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.

Uncovering opportunities for yield-hungry investors

With traditional fixed income providing historic low yields, Andrew Lockhart of Metrics Credit Partners explains how to unlock attractive income opportunities from the asset class for investors.

As concerns continue to mount about the outlook for the global economy, many investors are seeking to dial back their equities exposure in favour of defensive, income-producing investments available through the ASX.

The domestic corporate bond market is one option, however, it has a number of limitations. The domination of the market by banks means there is little diversity on offer and the recent global bond market rally has sent prices higher, depressing yields. It is also a difficult market for retail and SMSF investors to access.

So where should investors look for income and diversification opportunities? We believe the answer lies in the corporate loan market, accessible through ASX-listed vehicles that provide both liquidity and diversification.

Direct corporate loans, a subset of fixed income, provide the potential for higher yield than corporate bonds – along with predictability and low volatility. Loans are also often secured by a borrower’s assets, offering a greater degree of investor protection than equities.

These types of loans currently make up 77 per cent of the Australian corporate debt market, meaning there are ample opportunities for investors to tap into the current high demand for non-bank funding.

Stringent research and borrower engagement

Metrics provides investors with access to the corporate loan market through two ASX-listed opportunities.

The MCP Master Income Trust (ASX: MXT) is a diversified portfolio of predominantly investment grade corporate loans, while the MCP Income Opportunities Trust (ASX: MOT) also offers higher risk junior debt and seeks to also provide investors with the opportunity to generate capital gains from investment in options, warrants or private equity investments.

Metrics takes the same approach across all investments and our comprehensive screening and due diligence process mean we only proceed with a relatively small number of loans. In the 2018-19 financial year, we only proceeded with 19 per cent of all screened transaction opportunities. We then undertake ongoing monitoring of portfolio risks to protect investor capital.

Additionally, we generally lend for relatively short periods of three to five years. This approach helps reduce credit and market risk, and enhances portfolio returns for investors.

With portfolio diversification, strong risk management and consistent target yields of 4 per cent to 10 per cent on offer, we believe the corporate loan market warrants a closer look from investors.

Investordaily – Online by Andrew Lockhart

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