There has been a rush for investors pilling in to debt funds in the current low interest environment. Before the market falls, major global credit investors such as Partners Group and KKR were raising credit funds from retail investors on the ASX. Retail is chasing yield and usually it is the cheapest cost of capital compared to capital raised from institutional investors.
In the fixed income asset class the use of credit or debt is interchangeable.
Listed or Unlisted Debt Funds
Retail investors invest in debt or credit funds either directly via listed vehicles of these managers or through the unlisted route through managed funds or trusts. So far most of the listed funds have focused on corporate or high yield loans whilst the unlisted credit funds managed by Australian managers have been focused on real estate backed debt.
One point to note is that the listed credit funds do not own the loans / bonds directly. Rather these are feeder funds which further invest directly into the separate strategies operated by the mangers.
The funds are also actively managed funds rather than passive ETF funds which tracks a particular index.
Type of Debt Fund Strategies
Debt funds are fixed income investments which owns loans or bonds and returns is primarily made up of income from interest payments rather than capital gains. These loans can spread between corporate loans (loans to companies), loans secured against real estate (mortgages) or project financing (loans secured against specific projects or acquisition).
The expected returns for these funds will be based the risks of the underlying loans but overall returns are from low singles digits for senior loan and high single for those that invests in senior and subordinate loans.
In the real estate space, high single to low teens for funds which invest in mezzanine debt or provide construction funding.
List of ASX Credit Fund
|Symbol||Name||Market Cap ($)||Price||NTA||NTA Premium (Discount)|
|MXT||MCP Master Income Trust||$1,229,395,294||$1.93||$2.00||-3.5%|
|NBI||NB Global Corporate Income Trust||$750,892,651||$1.69||$1.66||1.8%|
|KKC||KKR Credit Income Fund||$725,200,014||$1.96||$2.04||-3.9%|
|PCI||Perpetual Credit Income Trust||$392,327,211||$0.98||$1.04||-5.8%|
|QRI||Qualitas Real Estate Income Fund||$320,206,012||$1.42||$1.60||-11.3%|
|MOT||MCP Income Opportunities Trust||$319,327,680||$1.85||$2.02||-8.4%|
There are a number of ETFs on the ASX which can be argued provide similar exposure to investors. What is interesting from the list of debt funds above is that each fund has its own distinct strategy which differentiate the fund from the rest of the pack.
MXT – Australia corporate loans via multiple funds.
NBI – Global fixed income securities.
KCC – Feeder into KKR Global Credit and European Direct Lending
PCI – Direct and indirect holdings of bonds.
QRI – Mix of real estate debt and fund investments.
MOT – Feeder into private credit funds strategies.
Since the crisis due to the limited liquidity the funds are trading at significant discount to their Net Asset Values. The discount of the traded price verses the NTA can be attributed to lack of liquidity but also market expect a degree of impairment in the loan book which at this stage it is too early to see. Investors have to remember book values are backward looking metrics.
Risks investing in corporate loans
Last but not least there certain risks in investing in corporate loans which are different to investing in the equity tranche.
Credit risks – lending is inherently taking on the credit of the borrower. The credit risk represent the risk the borrower default on the obligation during the term of the loan or at repayment.
Leverage risk – higher leverage increase risk of default
Liquidity risk – corporate fixed income securities are illquid and bespoke instruments. Since they are privately negotiated, the incoming buyer will need to review each individual facility agreement (or they should!) which takes time and due diligence cost.
Portfolio concentration – to create a meaningful portfolio means diversifying across credit rating, industry and loan types which can be difficult for individuals given the minimum cost of each position.
Interest rate risk – If the loans are fixed rate loans then the price of the bond will fluctuate from changes in interest rates.