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September 2021 • privatedebtinvestor.com
EXTRA
The key
fundraising
data from H1
s are p uz zled o ve r
Why firm a rk s
replace me nt be nc hm
The Global Guide
to Private Debt
The practitioner’s handbook to navigating private debt
This guide helps fund managers:
• Understand how LPs are constructing private debt allocations within their portfolios
• Determine how best to structure the legal, taxation and financial terms of a private debt fund
• Anticipate which strategies are likely to attract the most interest from LPs
• Mitigate currency risk in a private debt fund; plus much more
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Contents
How to contact us
Senior Editor
Andy Thomson
andy.t@peimedia.com, +44 20 7566 5435
Senior Special Projects Editor
Graeme Kerr ISSN 2051-8439 • ISSUE 86 • SEPTEMBER 2021
graeme.k@peimedia.com,
+44 20 3862 7491
Americas Editor
Robin Blumenthal
robin.b@peimedia.com, +1 646 970 3804
News Editor Insight Analysis
John Bakie
john.b@peimedia.com, +44 20 7566 5442
Reporter
Michael Haley
michael.h@peimedia.com, +1 212 633 1455
2
Performance Companies are coping
22
Raising awareness for venture debt
Contributor well, but are not out of the woods yet
David Turner
Recent expansion signals a bright
Managing Editor, Production: Mike Simlett Trend watch Ares writes future for a relative unknown
Production Manager: David Sharman
record-breaking green loan 4
Production Editors: Daniel Blackburn,
Adam Koppeser, Nicholas Manderson, Financing How lenders are adapting
Jeff Perlah
Copy Editor: Eric Fish to today’s favoured sectors 6
Art Director: Mike Scorer
Secondaries In conversation with
Head of Design: Miriam Vysna
Dechert’s Michael Wong 7
Art Director – Americas: Allison Brown
Senior Designer: Lee Southey EDITOR’S LETTER
Designers: Denise Berjak, Pio Blanco
What will come after LIBOR? 8
Head of Marketing Solutions: Beth Piercy
beth.p@peimedia.com, +44 20 7566 5464
Subscriptions and Reprints
subscriptions@peimedia.com Cover story
Customer Services
customerservices@peimedia.com
Editorial Director, US: Rich Melville
Editorial Director: Philip Borel
10
Director, Product: Amanda Janis “We expect a real Making inroads in Canada Covid
Director of Research and Analytics: Dan Gunner has been a game-changer for the
Operations Director: Colm Gilmore dogfight” country’ private debt market 24
Managing Director, Asia: Chris Petersen
Loans after LIBOR
Chief Commercial Officer: Paul McLean How the Nordics learned to love
There is a lively debate around what
Chief Executive Officer: Tim McLoughlin
will replace the benchmark and how direct lending Attitudes to private
suitable that replacement will be in credit have changed dramatically 26
the event of a crisis
UK asset holding company regime
A new framework may be particularly
Keynote interview beneficial for credit funds 28
Financing pre-EBITDA companies
18
Trust, collaboration and
For companies at a nascent stage of
development, obtaining debt finance
may not be straightforward 30
diversification: the three pillars of
For subscription information visit strong investor partnerships
privatedebtinvestor.com
CIFC’s Steve Vaccaro reflects on DATA
building a global credit platform that
No fundraising revival just yet 32
meets investors’ needs irrespective of
market conditions Funds in market 34
September 2021 • Private Debt Investor 1
Performance Companies are coping well,
even if they’re not out of the woods yet
I
n the early months of the It seems clear, for now at least, of respondents to our Private Funds
pandemic, it would have that any imagined parallels with Leaders Survey 2021 said they
taken a brave forecaster who the global financial crisis can be felt either positive or very positive
predicted that default rates dismissed. The pandemic has about their operating environment
would be where they currently presented challenges to businesses, when compared with the previous
are, writes Andy Thomson. but nothing on the scale of the 12 months, while 74 percent were
The most remarkable aspect of devastation seen in 2009. equally optimistic when comparing
the latest Proskauer Private Credit Unsurprisingly, perhaps, the their fortunes with those of the
Default Index for Q2 2021 is that – leaders of the world’s private public markets. Meanwhile, a mere
far from the Armageddon that might markets investment firms are 5 percent of those running private
have been expected – companies defiantly ebullient. Over a year markets funds believe ongoing
are resisting distress even better into a brutal health crisis that is still covid-related uncertainty will have a
than they do in what might be wreaking devastation in some parts significant effect in the near term.
termed ‘normal’ times. of the world, just shy of 80 percent
The average historical default How defaults have come down from
Healthy picture
rate is typically assumed to be pandemic highs (%) This healthy picture coincides with
somewhere around the 2 percent Q2 2020 Q3 2020 news that, in the UK, so-called
Q4 2020 Q1 2021
mark, whereas the index shows the 8 ‘bounceback’ loans – a form of state-
latest rate for senior secured and backed emergency government
unitranche loans standing at a very 7 financing – appear to have returned
modest 1.3 percent. If there were many companies to the straight and
6
fears of a default crisis, what has narrow. The UK Office for Budget
transpired is closer to the opposite – 5 Responsibility predicted
rarely has the figure been this low. in December that as much as
“Default rates have continued to 4 £19 billion (€22 billion; $26 billion)
decline as the economy re-opens,” of taxpayer money might be lost
3
says Stephen Boyko, co-chair of through the scheme, but the latest
Proskauer’s corporate department 2
estimate is around £5 billion.
