One of the most welcome trends in the financial markets in recent years has been the democratisation of strategies and asset class exposures that were formerly the preserve of institutional and professional investors, opening them up for access by retail investors.
That’s certainly on offer with the initial public offering (IPO) of MCP Master Income Trust, an investment trust, to be listed on the Australian Securities Exchange (ASX), that offers retail investors and self-managed superannuation funds (SMSFs) exposure to an asset class in the interest-bearing market that they have not had before, in the $1.1 trillion Australian corporate loan market.
MCP Master Income Trust offers investors direct access to a diversified pool of Australian corporate debt. Alongside wholesale funds managed by MCP, the trust will lend directly to Australian corporate borrowers, and hold a diversified exposure of loans to Australian companies, diversified by borrower, industry and credit quality.
Investors will receive monthly income from the interest and fees paid on these loans, in an investment that incurs low risk of capital loss, while offering the liquidity of an ASX listing, in Australian dollars.
The trust is managed by Metrics Credit Partners, which is an active participant in Australia’s corporate loan market, with extensive experience in direct lending to Australian companies alongside banks. Since launching its initial wholesale fund, the Metrics Credit Partners Diversified Australian Senior Loan Fund, in June 2013, and then the Metrics Credit Partners Secured Private Debt Fund in November 2015, MCP has grown its assets under management to more than $2 billion.
The issue opens up a way of gaining exposure, through an experienced manager, to the “credit,” or corporate debt market, which has usually been very difficult for most Australian investors – and especially SMSFs – to obtain, says Andrew Lockhart, Managing Partner of Metrics Credit Partners.
“Most Australian investors have become very heavily weighted to equities and have had limited opportunities to diversify their investment portfolios. They haven’t really had the opportunity to gain access to high-quality fixed income exposures,” Andrew Lockhart, Managing Partner of Metrics Credit Partners.
“This means they have tended, particularly in the case of SMSFs, to hold a lot of cash on deposit. We believe that there is a real opportunity for investors to tap into corporate credit, as it is effectively a new asset class for them.
“This investment not only opens up a new asset class, but it effectively allows investors to diversify along the capital structure of some of their equity investments. They might hold Woolworths shares, for example, but they’re diversifying in the capital structure by having an investment in loans to Woolworths – which is actually a lower-risk part of the capital structure,” he says.
One of the big anomalies in self-managed superannuation is the hole in the asset allocation where fixed income should be. According to the Australian Taxation Office (ATO), Australia’s army of SMSFs held just $8.1 billion worth of debt securities at March 2017 – barely 1.2% of the net $648 billion in assets they hold. The SMSFs held $157 billion in cash and term deposits, or 24.2% of assets.
The SMSFs also hold 14.9% of their assets in listed and unlisted trusts, some of which might be bond funds, but the numbers tell a story of distinct lack of opportunity to invest in domestic fixed income.
In contrast, SMSFs hold $207.6 billion worth of domestic shares, representing 32% of assets.
“We believe there is a significant need on the part of SMSF trustees to diversify their portfolios and apply part of their cash holdings in other asset classes, particularly the higher-yielding corporate loan sector,” says Lockhart.
“SMSFs and yield-oriented investors want to increase the effective diversification of their overall portfolios, to lessen what is a heavy dependence on the share market, and to have an exposure to an investment offering stable cash yields with low volatility or the risk of capital loss. Direct lending to Australian companies not only fills a whole in their portfolios, it offers attractive risk-adjusted returns.”
This new portfolio diversifier is itself diversified, he says, with the MCP Master Income Trust lending to listed companies, private companies, project and infrastructure financing to both government and PPP (public/private partnership) borrowers, providing funding to property development companies and real estate investment trusts (REITs), and also providing acquisition financing. However, it will not invest in the banking sector. MCP Master Income Trust will have in excess of 50 individual loans on day one, with a near-term target of 75-100 individual loan investments.
The target return of the trust is the Reserve Bank of Australia (RBA) cash rate plus 3.25% a year, net of fees, through the economic cycle. Based on the current RBA cash rate of 1.50%, the initial target return will be 4.75% a year.
Between 2000 and 2016, Australian corporate bonds generated a median return of 6.7% a year, with a high of 11% in a year, and a low of 3%, with only cash offering lower volatility of returns. While corporate loans are typically privately held by banks with limited inter-bank market trading of loans, the return volatility profile of a loan portfolio such as that held by MCP Master Income Trust is expected to be broadly similar to that of Australian corporate bonds.
“The philosophy behind the trust is very simple, to provide our investors with direct access to a diversified pool of Australian corporate debt, in a listed vehicle that gives them the risk-and-return profile from direct lending to Australian corporates, in a more liquid format,” says Lockhart.
“We think the unit price should be stable, and should trade at net asset value (NAV). The reason being that the asset class is not volatile, like equities: the underlying loans are all floating-rate loans, so if interest rates rise, the return to the investor increases in line with movements in interest rates.
“The fees and charges that we’re able to charge the borrower are distributed as income to our investor. When you lend in this market, the most that you’re looking to recover is the interest, fees and principal on repayment, so for an investor investing in our fund, the biggest risk they are exposed to is the risk of credit loss. But we believe we mitigate that through a diversified portfolio of loans that is actively managed,” he says.
Units in the trust are $2 in the IPO, with the offer opening on August 10, and up to $500 million being raised. Metrics Credit Partners is making a ‘cornerstone investor’ offer available to wholesale groups, and is looking to raise up to $150 million through that process alone. The general offer is scheduled to close on September 19, with ASX listing planned for October 9.
To learn more about the MCP Master Income Trust IPO click here.
