Three in Five Podcast

Episode 32: Three intermediate private credit questions for Chris

Steve sits down with Chris Adair, Senior Managing Director, Head of Strategic Partnerships at SLC Management, to discuss why intermediate private credit can be a compelling opportunity for investors.

Steve Peacher: Hi everybody thanks for dialing into this episode of “Three in Five,” this is Steve Peacher, president of SLC Management and I'm really happy to be joined again by Chris Adair who's head of strategic partnerships at SLC, and today I want to talk about, Chris, our private credit offering, especially in the intermediate space.

Chris Adair: Thanks for having me.

Steve Peacher: This has been an important area for us, and what we've seen from our institutional clients is that they generally been focused on the longer duration segments of private of our investment grade private credit offerings. And now we're talking and to clients and have watched product in the intermediate part of the curve in investment grade private credit. So, my first question is, you know why are clients now I'm interested in the intermediate part of the curve when they think of private credit, how are they looking you know, to invest in that, and how does it fit into their asset allocation?1

Chris Adair: You know Steve, it's interesting when we've had a third-party private credit, investment grade private credit offering in Canada now for well over five years, and when we first started to look at the U.S., I guess it's now a little over two years ago, with our with our first offering we initially thought that strategically it made a lot of sense for our clients, certainly in the longer duration space as kind of a plus component to augment their LDI portfolios and in particular their long treasuries or long credit allocations. And obviously that that's been a successful offering for us. Interestingly, what we have found is that there's almost like a credit curve inversion that's taking place with the long duration asset. When you look at spreads that that we're seeing in the private placement market today in kind of the short and intermediate part of the curve relative to the long part of the curve, you're seeing spreads kind of at that five year to seven-year tenor range in the neighborhood of the approximate about 175 basis points over a comparable, let's say single A corporate bond2. Whereas if you look at kind of further out the curve at the at the 20 year tenor range you're kind of in that 90, 85 to 100 kind of basis point range, so I mean if you think about just like absolute credit spread and absolute yield where we are today, the ability to pick up 175 basis points over comparable corporate bonds with same type of credit risk in kind of a five year in kind of a five year duration window, it's a pretty compelling story.3

Steve Peacher: What more can you tell the listeners about that strategy? Any more detail, and also we've got a solutions team at SLC that can help put these kinds of strategies in context for clients and help kind of get to the right risk return trade off from the client's perspective. Were they involved in this, and you know, in terms of trying to achieve the desired return characteristics?

Chris Adair: Tim Boomer heads up our solutions and strategy team here at SLC and interesting some of some of our best strategies are brought to us from clients right, and so in this instance, in particular we were working with a with a large U.S. corporate pension client that really understood and spent a lot of time and research on the private placement market, and you know they were kind of seeing what we were seeing in terms of this real opportunity set in the in the intermediate space, and so, we spent a lot of time with that client in particular, with Tim Boomer and the solutions team in terms of thinking about how would this fit, how could we structure a solution set that that one was optimal in terms of in terms of strategy and solution for the client to fit their return and income objectives, but also that really was that kind of mirrored kind of best in class in terms of what SLC could bring to market. I mean if you think about that that kind of five to seven year tenor, issuers in the in that space usually or financial institutions or private equity firms, or asset managers and they're usually issuing the private placements to match the lifecycle of their bonds, right. And so most corporate issues are concentrated in the seven to 15-year maturity bucket and a limited issuance extended beyond the 15 year period. So, you know what we're kind of seeing there's such a such a large demand for a long duration for long duration assets in general, as you know most life insurers really have a high demand to offset their liabilities in that kind of 20-year bucket, so it's really been this kind of structural inflection point that we've seen in terms of the spread curve so to speak, and so really having the ability to lean on our solutions team in terms of understanding that structural dynamic in spreads and being able to eventually put that together in a strategy and bring it to our clients certainly has been a benefit.

Steve Peacher: 2021 has been basically great in all markets, you know are equities are up, credit’s done really well, rates have come down, traditional fixed incomes has done well. You know you talk to clients in your role about kind of broad strategies. You talk to our clients and  institutional investors in the marketplace, given how well markets have done what are some of the themes you hear from them as they're looking forward to next year?