and private credit group. “We are Reflecting on the encouraging
seeing plenty of liquidity in the 1 signs for bounceback loans, Simon
market and our clients remain Fry, a partner at boutique advisory
bullish about the health of their 0 firm ReSolve, cautions: “What will
$25m-$49.9m >$50m
portfolios.” Source: Proskauer be key in telling us if the default
2 Private Debt Investor • September 2021
rate will continue to stay low is how
companies prepare for when the
The big numbers
government support fully stops.” The difference between first and fourth quartile, an
Memories can fade quickly, and “Investment in Australian pension steps up a gear and investors
less liquid and are happy with private debt performance
the 8.1 percent default rate reached
alternative assets
in the second quarter of last year
can support
$167m
already seems like a distant memory. good retirement
Few will be expecting rates to climb outcomes for UK
that high again in the near future, investors and
but Fry’s words are a useful reminder we welcome the
that no one really knows what lies government’s The difference between first- and fourth-quartile performance
around the corner. recognition of in any given year for an average size fund, according to
this in the prime Cliffwater’s study of US state pension performance
minister’s letter to
“ We are seeing
13.2x
the UK investment
plenty of liquidity in industry”
the market and our Jack Inglis, chief
executive of
Median enterprise value to EBITDA ratio
for US buyouts in the fourth quarter of last year,
clients remain bullish the Alternative according to Pitchbook
Investment
A$15bn
about the health of Management
Association
their portfolios ”
Ups
Stephen Boyko
Proskauer Target private debt investment total for AustralianSuper
over the next three years, representing a tripling of its
There has been a lot of talk in & current level of exposure
downs
€1.5bn
the market about how sponsors
and lenders have worked together
impressively to steer portfolio
“Akin to a
companies through the tough times.
Hitchcock plot, we
But as with covid, the first wave is not do not know with
necessarily the last or biggest. certainty what the Close for Eurazeo’s fifth direct lending vehicle focused on
Therefore, no one should be future holds as we European SMEs
assuming just yet that the bullet look to manage
$1.06bn 80%
has been dodged. A study from life with virus
corporate and fiduciary services firm variants and an
Ocorian found that 47 percent of increasing role of
capital market investors with direct big government”
Total amount of private debt
lending strategies were lacking secondaries in the first half of this
Taken from Dial M
confidence in their ability to manage year according to Setter Capital, Of investors happy with
for Market, KKR’s compared with $360m in the how their private debt
loss recoveries, “which could have first half of 2020 portfolio performed during
credit market
serious implications if default rates review for the
the first half of this year,
according to a study by
rise as pandemic-driven government second quarter of the Alternative Investment
support schemes are withdrawn”. 2021, authored by Management Association
2/3
This was particularly true of European Chris Sheldon, the
managers and those that had been firm’s partner and
around for less than 10 years. head of leveraged
Optimism in the current credit
environment seems appropriate,
though it should be of the cautious
Of institutions planning to invest further in private credit
to meet their target allocations, according to the
variety. n Alternative Investment Management Association
September 2021 • Private Debt Investor 3
Insight
Trend watch Ares writes ALLOCATION•WATCH
record-breaking green loan
n Teachers’ Retirement System
of Louisiana
A
res Management, the largest is expecting industry issuance of The pension has approved a $125
private debt manager in collateralised loan obligations to hit million commitment to Blackstone
the world, has written a a record this year. Tactical Opportunities IV, launched
groundbreaking £1 billion ($1.4 “It feels like we’re in the beginning in Q1 2021 with a $4.5 billion target.
billion; €1.2 billion) direct loan with of a new credit cycle,” Basmadjian The Tactical Opportunities series
a margin linked to ESG targets. This tells Private Debt Investor after invests globally across a variety
is the first time the firm has included Carlyle reported that first-half of sectors with the strategic focus
ESG-linked terms in a direct fundraising for the firm surged on equity, debt and mezzanine
loan, and it is the “largest private nearly 50 percent on the same investments in special situations.
credit-backed sustainability linked period a year ago. Basmadjian says
financing to date”, the firm says. CLO issuance for the entire industry
Funds managed by the firm’s has already set records in 2021, with n Ohio Police & Fire Pension
European direct lending platform Wall Street estimating it will hit Fund
are serving as sole lender on $130 billion-$140 billion this year. The pension has approved
£1 billion of facilities to RSK Group, Carlyle reported that fee-related a $50 million commitment
a UK-headquartered environmental earnings in global credit surged to CapitalSpring Investment
and engineering business. The deal 25 percent, to $46 million in the Partners VI. CapitalSpring’s sixth
is notable both for its size – unusually first half of the year, partly driven by fund is seeking $750 million in
large among direct lending deals – increased management fees from commitments targeting the branded
and for its sustainability angle. strong CLO origination activity over franchise restaurant sector in the
The facilities include an annual the past 12 months. US through credit tranching. The
margin review based on the pension had previously committed
achievement of sustainability Fund size keeps growing to the fifth fund in the series.
targets, “which are broadly focused The size of the average private debt
on carbon intensity reduction and fund shot up in the first half of 2021
continual improvement to health as a relatively low number of funds n Montana Board of Investments
and safety management and ethics”, from large managers took the lion’s MBOI has committed $125 million
the firm says. share of capital. With numerous across two private debt vehicles, per
multibillion-dollar debt funds closed its August 2020 investment board
Carlyle flags buoyant so far this year, the average size sits meeting documents. It comprises
CLO market just below $1 billion. The covid-19 $75 million to GoldenTree
Lauren Basmadjian, Carlyle Group’s pandemic is thought to be leading Distressed IV and $50 million
co-head of liquid credit and head more LPs to commit capital to large to Centerbridge Special Credit
of US loans and structured credit, managers that they know well. n Partners IV. Both are re-ups.
