Finding defensive investment income without increasing risk

Australia’s largest non-bank lender, Metrics Credit Partners manages a book of around $13 billion, of which $7 billion is to the commercial property sector. Lockhart, one of the firm's four managing partners, describes Metrics core aim as providing an opportunity for investors to allocate capital defensively without sacrificing returns.

In fact, private debt funds such as those managed by Metrics can benefit in the current environment. As interest rates rise, the income levels for investors also increase due to the floating rate nature of the underlying loans. In the case of the Metrics Direct Income Fund and Metrics Master Income Trust, this income is diversified across a portfolio that spans around 280 underlying loans.

“On the income side, that comes from the fees we charge borrowers, alongside the interest margin we earn. The floating base rate (BBSY) also flows through as part of the total income we provide investors,” Lockhart says.

The vast bulk of Metrics portfolios is invested in senior secured loans, around 98%, with a portion of the ASX listed Metrics Income Opportunities Trust held in subordinated or mezzanine debt.

Metrics also benefits from its shorter loan terms, which reduces investors’ credit risk by providing greater flexibility to reset the terms and pricing of loans regularly. It also provides greater liquidity across the portfolio and delivers another important source of investment income through the recycling of capital and collection of origination fees on new loans.

Effectively managing credit risk amidst the heightened volatility of financial markets, while also generating acceptable income, is Lockhart’s key focus currently.

“Our role as a lender is to look at each company individually, to determine what is driving cash flow, and how sustainable their businesses are,” he says.

Looking at agriculture or the mining sectors as examples, they’re also exposed to currency risk, commodity price risk, production risk and other things including the seasonality of weather conditions. These all create volatility in terms of the earnings companies can generate.

“For us, because we’re so diversified, the risks will vary across individual companies, industries, and management teams. Our role is to identify those risks and determine how we can mitigate them when we lend to those companies," he says.

"For example, people say they're worried about what will happen if property prices fall 20% or 30%. Our job is to determine a company's capacity to pay down their debt in such circumstances, or whether they're just not financially strong enough."

This is part of the reason why Lockhart and his team are so selective in their loan agreements, signing up only around 20% of the deals that cross their desk. That's how they adapt during tougher market conditions such as we're currently seeing. Regardless of the market conditions, companies will always require capital.

"Our role is to drill down to a very micro level, to identify the risks associated with each individual transaction and then seek ways to mitigate them. And that might also mean you just don’t lend to that particular company," he says.

Metrics Credit Partners is a leading Australian non-bank corporate lender and alternative asset manager. Metrics seeks to provide regular and consistent income to investors through its portfolios of directly originated loans to Australian companies. Metrics team manage in excess of $13bn in funds from retail and institutional investors.

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