Episode 25

Three investment grade private credit investing questions for Sam

Steve Peacher: Hi everybody, this is Steve Peacher, President of SLC Management, this is our next episode of “Three in Five,” and today I'm joined by Sam Tillinghast, who's a senior managing director at SLC and runs our private fixed income team, which is one of our biggest teams, both at Sun Life and third party clients. And so I want to talk to Sam today about the investment grade[1] private credit market. So Sam thanks for taking a few minutes.

Sam Tillinghast: Thanks for having me, Steve.

Steve Peacher: So we've obviously heard a lot about how the pandemic has impacted the stock markets, the public bond markets, what about the investment grade private credit markets? How have they changed as a result of the pandemic?

Sam Tillinghast: Yeah, sure Steve. In many ways the market behavior this year is a direct reflection of what happened last year. One of the market dynamics that we saw in 2020 was that many investors missed out on very attractive deals and much of this missed opportunity was due to portfolio monitoring and dealing with amendments, covenant breaches. Other investors were too conservative to invest in the face of uncertainty about the economy. This year, those investors are trying to make up for that missed market, especially in the syndicated private placement market. Another market dynamic that we've seen is that new investors have been attracted to the market due to the store three White spreads to publics last year. As bonds spreads tightened dramatically during the second half of 2020 spreads for privates remained that much higher levels for much of the year.[2] And some of this some new capital is coming to the market in the form of third-party capital that larger insurance companies and asset managers like yourselves, have raised. For example, we've seen pension plans, OCIO providers P&C insurers who discovered investment grade right credit’s higher yields, lower losses that we get to finance the collateral. And all this has resulted in higher demand for deals which has brought challenges, especially for smaller brokers. This demand has led to very large bid sizes and syndicated deals and that’s made it difficult for smaller lenders to get there fill and hit their targets. Now, let’s talk about the haves and have nots and investment grade privates. Larger investors like ourselves, are doing direct deals, club deals and dominating allocations of syndicated transactions and we're actually having what looks like it could be a potential work of your talks about.

Steve Peacher: You know your group has a lot of different types of transactions, you lend against infrastructure projects, you lend to the middle market companies. One of the things you've done over the years is you've lent against portfolios managed by alternative asset managers and that's been a great place to have lent money over the years, with great collateral protection. And, that markets evolving so that you're now seeing alternative asset managers themselves as an area where there's investing opportunities from a debt standpoint. How has issuance in your market, the private placement market for alternative asset managers, changed?

Sam Tillinghast: That's a good question, Steve. Well it's really changed in two ways.

The types of deals have changed and the volume in both dollars that number of deals has significantly increased. We used to mainly see lending opportunities in the sector for credit funds or investment deals like Business Development Companies (BDCs) or separately managed accounts. Now we're seeing notes being issued by the alternative asset managers themselves at the management company level. These asset managers are discovering that the investment grade private credit market can provide long term, patient capital, efficient execution and also confidentiality. And from a credit standpoint these asset managers are well established firms that strong management teams, good governance, with leadership transition plans. Also, have tens of billions of assets under management consisting of diversified funds. These funds producing evidence and stable, predictable cash flows in the form of management fees. These are proceeds from these private lending transactions tends to be to provide additional capital for the asset managers to make co-investments required by limited partners and their newly raised funds. And over time as these firms are growing, the amount of capital required has increased as part of a larger funds raised. According to the Private Placement Monitor, financials were 21% of private placement organizations in 2018 but that's grown to 35% in 2020 and 40% year to date and 2021. Those numbers doing through the other types of finance companies, including REITS, but almost all the growth has come from alternative asset managers. And the growth is interestingly it's even impacted the league tables in private placement market for banks that serve as placement agents. An investment bank that had been focused on this sector recently pushed out commercial bank that held the number one position for decades. The bank that formerly held the number one spot has historically focused on more traditional issuers, like industrials, utilities, REITS. The bank that's taken over the number one spot in the league tables specializes in more unusual deals. Many of their deals are either lending to funds or to alternative asset managers.

Steve Peacher: When people think about private placements, they tend to think about long duration deals, 30 year deals and certainly there's a lot of there's a lot of those in the marketplace, and that is an area focus, but your team and really invest across the curve, so can you talk about the types of opportunities you see a different duration points in the market?

Sam Tillinghast: Sure definitely different types of deals for different duration needs, most investors in the market do focus on the long end. Many of the traditional corporate transactions, including industrials and utilities, are long duration deals. We probably see the most competition in those sectors and we rarely see attractive relative value there. We see better value in project finance and infrastructure opportunities, credit tenant leases and ground leases in alternative asset managers in the long end. There's actually less competition at the shorter and intermediate end of the spectrum and therefore we see more relative value at the shorter end. Deals at the shorter and include private ABS, which we directly originate, fund finance opportunities, some corporate private placements and some project finance and infrastructure debt, where there's an infrastructure fund that's acquiring existing assets.

Steve Peacher: Alright well thanks for those comments on private placements, I want to end with a personal question, I know your daughter’s getting married early next year, so how's the wedding thing going and, more importantly, as the father of the bride, is anyone listening to anything that you have to say?

Sam Tillinghast: Definitely they're not, you know I don't I don't have that many responsibilities, I do have one and that’s the father daughter dance that's the one I’ve got my mind the most. The last time I danced was probably the father daughter dance when she was in the fourth grade. So, I'm actually flying to Texas tomorrow to be with my daughter, we're going to take some dance lessons, she wants to have a very choreographed dance, and then the next day we're going camping together, something we haven't done since she was a little girl so should be a nice long weekend.

Steve Peacher: That's well that's great. Well yeah, you're the spotlight, that's the one spotlight you can't get wrong, so you know get those dancing shoes on. And thanks for taking a few moments with us Sam, and thanks to everybody for listening to this episode of “Three in Five.”

Sam Tillinghast: Thanks Steve.

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