Average private debt fund size is close to $1bn ($m)
1,000 n Connecticut Retirement Plans
and Trust Funds
800
The organisation confirmed
600 $425 million-worth of commitments
to private debt at its July 2021
400 investment advisory council
meeting, a contact says. It comprised
200
€150 million each to ICG Europe
0 Fund VIII and Strategic Value Special
2016 2017 2018 2019 2020 H1 2021 Situations Fund V, and $125 million
Source: PDI to BIG Real Estate Fund II. n
4 Private Debt Investor • September 2021
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Insight
Financing How lenders are adapting to today’s
favoured sectors
O
ut of a crisis comes
innovation, and one of the “ These businesses
distinctive features of the
pandemic from a business point of
can still represent
view has been a bifurcation between a very good credit
sectors that have flourished and
those that have struggled, writes risk as they have a
Andy Thomson.
Businesses in the healthcare,
lot of other positive
software and technology sectors characteristics ”
have found themselves favoured
Xenia Sarri
perhaps more than any others. Lincoln International
However, private debt managers
wanting to support these types of
companies have faced a challenge.
Many lenders, especially those
of a more generalist persuasion,
have become used to financing against recurring revenues rather 20 percent, compared with
businesses with long track records than EBITDA. This is not exactly a 50 percent in the wider leveraged
and strong profits. new phenomenon, having been loan market, and debt multiples of
Many of the best performing an option in the US for around a around 2x annual recurring revenue.
companies today may well lack decade. While senior loan defaults have
both. Their main priority has What is striking is how much been in the range of 4-10 percent
been growth, and many have more popular it has become. Sarri for the wider market over the past
flat or negative earnings before says Lincoln had typically been six quarters, in the software sector
interest, taxes, depreciation and involved in four to five recurring the range was 0.4 to 3.5 percent.
amortisation. revenue financings in the software Recoveries in default also tend to be
Yet no one should assume that sector each year but, over the past stronger due to the likely presence
this makes them unbackable. “They 12 months, the figure rose to 20. of valuable intellectual property and
may not be typical leveraged buyout A greater proportion of deals significant equity cushions.
candidates, but these businesses are happening in Europe, where Given these attractive
can still represent a very good they have only taken root over the characteristics, it is not surprising
credit risk as they have a lot of other past few years, and estimates put that many lenders are taking a
positive characteristics,” says Xenia the number of lenders prepared to closer look. In the fast-changing
Sarri, a managing director in the do such financings at around 75, environment of the past 12 months,
capital advisory group at investment compared with approximately 40 ‘sticking to the knitting’ has seemed
bank Lincoln International. a year ago. a less viable approach.
In recognition of this, many more The dislocation opportunity in
lenders are now considering lending Misconceptions the early months of last year was
One of the misconceptions around an example of fund managers
4-10%
this type of financing is that, by needing to be adaptable and quick
eschewing traditional metrics, it off the mark. Those qualities are
must be inherently riskier. still required to take advantage of
But, according to Sarri, the today’s opportunities. “There’s more
Senior loan default rate in recurring revenue deals Lincoln liquidity than ever before and a
the wider market over the past
six quarters
has seen have typically involved lot of innovation around financing
loan-to-value ratios of around structures,” says Sarri. n
6 Private Debt Investor • September 2021
Insight
Secondaries In conversation with
Dechert’s Michael Wong
Q What are the key
considerations, including
potential pitfalls, for parties
on either side of a secondaries
deal?
Q Private credit secondaries
seems to be maturing – is
“ The increase in Key considerations include tax,
disclosure rights to buyers and
that your impression too? GP-led secondary anti-money laundering. Buyers and
That’s certainly what we’ve been sellers should conduct an in-depth
seeing and consistent with a notable transactions has tax analysis on the underlying funds’
uptick in the secondary mandates
we’ve been instructed on.
resulted in more tax position and commercially
agree on the payment of any tax or
We’ve seen the private credit diverse and complex potential tax liabilities at the outset.
secondaries market grow In addition, if the buyer is a fund of
significantly over the past 24 months secondary deal funds or has other investors backing
in three areas: an overall increase in
the number and size of secondary
structures ” the transaction, the parties will need
to map out the disclosure rights
transaction mandates; a general with the underlying credit fund
increase in the number and size of managers. AML is also an issue and
specialised secondary funds that should be addressed early to avoid
have come on to the market; and any last-minute hiccups – particularly
an increase in the prevalence of in a transaction involving multiple
GP-led secondary transactions as underlying funds.
a percentage of overall secondary
deal volume in the market. The
increase in GP-led secondary
transactions has resulted in more
Q What’s your impression
of the current state of the
private debt market in Asia?
diverse and complex secondary deal I think it is growing substantially.
structures, which is dictated by the Our experience is, given the
bespoke commercial objectives of economic environment which has
the GP and the existing LP. been greatly affected by covid,
many smaller private businesses
Q What was your role
in the Ping An/Coller
secondaries deal? How long
are tapping into private funds
(including hedge funds and
traditional private equity funds) for
did it take and what were the time of completion, with a highly capital, by way of debt, for short-
notable features? diversified portfolio covering 400 term funding for their businesses
Dechert acted for Ping An as fund positions in over 250 companies, and operations as bank loans are
counsel and as seller counsel on the and spreading across a range of not always available.
transaction. The legal component industries, such as professional During the past year, we’ve seen
of the transaction was completed services, healthcare and clients frequently investing in private
within approximately four months telecommunications. debt issued by businesses in real
with the commercial processes and estate, hotel and leisure and aircraft
discussions occurring two months
prior to commencement of legal
documentation. The transaction
Q Would you expect Asia-
based institutions to make
increasing use of secondaries?
leasing, and we have been part of
those. We expect this to continue
and businesses will increasingly tap
sees the sale of interests in Ping An’s Yes, we would expect to see private funds as a funding source as
credit fund of funds to Coller and increasing use of the secondaries they are less regulated and much
another institutional investor. market as the large volume of more flexible with their offering. n
The transaction is notable for private equity funds and private
being the largest private credit credit funds that have been set up Michael Wong is a partner at law firm
secondaries transaction at the over the past years begin to mature. Dechert in Hong Kong
September 2021 • Private Debt Investor 7
Insight
Editor’s letter
What will come New York
130 West 42nd Street
Suite 450
after LIBOR?
