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Credit funds: take a good look under the bonnet
Investors in ASX-listed credit funds, which have been very popular with investors looking for yield, are on a steep learning curve right now, as they find that different funds invest in a variety of different assets, with some very different outcomes.
While the asset values of some credit funds held up in the face of market turmoil over the past month, others have taken a hit. And the unit prices of all listed credit funds are now below their net tangible assets (NTA).
Funds that invest in securities traded in public markets have suffered the biggest falls in NTA, while those that originate their own loans have done better.
The NTA of one credit fund, MCP Master Income Trust, was unchanged last month, although its unit price fell.
Metrics Credit Partners, which manages two ASX-listed credit funds and originates its own corporate loans, has reported that some of its borrowers are seeking to defer interest payments until their operations return to normal. Metrics also said some covenant waivers have been requested.
“[Metrics] is of the view that some loans held within the [MCP Master Income Trust] are exposed to working capital/liquidity squeeze,” it said in an investor update.
Metrics managing partner Andrew Lockhart says: “We have stressed the portfolio. Companies tell us their debtor collections are getting harder. We need to see whether the companies we are lending to have the wherewithal to get through difficult times.”
He says Metrics currently has no borrowers in default or in arrears, and there are no breaches of covenants.
In the event there are arrears, he says Metrics has sufficient cash to allow it to continue paying its target distributions.
The make-up of loans in the $1.3 billion MCP Master Income Trust, which has a target return of the cash rate plus 3.25 per cent, is 4 per cent AA-rated, 2 per cent A, 46 per cent BBB, 40 per cent BB and 7 per cent B. Eighty-seven per cent of the loans are ranked senior.
The $350 million MCP Income Opportunities Trust, which has a target cash return of 7 per cent and a total return of 8 to 10 per cent, has 47 per cent senior debt, 34 per cent subordinated, and 16 per cent equity.
Lockhart says: “The corporate loan market remains open. While new-money primary lending is slowing, loan transactions negotiated pre-COVID-19 are being successfully closed. The Australian corporate bond market is effectively closed at present.”
He says Metrics avoided sectors such as media and resources, where earnings are cyclical.
“What we see coming out of this is that lenders will demand more collateral from corporate borrowers. They will want to have controls in place to secure their interests.”
The unit price of the MCP Master Income Trust fell 15.5 per cent to $1.69 in March. However, the NTA remained unchanged at $2.
The credit fund that suffered the heaviest fall last month was KKR Credit Income Fund. Investors have suffered a double blow: the fund’s asset value fell heavily during the month, and its units are now trading at a big discount to asset value.
Its unit price fell 32.3 per cent and its NTA fell 21.9 per cent. The month-end unit price of $1.55 was 22.1 per cent the month-end NTA.
The KKR Credit Income Fund was one of the most successful ASX listings last year, raising $925 million. The fund is managed by KKR Australia Investment Management and invests in two established KKR funds, the Global Credit Opportunities Fund and the European Direct Lending Fund.
The Global Credit Opportunities Fund invests in the sub-investment grade credit market, purchasing securities on the secondary market. The European Direct Lending Fund is a portfolio of senior corporate loans largely originated by KKR and not traded on secondary markets.
In an investor briefing last week, KKR said investors were selling out of more risky segments of the credit market, such as high-yield bonds and leveraged loans, and that was having a negative impact on the fund. It reassured investors that it had no defaults in its portfolio.
Investors in Neuberger Berman’s NB Global Corporate Income Trust have suffered similar falls. The fund’s NTA fell 19 per cent in March and its unit price 24.6 per cent. The month-end unit price of $1.50 was 9 per cent below NTA.
The NB Global Corporate Income Trust invests in global high-yield corporate debt securities. The manager targets monthly distributions equivalent to a yield of at least 5.25 per cent a year, with modest growth in assets over time.
Gryphon Capital Investment Trust invests in residential mortgage-backed securities and other asset-backed securities. It is highly exposed to the ups and downs of the Australian home loan market.
Gryphon advised investors last week that the hardship relief being provided to borrowers impacted by COVID-19 will reduce the principal and interest payments that flow through to RMBS note holders.
However, Gryphon says Australian securitisation programs have “structural protections against liquidity stress, such as what is anticipated with the granting of hardship relief for borrowers.
“Such structural protections are sized to allow interest payments to continue to be made to the RMBS note holders.”
Gryphon says it does expect arrears to increase in coming months. Offsetting the impact of unemployment and other COVID-19 effects, many borrowers are ahead of their scheduled payments, have offset balances or another capacity to meet their mortgage repayments.
“Assuming the outbreak will peak mid-year and the economic recovery commences in the third quarter of this year, we do not believe that the expected increase in arrears will roll into either late stage arrears or eventually into default,” Gryphon said.
“Sustainable monthly income is a core pillar of Gryphon Capital Income Trust and we are not expecting any disruption to the monthly distributions.”
The fund’s unit price fell 17.1 per cent to $1.65 in March. However, its NTA was steady during, falling just one cent to $1.99.
Perpetual Credit Income Trust invests in a portfolio of credit and fixed income assets, with a spread of credit quality, loan maturity, country and issuer. It will not hold any government or semi-government debt securities. Typical investments will include corporate bonds, floating rate notes, securitised assets and corporate loans.
Perpetual has more than $7 billion in credit and fixed income and the group’s head of credit Michael Korber manages the income trust’s portfolio.
The fund’s unit price fell 13.5 per cent to 90 cents in March, while the NTA fell 4.5 per cent to 1.05. At the end of March, the units were trading at a 14.3 per cent discount to NTA.
