Demand for ASX-listed credit funds has been strong this year, as investors chase higher yields. The latest fund to come to the market, the KKR Credit Income Fund, increased its issue size from $750 million to $925 million and closed its offer within days of opening.
There has been a boom in credit fund offerings of various types over the past couple of years, giving investors access to yields of 5 to 8 per cent through exposure to corporate debt, secured small business loans, consumer credit, high-yield bonds and mortgage-based securities.
Credit managers with ASX-listed products in the market include Metrics Credit Partners, Perpetual Investments, Gryphon Capital Investments, Neuberger Berman and Qualitas Group.
These funds provide an alternative to franked dividends for investors looking for income. They also offer significantly higher yields than bond funds or term deposits. But there is a wide range of assets and risks in this growing segment of the market.
Metrics managing director Andrew Lockhart says: “Investors need to look at the underlying risk. The profiles of these funds can vary greatly.”
KKR Credit Income Fund. The fund will be managed by KKR Australia Investment Management. It will invest in two established KKR funds, the Global Credit Opportunities Fund and the European Direct Lending Fund.
KKR says it is aiming to deliver a distribution yield of 4 to 6 per cent a year, net of fees and expenses, and a total return of 6 to 8 per cent a year.
KKR has had a dedicated credit business, KKR Credit, since 2004. KKR manages a total of US$206 billion of assets, of which US$70 billion is managed by KKR Credit.
According to the product disclosure statement, KKR’s advantages in this market include its global reach and well-established partnerships with investors.
The Global Credit Opportunities Fund invests in the sub-investment grade credit market, purchasing securities on the secondary market. KKR has an 11-year record of investing in the sector. Over the three years to the end of June, the fund returned an average of 9.1 per cent a year.
The European Direct Lending Fund is a portfolio of senior corporate loans largely originated by KKR and not traded on secondary markets. Loans are senior secured and floating rate. Loans in the portfolio are expected to pay a yield of around 6.5 per cent.
KKR is paying all the upfront establishment costs of the offer to ensure that the net asset value at listing is not less than the funds subscribed. The fund will have a distribution reinvestment plan.
The fund manager will receive a base fee of 88 basis points of the NAV a year, plus GST. It is also entitled to a performance fee of up to 5.125 per cent.
Metrics Credit Partners. Commercial lender Metrics launched its second listed credit fund earlier this year, the MCP Income Opportunities Trust, with the new fund holding a portfolio of sub-investment grade debt and targeting a return of 8 to 10 per cent.
The new fund is targeting income of 7 per cent and some participation in upside gains through exposure to derivatives.
Metrics has been in the commercial loan market since 2013, backed by institutional, high net worth and retail investors. It has originated 200 loans worth $5.5 billion since then, including corporate loans, property development, project and infrastructure finance and acquisition loans.
It participates in syndicates and club loans and originates on a bilateral basis. And it lends right through the capital structure, including structuring equity returns through warrants and options.
In 2017, it launched its first ASX-listed fund, the MCP Master Income Trust, which has a majority of its funds in investment grade loans and targets an income return of the cash rate plus 3.25 per cent.
Metrics managing partner Andrew Lockhart says the fund has more than 100 individual loans, has not lost any money and has exceeded its target return consistently. The trust has traded at a premium to its net asset value since listing.
Eighty per cent of Metrics’ loans are secured. Lockhart says the group’s preference is for loans with terms of three to five years. Around one-third of te portfolio is in commercial property.
Perpetual Investments. The Perpetual Credit Income Trust was launched in March. It aims to invest in a portfolio of 50 to 100 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.
Perpetual has more than $7 billion in credit and fixed income. The group’s head of credit Michael Korber will manage the portfolio.
The fund will target an income return of the Reserve Bank cash rate plus 3.25 per cent, net of fees. The estimated management cost is 88 basis points.
The fund can hold up to 70 per cent in unrated or sub-investment grade securities. It can hold up to 30 per cent in foreign currency securities.
Typical investments will include corporate bonds, floating rate notes, securitised assets and corporate loans.
Perpetual says its credit team uses a proprietary credit scoring process to assess the risk of individual exposures and the overall credit market.
Exposure to corporate loans may be gained directly or through investment in the Perpetual Loan Fund. The Perpetual Loan Fund was established in June last year.
Qualitas Group. Last November, Qualitas Group listed the Qualitas Real Estate Income Fund on the ASX, providing income from a portfolio of secured commercial property loans and targeting a net return of 8 per cent a year.
The loan portfolio will be a mix of senior and mezzanine debt. Qualitas was established in 2008 and since then has allocated $1.7 billion of debt and equity capital to real estate assets worth around $7.3 billion. It has made 84 loans.
The Real Estate Income Fund invests in a number of established Qualitas funds.
It has been slow to allocate all the funds raised and earlier this year sought approval from investors to invest money in another Qualitas fund.
Neuberger Berman. The 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.
The Neuberger Berman fund is the only one of the recent entrants into this market that offers global exposure. This offers the advantage of a much bigger pool of assets for the manager to choose from but it also exposes investors to currency risk.
Gryphon Capital Investments. The ASX-listed 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 last year, 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.