New York
NY 10036
T: +1 212 633 1919
London
100 Wood Street
London
EC2V 7AN
Andy Thomson T: +44 20 7566 5444
andy.t@peimedia.com Hong Kong
19F On Hing Building
1 On Hing Terrace Central
Hong Kong
T: +852 2153 3240
Private Debt Investor
A
s the deadline to replace the LIBOR benchmark for financial instruments Published 10 times a year by
including loans creeps ever closer, so too does the urgency with which PEI Media. To find out more about
PEI Media visit thisisPEI.com
banks and fund managers must make their preparations. In the UK,
where there appears to be consensus on a suitable replacement, this looks © PEI Media 2021
relatively straightforward. But in the US, where there are a host of possible No statement in this magazine is to
replacements, the picture is much more confusing. be construed as a recommendation
to buy or sell securities. Neither
In this month’s cover story, starting on p. 10, Robin Blumenthal speaks to this publication nor any part of it
leading banking sources, lawyers, consultants and others about the competing may be reproduced or transmitted
in any form or by any means,
merits and potential pitfalls of the electronic or mechanical, including
different benchmarks. With vast photocopying, recording, or
by any information storage or
portfolios of loan-related contracts “ Finding a solution retrieval system, without the prior
waiting to be tweaked, finding a permission of the publisher.
solution that works for everyone is a that works for Whilst every effort has been
made to ensure its accuracy, the
huge but vitally important task – and everyone is a
publisher and contributors accept
no responsibility for the accuracy
one that, as we discover, does not of the content in this magazine.
come without challenges. huge but vitally Readers should also be aware
that external contributors may
Also in the issue, we reflect on the important task ” represent firms that may have
fundraising data from the first half of an interest in companies and/or
their securities mentioned in their
this year and find there are few signs contributions herein.
yet of a revival (p. 32). Investors are still being hampered by travel restrictions
Cancellation policy You can
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trusted managers. This ‘flight to safety’ is also reflected in their strategic choices, time during the first three months
of subscribing and you will
with senior debt notably increasing its share of the pie. receive a refund of 70 percent
We also lift the lid on developments in the Canadian and Nordic private debt of the total annual subscription
fee. Thereafter, no refund is
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Andy Thomson
8 Private Debt Investor • September 2021Cover story
September 2021 • privatedebtinvestor.com
EXTRA
The key
fundraising
data from H1
Private Debt Investor | Issue 86 | September 2021
Why firms are puzzled over
replacement benchmarks
Cover story
10 Private Debt Investor • September 2021Cover story
The benchmark that has
underpinned vast numbers of
financial instruments globally is
coming to an end. But there is a
lively debate around what will
replace it, and how suitable
that replacement will be
in the event of a crisis.
Robin Blumenthal reports
September 2021 • Private Debt Investor 11Cover story
C
all it the battle of the small number of global banks. It is cal-
benchmarks. As much culated daily by averaging what those
as US authorities lenders say they would pay overnight
have been eager to to borrow from each other, not what
persuade the financial they actually paid. That has left it vul-
markets to adopt the nerable to manipulation.
Secured Overnight Financing Rate, After a scandal involving collusion
or SOFR – the benchmark they have by some high-profile institutions came
slated to replace dollar-based LIBOR to light in 2012, regulators in the UK
when it is phased out for new con- decided to hand over its administra-
tracts at the end of the year – it seems tion to the Intercontinental Exchange
plenty of market participants are not Benchmark Administration from the
buying into it. clubbier British Banking Association,
There is a lot riding on a smooth and to replace LIBOR with something
transition. The London Interbank more transparent.
Offered Rate underpins hundreds SOFR, which the Federal Reserve
of trillions of dollars of financial Bank of New York began publishing in
instruments – predominantly deriv- April 2018, is a broad measure of the
atives – and includes an estimated overnight cost of borrowing cash that
$6 trillion of commercial loans. Not is collateralised by US Treasuries in the
exactly small potatoes. so-called repo market.
Consulting firm Oliver Wyman has The secured rate is based on approx-
estimated that a typical US bank today imately $1 trillion of daily transactions
has 20-25 percent of its balance sheet between a diverse set of borrowers and
in LIBOR. When commercial real es- lenders.
tate and mortgages are included in the “One of the concerns with LIBOR
overall tally, the consultant concludes was that $1 billion of transactions
that there are nearly $10 trillion of in the London market was dictating
LIBOR-referenced loans outstanding the rate on hundreds of trillions of
in the US. dollars of transactions,” says Roger
But LIBOR, an unsecured inter- Chari, a partner at Duane Morris who
est rate benchmark that is published heads the law firm’s LIBOR transition
daily, is refusing to go quietly, at team.
least in the US commercial lend-
ing market. “So far, the rate that “The risk is that the SONIA’s the one
is going away is winning,” said an In the UK, new contracts and loans
Oliver Wyman presentation on the market’s going to based on LIBOR are well on the way
transition this summer. And that is to being replaced by the Sterling
because SOFR and LIBOR are not
freeze up and lenders Overnight Index Average, or SONIA,
interchangeable. which is based on actual trades in the
“There’s no question that SOFR
aren’t going to want UK overnight unsecured lending and
is a more transparent and more liquid to be lending at the borrowing market. The British bench-
underlying market than LIBOR,” says mark is administered by the Bank of
J Paul Forrester, a partner in law firm very time you need England, which publishes the rate
Mayer Brown’s Chicago office. “The every business day.