Chris Adair: It's pretty common – one, we're still on this search for yield environment, I think this intermediate private credit strategy certainly meets that, certainly, on the front part of the curve. Like I said, you know it's hard to go somewhere where you can kind of pick up 175 basis points of excess spread over a comparable corporate bond. And so we're hearing a lot of that. We're hearing concerns or conversations around inflation and how that kind of fits in to not only a traditional fixed income allocation for our clients, but also are there alternative or other strategies that clients could look to invest in to help offset some of the some of the inflation pressures that we certainly have experienced in the second half of 2021 and continuing on into 2022. Kind of going back to the solutions team and kind of sitting in my seat in particular we definitely have an advantage in order to think outside of the box and bring alternative strategies to our clients. You can think about real estate, you can think about the offsetting nature that real estate has to inflation or you can think about infrastructure and some of the strategies there that have inherent inflation protection type structures embedded in them. Even in traditional investment grade fixed income, we have TIPs and CLOs with floating rate structures. And on the non-investment grade side, SLC affiliates have bank loans and narrowly syndicated loans. And finally, as you know Steve, at SLC we have a derivatives desk that manage approximately $60 billion in risk exposures4. So we can look at inflation swaps in isolation or combined with some of these alternative yielding strategies. So, it's nice to be able to have a full suite of alternative yielding strategies that we can sit down and talk to our clients. I'd probably say the most the most interesting thing that that our clients are faced with is that it's not going to be an off the shelf type solution or offering, I think I think clients are looking to be outside of the box, looking for their asset managers to work across their various different strategies and platforms to bring the optimal, bespoke solution to potentially solve our clients’ inflation risk.

Steve Peacher: Well thanks for all that, and before we end just something on the personal front, I know as we've all been kind of working in different locations during COVID you spent more time down in Florida, which has been fun. So of all the things that there are like about being down there, what do you like most about being able to spend more time down in Florida during this period?

Chris Adair: I'd probably have to say Steve, I'm sure if you ask most people that question, it would be the weather, but particularly for me it's been the ability to really kind of spend more time with my dad who’s down here. But I have to say, the weather hasn't been as bad as well.

Steve Peacher: It's not tough duty?

Chris Adair: No, it's not that tough, yeah.

Steve Peacher: Well, Chris thanks for taking a moment, and thanks everybody for listening to this episode of “Three in Five.”

Chris Adair: Thank you Steve.

 

Disclosure

Investment grade credit ratings of our private placements portfolio are based on a proprietary, internal credit rating methodology that was developed using both externally purchased and internally developed models. This methodology is reviewed regularly. More details can be shared upon request. Although most U.S. dollar private placement investments have an external rating, for unrated deals, there is no guarantee that the same rating(s) would be assigned to portfolio asset(s) if they were independently rated by a major credit ratings organization.

The information in this podcast is not intended to provide specific financial, tax, investment, insurance, legal or accounting advice and should not be relied upon and does not constitute a specific offer to buy and/or sell securities, insurance or investment services. Investors should consult with their professional advisors before acting upon any information contained in this podcast.

SLC Management is the brand name for the institutional asset management business of Sun Life Financial Inc. (“Sun Life”) under which Sun Life Capital Management (U.S.) LLC in the United States, and Sun Life Capital Management (Canada) Inc. in Canada operate. Sun Life Capital Management (Canada) Inc. is a Canadian registered portfolio manager, investment fund manager, exempt market dealer and in Ontario, a commodity trading manager. Sun Life Capital Management (U.S.) LLC is registered with the U.S. Securities and Exchange Commission as an investment adviser and is also a Commodity Trading Advisor and Commodity Pool Operator registered with the Commodity Futures Trading Commission under the Commodity Exchange Act and Members of the National Futures Association. Registration as an investment adviser does not imply any level of skill or training. There is no assurance that the objective of any private placement strategy can be achieved. As with any strategy, the Advisor’s judgments about the relative value of securities selected for the portfolio can prove to be wrong.

