National Australia Bank (NAB) is spinning off its non-traded credit team to establish an independent asset-management company that will offer loan exposures to investors both in Australia and overseas.
The A$1 billion portfolio of loans has been built over the past several years with the aim of providing non-bank investors with access to Australia’s corporate and institutional loan market, says Andrew Lockhart, a director of the team in Sydney.
NAB will retain a minority 35% shareholding in the new company, to be called Metrics Credit Partners. The majority owners will be its three principals, Lockhart and fellow credit-team members Graham McNamara and Justin Hynes.
Metrics was established in May as a wholly owned subsidiary of NAB, and the bank intends to sell its majority position in October. Perpetual has been mandated to serve as trustee and custodian.
Metrics is in discussions with six superannuation funds for an initial close, and the partners are keen to include some Asia-based institutional investors before hard closing in the fourth quarter.
Investors in places such as Japan and Korea could include pension funds as well as commercial banks looking to put capital to work, who want an Australian core lending exposure, but perhaps without the cost of having to open a bank branch there.
Lockhart says by building this loan portfolio and then spinning it into a fund, NAB provides an automatic track record, an experienced credit team and access to a pool of quality securities, while removing the risk of a start-up venture.
The Australian corporate loan market is around $450 billion and its domestic bond market has $40 billion of outstanding securities. Among corporate loans, the syndicated market accounts for $200-250 billion. Last year saw $108 billion worth of transactions completed across 210 individual deals, placed with around 70 investors globally.
The assets include infrastructure and project bonds, leveraged loans and vanilla corporate bonds. “This offers a floating-rate, high cash yield and historically low-risk vehicle,” says Lockhart.
“Because banks hold this paper to maturity on their balance sheets, there has never been a way for other investors to access these assets,” he says, noting that the big four Aussie banks own over 70% of the entire corporate loan market.
The new company’s fees are going to be kept low. The management fee will be 40 basis points, with a further 2-3bps for custody and administration. “We want to be a large-scale, low-cost aggregator of capital,” Lockhart explains. Although the fund can accept investments as low as $10 million, the portfolio enables big tickets, up to $500 million. Metrics hopes to raise $1.5-2 billion this year, and perhaps build the fund up to $3 billion over time.
He and his colleagues say this is the first time any bank in Australia has spun off its loans team to third-party investors. The bank gains a new distribution platform and can participate in the new company’s share returns.
He says over the past two years the portfolio has returned 8% annualised on a cash-yield basis, with zero defaults. The credit quality ranges from BB- or CCC-rated paper in the leveraged space, to single-A names. The average credit weighting is around BBB-.