problem is that it’s not comparable them to” But the changeover has not been
to LIBOR because it doesn’t reflect nearly as smooth in the US. The Al-
many lenders’ funding costs and is less HARRIS SIMMONS ternative Reference Rates Commit-
credit-sensitive.” Zions Bancorporation tee, an industry panel charged by the
LIBOR, which came into existence Federal Reserve Bank of New York
in the late 1960s, is based on a poll of a with leading the transition, is strongly
12 Private Debt Investor • September 2021Cover story
How prepared is your institution to address the phasing out of LIBOR? (%)
advocating for SOFR. The rates com-
mittee “is trying to do a rate for all sea- Lenders Private equity investors Total
sons”, says Adam Schneider, a partner
0 10 20 30 40 50
in Oliver Wyman’s financial services
practice who also sits on the panel,
Very prepared
known as the ARRC. “There was a
rate for all seasons, LIBOR. Replac-
ing it with a new rate that has different
characteristics is daunting.” Somewhat prepared
The main problem is that SOFR is
a risk-free rate because it is based on
overnight borrowing backed by US
Neutral
Treasuries, while LIBOR is sensitive
to credit conditions. This means that if
there is a market event and SOFR is the
prevailing rate, the rate banks charge Somewhat unprepared
for loans will be likely to fall – since
SOFR is risk-free and essentially a safe
harbour – while their cost of funds will
Not prepared at all
rise.
This is likely to lead customers to
draw down their credit lines and could
Source: Katten
cause a serious mismatch between
the cost of loans and the cost of bank
borrowing in the market. As rates fall,
borrowing from banks rises, even as it
becomes more expensive and difficult driving down the freeway the wrong restructuring lending products to pro-
for lenders to get funding. way during a crisis”. vide banks with more protection,”
“This is how markets behaved in Moreover, if a risk-free rate such with fees or significant rate floors on
past crises, and banks are wonder- as SOFR predominates during a cri- loans.
ing how to protect themselves if they sis, “the risk is that the market’s going Many banks are moving towards
lend with SOFR,” says Schneider. All to freeze up and lenders aren’t going more recently developed credit-sensi-
the stimulus that was injected into to want to be lending at the very time tive rates as an alternative to LIBOR.
the system because of the pandemic, you need them to”, says Simmons. The CSRs include Ameribor; Bloomb-
among other things, helped to push Zions Bancorporation began erg’s Short Term Credit Sensitive Index,
rates on 10-year Treasury inflation- adopting Ameribor, a credit-sensitive known as BSBY; and credit-inclusive
protected securities to a record low rate that is published on the American term rates and spreads, known as CRI-
of minus 1.132 percent at the end of Financial Exchange, this summer as a TR and CRITS, that are published by
July. substitute for LIBOR. The lender now IHS Markit. In addition, ICE is testing
“It’s perplexing to me that regula- has a number of clients with this refer- a dollar-based credit-sensitive rate.
tors would be endorsing SOFR as a ence rate incorporated into their loan
reference rate for commercial lend- agreements. Banks hesitant
ing,” says Harris Simmons, chairman With LIBOR, both loans and bank Unsurprisingly, just a few months
and chief executive of Zions Bancor- funding costs move the same way away from the deadline to stop using
poration, a Utah-based lender with during stress, creating more equi- LIBOR for new instruments, many
more than $80 billion of total assets. In librium. But with SOFR, the cost of banks are still hesitant to make the
times of stress, when credit spreads are money goes up and the price of loans transition to SOFR. “A lot of people
widening and market participants are goes down. According to Schneider: are trying to figure out what every-
“piling into Treasuries and repo rates “Changing this dynamic will either body else is doing,” says Matt Hays,
are coming down, it seems to me that mean not using SOFR – and there a partner in law firm Dechert’s global
you set the stage for the equivalent of is pressure to use other rates – or financial practice who leads the firm’s
September 2021 • Private Debt Investor 13Cover story
LIBOR transition taskforce. “Nobody
“We expect a real ‘I understand allegations of market
wants to be the first mover.”
dogfight between manipulation led to concerns about
The lack of consensus on a pre- LIBOR, but now that such concerns
ferred alternative is slowing down the term SOFR and have been alleviated, can’t better con-
transition. trols simply be installed?’”
Although there is an imminent need various alternative Although the US Federal Reserve
to move lending to new rates, “lit- supports the use of SOFR, chairman
tle lending is being done on any new rates this fall” Jerome Powell has testified before
rate”, according to Oliver Wyman. Congress that the ARRC’s recom-
Fund prospectuses are cautioning that ADAM SCHNEIDER mendations and the use of SOFR
the uncertainty surrounding a LIBOR Oliver Wyman are voluntary, and that market par-
replacement could create more volatil- ticipants should transition away
ity. One big issuer of collateralised loan from LIBOR “in the manner that is
obligations tells Private Debt Investor most appropriate given their specific
that as recently as this summer, lever- circumstances”.
aged loans were still being priced using Nevertheless, Treasury Secretary
LIBOR. Janet Yellen at a meeting of financial
“The market still hasn’t seen a regulators in June urged bankers and
SOFR syndicated loan,” says Chari of other market participants to avoid
Duane Morris. alternative rates that she said are not
That is partly because the ARRC robust enough to underpin many other
took so long to endorse a for- financial products. At the same meet-
ward-looking term rate for SOFR, ing, the Fed’s vice-chairman, Randal
which is crucial to remove uncertainty Quarles, who has strongly advocated
about rate changes for the large num- for the use of SOFR, said “LIBOR
ber of commercial and consumer loans is over”.
with floating rates. Although there are
seven different tenors for LIBOR, and SOFR ‘robust’
much of the leveraged lending mar- In a speech in June, Quarles said
ket uses term rates, SOFR was largely SOFR “rests on one of the deepest
limited to an overnight rate until this and most liquid markets in the world
summer. and is therefore likely to remain avail-
The ARRC originally said it would able even when other financial mar-
recommend a term SOFR rate by kets are disrupted”. According to the
mid-2021, but then reversed itself.
