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 presents at the 2021 Pinnacle Insight Series

With the official cash rate close to zero, investors are forced to seek higher returns outside of traditional fixed income options, namely traditional government bonds and term deposits. At the Pinnacle Insight Series 2021, Andrew Lockhart, Managing Partner of Metrics Credit Partners describes how private debt has the ability to provide investors with attractive returns and capital stability without the need to move into riskier assets such as shares.

During this recording, Andrew discusses:

The key benefits and features of Australian private debt
The floating rate structure of corporate loans
The outlook for the asset class in 2021
What to look for when selecting a private debt investment manager

Recording date: 4^th February 2021

Duration: 11 min

Watch recording on-demand here.

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