Reporting season sell-offs present buying opportunities
October 15, 2018
Investors, start your engines
October 15, 2018

Andrew Lockhart, Metrics Credit Partners

The third listing of a credit fund on the ASX in a year has breathed life into a sector that, until recently, has provided investors with few opportunities to invest in corporate debt.

Last month’s listing of Neuberger Berman’s NB Global Corporate Income Trust follows the listing of Gryphon Capital Investments’ Gryphon Capital Income Trust in April and Metrics Credit Partners’ MCP Master Income Trust in October last year.

Independent Investment Research, which rates the Gryphon Fund ‘recommended’ and the MCP and NB trusts ‘recommended plus’, says each fund offers a different approach to managing the credit, interest rate and liquidity risk in credit markets.

The latest entrant, NB Global Corporate Income Trust, invests in a portfolio of global high yield bonds. These are non-investment grade securities, with a focus on B and BB rated bonds. The manager is targeting monthly distributions equivalent to at least 5.25 per cent per annum, with modest growth in asset value over time.

Because non-investment grade bonds have a higher probability of default, the fund plans to have a well diversified portfolio to 250 to 350 issuers.

Gryphon Capital Income Trust invests in a portfolio of floating rate asset-backed securities and residential mortgage-backed securities (RMBS). The target return is 3.5 per cent above the cash rate. The portfolio will be actively managed and securities will generally have floating interest rates.

At June 30, 84 per cent of the portfolio was invested in investment grade securities, with 44 per cent in AAA rated securities. The bulk of the portfolio is invested in prime RMBS.

Residential mortgage-backed securities (RMBS) are collections of mortgages that have been bundled together and sold off a lender’s balance sheet in the form of a bond. They produce an income by providing exposure to repayments on the underlying mortgages.

While RMBS is the most common form of asset-backed security in the Australian market, other types of loans can be securitised in the same way. These include credit card debt, car loans and commercial finance.

Gryphon Capital Investments is an institutional fixed income manager, established in 2014 and with mandates currently valued at around $1.7 billion.

The fund’s distributions since listing have been running at 3.2 per cent (annualised).

MCP Master Income Trust invests in a portfolio of Australian corporate loans. The manager targets returns 3.25 per cent above the reserve Bank cash rate, paying monthly distributions.

Securities in the fund include debt issued by investment grade and non-investment grade companies. At June 30, there were 82 individual investments with 73 per cent in investment grade assets (rated BBB and above).

MCP has been in business since 2011. It launched a wholesale fund, the Metrics Credit Partners Diversified Australian Senior Loan Fund, in 2013 and two more wholesale funds since then. It has more than $2 billion of funds under management. The Diversified Fund has produced an average return of 5.04 per cent a year since inception.

MCP has invested more than $3 billion in 80 loan transactions since June 2013. It lends to public and private companies and also provides project finance.

MCP puts the size of the Australian non-financial corporate debt market at $1.1 trillion.

The listed fund’s distributions since listing have been running at 4.9 per cent (annualised)

The emergence of these funds over the past year is no coincidence. A range of regulatory reforms has opened up the Australian credit market to non-banks lenders. One important change is tighter capital requirements for banks.

Higher capital levels for business and corporate loans are a permanent feature of the banking market. Bank risk appetite is not going back to what it was.

Andrew Lockhart, the managing partner of Metrics Credit Partners, says banks have been reducing their exposure to a number of areas, such as commercial real estate and development finance.

“As a result, we can take less risk on the loans we do and earn a higher margin,” he says.