It finally endorsed a term SOFR rate
published by the Chicago Mercantile
Exchange, the derivatives market op-
erator, in late July. However, Oliver
Wyman says that there will not be
an ability to hedge term SOFR un-
til at least 2023. Meanwhile, all the
credit-sensitive benchmarks have term
options.
Jim Aronoff, a managing director in
the restructuring and dispute resolu-
tion practice of accounting firm Cohn-
Reznick, says that many of his clients
believe LIBOR was not broken in the
first place. “As bizarre as it sounds,
a comment I hear very frequently is,
14 Private Debt Investor • September 2021Cover story
A financial force of nature
New York Fed’s website, “during acute
market stress in March 2020, SOFR Richard Sandor came up with an answer to LIBOR.
volumes remained robust – while activ- Other ideas are in the pipeline.
ity in term unsecured markets further
dried up”. Richard Sandor, the mastermind of Ameribor, a credit-sensitive
At roughly $1 trillion, daily SOFR alternative to LIBOR, along with the American Financial
trading in the repo market dwarfs the Exchange, the trading platform that helps set the new benchmark,
volume in both the overnight and term has spent much of his career revolutionising the landscape for financial
credit-sensitive rates. But the repo products.
market relies heavily on trading by just It all began some 50 years ago, when Sandor, who was on sabbatical
a handful of banks, according to the from the University of California, Berkeley, became the chief economist
Bank for International Settlements. By and vice-president of the Chicago Board of Trade. There he invented
contrast, the American Financial Ex- several interest-rate futures contracts and became known as the “father of
change, where Ameribor is traded, rep- financial futures”.
resents about 25 percent of US banks The American Financial Exchange, or AFX, is Sandor’s latest brainchild.
in terms of both assets and by number. He launched the platform for interbank lending and borrowing in 2015. It
So far, there is “limited” activity helps set Ameribor, which he created as “the anti-LIBOR”.
in SOFR futures and derivatives, says Soon after the LIBOR scandals emerged in 2012, Sandor realised that
Mark Cabana, head of US rates strat- the structure of the British benchmark was flawed and he began working
egy at Bank of America. Cabana be- on a substitute. In an interview with the Kellogg School at Northwestern
lieves “there’s enough trading activity” University, Sandor said that “as with interest-rate futures, everybody
underlying the credit-sensitive rates to thought a new [benchmark] was unnecessary”.
inform their indices. He set to work to prove them wrong. “We did this highly remarkable
He expresses concerns about how thing – we asked the customer what he wanted,” Sandor says wryly. Over
credit will be priced off SOFR versus the course of the past 10 years, he and his team have visited 125 cities
an index that has credit risk. Cabana across the US, from Tupelo, Mississippi, to Green Bay, Wisconsin, to speak
says that although the Fed has not said to bankers at community, regional and minority-owned banks to inform
so explicitly, he thinks the central bank them of the creation of Ameribor and the AFX.
believes there is an advantage to having From that intelligence gathering, Sandor says, “things crystallised and
a rate it can easily control, and that the we realised intuitively that we could help match institutions in high-growth
banking sector would be safer using a areas with those in low-growth areas of the country and create a truly
risk-free rate. national market”.
“The Fed from day one has hated Efforts have paid off. AFX represents a full 25 percent of US banks with
the fact that a major international rate assets of $5.3 trillion. “We opened up the capital markets and democratised
is being set by markets over which they them so that minority-owned, regional and mid-sized and community
have no control,” says Mayer Brown’s banks would have access to liquidity that the large banks had, through a
Forrester. “It does affect their ability peer-to-peer fintech exchange,” Sandor says.
to implement monetary policy.” With Ameribor has the imprimatur of no less a personage than US Federal
SOFR, because the Fed can intervene Reserve chairman Jerome Powell. He testified to a congressional
in the US repo market through its committee that Ameribor “is a fully appropriate rate for banks that fund
open-market operations, the US cen- themselves through the American Financial Exchange or for other similar
tral bank “can push rates around any institutions for whom Ameribor fully reflects their cost of funding”.
way they want”. He noted the benchmark “may not be a natural fit for many market
The Fed in late July launched a participants”.
standing repo facility to provide liquid- Sandor shows no sign of slowing down. At a webinar the AFX hosted
ity to big Wall Street banks and other this summer, he said: “We’re working on a real whopper… that involves
central banks to help stabilise markets trillions of dollars.” Sandor tells Private Debt Investor that he is broadly
experiencing stress. looking into some sort of investment instrument, possibly related to a
Under the facility, primary dealers subset of banks on the AFX. Plus, he is “making a thrust into sustainability
could exchange Treasury and other debt in banking”. We’ll be sure to stay tuned.
