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 cuts performance fee

Metrics Credit Partners has announced it has cut performance fee for its MCP Income Opportunities (MOT) to counter the low rate environment.

The firm said that the trust’s current performance fee was based on achieving the Reserve Bank of Australia (RBA) cash rate plus 6% per annum while, at the time of the launch, it stood at 7.5% per annum.

Also, given the subsequent drop in the RBA cash rate, the performance fee now applied once returns hit 6.75%.

“As a result of these rate cuts, Metrics is entitled to a performance fee this year. We have therefore elected to waive this fee to ensure investors keep more of the trust’s outperformance in their back pocket and restores the position for investors to what was originally intended when MOT was first listed on the ASX,” Metrics managing partner, Andrew Lockhart said.

MOT aimed to offer exposure to a range of borrowers and private credit instruments that were typically not available to retail investors.

The trust listed on the Australian Securities Exchange (ASX) in April 2019 and recently changed its income distributions from quarterly to monthly.

Since inception, MOT has delivered 7.22%, exceeding the target return of 7% a year, the firm said.

by Oksana Patron | moneymanagement.com.au | January 22, 2020

Email us
invest@metrics.com.au

1300 010 311
Mon-Fri 9:00 - 5:30