics would likely add NZ loans to the fund. The group opened a loan origination office in Auckland last year, cementing three deals since with another due for sign-off.

He said offering a PIE fund showed Metrics was “committed to the NZ market and not just to originate and lend”.

The new fund, targeting an annual return of 3.25 per cent above the NZ official cash rate “net of fees and costs, through the economic cycle”, according to a release.

Lockhart said the PIE structure would make it easier for NZ wholesale clients to access the Metrics strategy in a tax-efficient manner.

Several NZ entities, including a KiwiSaver scheme, have already invested in Metrics Australian-based funds, he said.

“We’re also talking to NZ asset consultants,” Lockhart said.

With interest rates stuck in low gear for some time, he said there was a high demand for alternative credit and other products offering yield.

“Corporate loans have a low correlation to other major asset classes, including equities and bonds, providing excellent diversification opportunities,” Lockhart said in the release.

He said Metrics had managed to beat all targets with no defaults among its loan portfolios since the manager launched eight years ago.

“[The Metrics management team] has been doing this for the last 30 or 40 years,” Lockhart said.

Unlike long duration traditional bond investments, the Metrics loan portfolio would also weather rising interest rates, he said, as “our asset class operates off running rates”.

“Our loans are floating rate, so the total return will increase if rates increase,” Lockhart said.

Metrics now boasts about A$6.5 billion under management – with roughly A$1.8 billion in retail money – spread across 12 funds, including two ASX-listed vehicles.

Lockhart said alternative credit providers such as Metrics have stepped into the breach left by mainstream banks in the wake of the global financial crisis. Post the GFC new global banking regulations have required major financial institutions to shore up capital buffers, limiting their corporate lending facilities.

As well as IIS for fund-hosting, the new Metrics PIE uses Public Trust as supervisor. The Australian firm is also part of ASX-listed multi-affiliate Pinnacle group, which is represented in NZ by David Batty.

Investment News NZ, 7 March 2021. To read the official media release prepared by Metrics, click here.

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