with the central bank for overnight cash
September 2021 • Private Debt Investor 15Cover story
“The problem is The LIBOR commercial lending market*
Approximate
that [SOFR] is not USD LIBOR lending footprint outstanding
($bn)
% LIBOR Low ($bn) High ($bn)
comparable to LIBOR Syndicated loans** 3,400 97 3,298 3,298
Corporate business loans** 1,650 30-50 495 825
because it doesn’t
Non-corporate business loans 1,252 30-50 375 626
reflect many lenders’ CRE/commercial mortgages 3,583 30-50 1,075 1,792
funding costs and is Total 9,885 5,244 6,541
*estimate based on industry and Federal Reserve surveys plus Oliver Wyman analysis
less credit-sensitive” **some overlap exists between estimates of syndicated and corporate business loans
Source: Oliver Wyman
J PAUL FORRESTER
Mayer Brown
loans at a rate of 0.25 percent. The Fed, said that a majority of the lenders and
which set a $500 billion daily cap on the private equity sponsors polled admit-
facility, first intervened in the repo ted they were not very prepared for the
market in September 2019, when LIBOR transition. All the replacement
“overnight money market rates spiked language in existing documents must
and exhibited significant volatility, be changed, at a significant cost of time
amid a large drop in reserves due to the and money, although in the US mar-
corporate tax date and increases in net ket participants generally have until
Treasury issuance”, according to the mid-2023 to replace existing LIBOR
Fed’s website. contracts with another rate.
In a briefing to the Federal Open To prevent a flood of lawsuits, New
Market Committee at its April meet- York state enacted a law last spring to
ing, recorded in its minutes, Fed staff designate SOFR as a fallback in LI-
noted that repo operations “have been BOR legacy contracts that either do
a useful tool in controlling the federal not have one or where counterparties
funds rate by adding reserves to ensure cannot agree. And there is a move in
that they remain ample, and by limiting the US Congress to reference some
pressures in repo markets that could form of SOFR as a fallback.
spill over into unsecured markets”. But with the end of the year fast ap-
They cited the repo operations’ role in proaching, the majority of borrowers
helping to stabilise financial markets in surveyed by Oliver Wyman say they
March 2020. have not yet even been approached by
However, a few participants point- their banks to discuss available options.
ed to the risk that “such a facility could “The trillion-dollar question is,
crowd out private market sources of li- ‘What are people going to do?’’’ says
quidity provision”. Dechert’s Hays.
All that aside, “widely differing “We expect a real dogfight between
views” remain on which rate to use, ac- term SOFR and various alternative
cording to Oliver Wyman. rates this fall,” says Oliver Wyman’s
Law firm Katten, in its Private Credit Schneider. It is unclear if and when
Survey Report 2021, published in April, there will be a winner. n
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K E Y N O T E I N T E R V I E W
Trust, collaboration and
diversification: The three pillars of
strong investor partnerships
CIFC’s Steve Vaccaro reflects on building a global credit platform that meets
investors’ needs irrespective of market conditions
Q CIFC has recently reached
its 15-year anniversary
and crossed $30 billion in
SPONSOR
CIFC
our success would be possible. We’ve
achieved quite a bit and there’s much
more to come over the next few years.
assets under management.
How do you reflect on those
landmarks?
As we’ve grown and crossed these land-
continuously re-examining whether our
processes and procedures continue to
support our growth efforts or whether
Q You have diversified
into numerous different
strategies. How have you
marks there’s some commonality around any part of them hinders our ability to gone about that and are
what has driven our success: nurturing scale and diversify the platform. there are other areas under
a strong culture and having our people We have demonstrated that size does consideration?
aligned with that culture. Achieving not necessarily diminish performance. This is a question I get asked periodi-
these milestones is not a one-person That was a main consideration as we cally by investors. Our approach to di-
exercise – it’s truly a team effort that re- began to extend our platform. Being versification has always been to remain
quires everybody to be behind the stat- able to maintain performance not only true to our core competencies in cor-
ed goals that we’re seeking to achieve. in the face of growth but across market porate credit, and as we’ve grown, we
Further, self-assessment is critical, and cycles has been a key contributor to have built on leveraging our individual
you must be willing to be flexible and our success. I’m also immensely proud product expertise that we’ve brought in-
make changes. As we grow, we are of our people without whom none of house across various strategies. CIFC
18 Private Debt Investor • September 2021Analysis
is not a firm where we create silos. Our
culture is collaborative and encourages
teamwork among different disciplines,
allowing each strategy team to gain val-
ue and information from one another.
Collateralised loan obligations have
always been an important part of our
business and make up the largest por-
tion of our assets. We also manage total
return loan and bond funds, long/short
credit, structured credit, opportunistic
credit and, more recently, multi-asset
credit. We expanded our operations
footprint into Europe and offer these
customised client solutions globally.
Our structures include commingled
funds, UCITS and separately managed
Q How do you ensure you’re maintaining the right culture
as the business expands and diversifies into new areas?
That’s a critical question and at the core of our planning as we contemplate
accounts. We provide different risk and continued expansion. We moved into Europe and had employees
liquidity profiles for our investors to geographically separated from the New York headquarters. Maintaining our
suit their needs. culture and teamwork is absolutely first and foremost in our hiring practices
Looking ahead, we’re always eval- and how we approach growth initiatives. We want people who want to be
uating ways to expand into new areas here and want to share our vision both in terms of how we run this firm and
and one particular focus is direct lend- our goals of creating a best-in-class global alternative credit platform.
ing, which we view as highly comple- For us, that entails working together and having a ‘firm first’ attitude.
mentary to our liquid credit businesses. Our different product teams don’t sit in isolation from one another, they
We are in active conversations with all sit together on one trading desk and there’s a constant dialogue around
multiple parties about the prospect of risk and markets. It’s about leveraging off one another, and working as a
combining with CIFC and it is highly close-knit team, which is fundamental to our philosophy of how we want to
probable we will do so in the near term. continue to expand the business.
Q With different strategies
under one roof, how
do you seek to ensure they
solutions team allows us to support all
of our strategies globally.
asset managers to consider.