The relative value over public benchmarks estimate is derived by comparing each loan’s spread at funding with a corresponding public corporate bond benchmark based on credit rating. Loans that are internally rated as “AA” are compared to the Bloomberg Barclays U.S. Corporate Aa Index, loans rated “A” are compared to the Bloomberg Barclays U.S. Corporate A Index, while loans rated “BBB” are compared to the Bloomberg Barclays U.S. Corporate Baa Index. For certain power and utility project loans, a best fit approach of a variety of Bloomberg Barclays’ indices was employed prior to September 30, 2016. After this date, these types of loans were compared to Bloomberg Barclays Utilities A Index and Bloomberg Barclays Utilities Baa Index, for “A” and “BBB” internally rated loans, respectively. Relative spread values obtained through the above methodologies were then aggregated and asset-weighted (by year) to obtain the overall spread value indicated in the podcast.

Unless otherwise stated, all figures and estimates provided have been sourced internally and are as of December 31, 2020.

Unless otherwise noted, all references to “$” are in U.S. dollars. This document may present materials or statements which reflect expectations or forecasts of future events. Such forward-looking statements are speculative in nature and may be subject to risks, uncertainties and assumptions and actual results which could differ significantly from the statements. As such, do not place undue reliance upon such forward-looking statements. All opinions and commentary are subject to change without notice and are provided in good faith without legal responsibility.

Unless otherwise stated, all figures and estimates provided have been sourced internally and are current as at the date of the podcast unless separately stated. All data is subject to change.

Past performance is not indicative of future results. No part of this material may, without SLC Management’s prior written consent, be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient.

1Private placement monitor

2The relative value over public benchmarks estimate is derived by comparing each loan’s spread at funding with a corresponding public corporate bond benchmark based on credit rating. Loans that are internally rated as “AA” are compared to the Bloomberg Barclays U.S. Corporate Aa Index, loans rated “A” are compared to the Bloomberg Barclays U.S. Corporate A Index, while loans rated “BBB” are compared to the Bloomberg Barclays U.S. Corporate Baa Index. For certain power and utility project loans, a best fit approach of a variety of Bloomberg Barclays’ indices was employed prior to September 30, 2016. After this date, these types of loans were compared to Bloomberg Barclays Utilities A Index and Bloomberg Barclays Utilities Baa Index, for “A” and “BBB” internally rated loans, respectively. Relative spread values obtained through the above methodologies were then aggregated and asset-weighted (by year) to obtain the overall spread value indicated in the podcast. Past performance is not indicative of future results.

3LTM activity via Private Placement Monitor as of 9/30/21, less than 7-year average life. Financials account for 51% of deals. This is based on SLC transactions over the last 12 months. Investment grade credit ratings of our private placements portfolio are based on a proprietary, internal credit rating methodology that was developed using both externally-purchased and internally developed models. This methodology is reviewed regularly. More details can be shared upon request. Although most U.S. dollar private placement investments have an external rating, for unrated deals, there is no guarantee that the same rating(s) would be assigned to portfolio asset(s) if they were independently rated by a major credit ratings organization. The relative value over public benchmarks estimate is derived by comparing each loan’s spread at funding with a corresponding public corporate bond benchmark based on credit rating. Loans that are internally rated as “AA” are compared to the Bloomberg Barclays U.S. Corporate Aa Index, loans rated “A” are compared to the Bloomberg Barclays U.S. Corporate A Index, while loans rated “BBB” are compared to the Bloomberg Barclays U.S. Corporate Baa Index. For certain power and utility project loans, a best fit approach of a variety of Bloomberg Barclays’ indices was employed prior to September 30, 2016. After this date, these types of loans were compared to Bloomberg Barclays Utilities A Index and Bloomberg Barclays Utilities Baa Index, for “A” and “BBB” internally rated loans, respectively. Relative spread values obtained through the above methodologies were then aggregated and asset-weighted (by year) to obtain the overall spread value indicated in the podcast.

4As of 9/30/2021