What are your thoughts on this,
complement each other? On the investment side, we have from a CIFC perspective and
We believe in the fundamental prem- cross collaboration across strategies, from what you observe in the
ise that investors don’t want to change with expertise in one strategy providing wider market?
managers when they want to reallo- information and support to others. In For us, ESG is at the core of everything
cate within credit. A primary reason my opinion, the most important point we do. It’s how we invest and govern
for this is trust, which is at the centre about having multiple strategies under the firm. We have long recognised that
of our partnerships with our investors. one roof is that it allows us to make ESG is an important consideration and
Additionally, there is a significant time better decisions. In difficult times, the good business practice. Our expansion
commitment that investors must make more products you manage, the more into Europe, where ESG has been
in order to evaluate managers, which information you have, and the more at the forefront for many years, rein-
makes it difficult for them to bring in a information you have, the better deci- forced this view. We are a signatory to
new manager every time the opportuni- sions you can make. There is always a the UN PRI and incorporate ESG into
ty shifts in the marketplace. Therefore, relative value opportunity somewhere our underwriting and investment pro-
we view a multi-strategy platform as an that can be exploited to the benefit cesses. DE&I is equally at the forefront
advantage, as it allows us to offer inves- of investors, which becomes easier to for us, having a formal DE&I commit-
tors different risk and liquidity profiles identify and execute with a large and tee that’s responsible for ensuring an
and gives them the ability to stay invest- diversified platform. inclusive workplace and upholding our
ed on our platform and allocate between core values. We’ve had these processes
strategies when it’s deemed necessary
or appropriate. Having a large investor Q Clearly, DE&I and ESG are
vitally important areas for
in place for some time; it’s not new for
us. I believe reflection and actionable
September 2021 • Private Debt Investor 19Analysis
feedback has allowed us to become a I would say government assistance financial crisis. The product itself has
better firm. was absolutely critical in getting every- also become mainstream with banks
Nonetheless, we recognise there has one through this unique period. It gave and insurance companies at the top
been a lack of industry co-ordination markets confidence and enabled them of the capital structure. It’s become an
around these issues and we want to have to remain open and function properly. attractive asset class for family offices
a part in changing that. This past year, It also allowed access to liquidity that and other alternative investors that are
we established the CLO Initiative for was beyond what most people antic- looking for yield. Overall, the investor
Change, a philanthropic programme ipated. Companies were able to gain base has shifted significantly from a
associated with our CLO issuance that access to sufficient capital to support trading to a ‘buy and hold’ philosophy.
is dedicated to supporting organisations them through the most difficult period During the pandemic, we observed
that are striving for social, economic and liquidity was the result of govern- that if you understood the fundamen-
and environmental change. With our ment policies being very accommoda- tals, you could get exposure at very
deal partners, we came together and tive at a critical point in time. attractive prices. The market has since
made a collective donation of $145,000 quickly returned to pre-pandemic
to Black Girls CODE.
It is our intention to replicate this
type of donation at least annually. More
Q What’s investor appetite
like today and how do
you go about serving investors
levels of health. Demand in 2021 has
been fuelled by this challenging envi-
ronment we find ourselves in, and the
importantly, firms across the market effectively? fact that returns from CLOs are really
are starting to address these issues as As investors search for yield, it is ap- quite attractive. I don’t see this fading
well, which was our hope. We strive to parent the traditional 60/40 model is and I think we’re going to have strong
be a leader in the space and appreciate broken. How do you find yield and demand right through to year end.
the recognition we have received from acceptable risk that doesn’t have high
our peers, who’ve expressed a strong
desire to replicate these efforts with
similar initiatives.
correlation? For us, being able to offer
a platform with multiple avenues of ac-
cessing credit allows us to engage in-
Q What do you predict for
the credit markets in
general in the period ahead?
We will continue to evaluate and vestors in solutions-orientated conver- The economy continues to be strong as
evolve our practices around ESG sations. The CLO market is very much we work through the reopening. How-
and DE&I to ensure that they meet in favour and a lot of that has to do ever, we still face the impact of the pan-
best-in-class standards. with how it has consistently performed demic globally and resulting growth
through periods of stress over the last concerns. We have an internal debate
Q How did CIFC navigate
the market uncertainty
of the last year and what role
couple of decades. While sometimes
there can be negativity around credit,
I don’t think many people envisioned
on a daily basis about inflation – wheth-
er it’s transitory or not and how much
growth will slow once we get past the
did the government play in how robust these structures are in reopening. Taking a step back to look
supporting credit markets and terms of the protection they provide, at the broader picture, we believe credit
the economy? the non-mark to market nature, the di- is fundamentally sound.
I’m very pleased with how our funds have versification, and the excess spread. Our view is that over the coming pe-
performed through this period, demon- The CLO investor base really be- riod we’re likely to see more price risk
strating CIFC’s capacity to do well gan to evolve and expand from niche than credit risk. The default forecasts
during an economic downturn. What to mainstream following the great coming out of the banks and the vari-
we did was a basic blocking and tackling ous rating agencies have been tracking
exercise of re-underwriting every name lower down and frankly tracking the
in our portfolio and trying to assess what “One particular focus actual results that we’ve been seeing.
each company’s liquidity profile and ac- We’re going to have volatility. How-
cess to capital might be. Based on this, is direct lending, ever, I do not necessarily think we’re
we ranked the companies on their abili- going to have a material spike in credit
ty to succeed through the pandemic and
which we view as risk. I believe credit is in good shape
tried to mitigate as much risk as possi-
highly complementary with robust liquidity, low interest rates
ble. It was quite a herculean exercise that and continuous cashflow generation. n
took several weeks to work through, and to our liquid credit
we were very active in the markets, buy-
ing and selling names, repositioning our businesses” Steve Vaccaro is chief executive officer
and chief investment officer of CIFC Asset
portfolio to reduce risk. Management, a global credit specialist
20 Private Debt Investor • September 2021You can also read
