Emerging markets offer respite from private debt competition
As competition amongst private debt managers in the US and Europe erodes terms, emerging markets offer an interesting alternative, according to Mihai Florian, senior portfolio manager at RBC BlueBay Asset Management.
“In general, loans are still executed under old style documentation, you have a full financial covenant package, you have restrictions in terms of disposals, moving assets, paying dividends, there are much better protections from a creditor’s perspective,” he told Alternative Credit Investor. “We keep looking at developed markets, where in Europe 90 per cent of deals are under cov-lite, and we’ve seen a number of situations where companies draw down assets and raise money, priming the current creditors and creditor on creditor violence. We don’t have that in emerging markets.”
Florian runs the Emerging Market Illiquid Credit strategy at BlueBay, which invests across a range of geographies, including Turkey, Brazil and Mexico. It is fully invested and the realised IRR is expected to exceed 21.8 per cent on a gross basis on investments fully exited, beating its targeted return of 15 per cent.
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Florian sees significant opportunity in emerging markets, where the number of funds targeting these countries is significantly less than those investing in developed markets. But there are similar drivers, with banks under regulatory and capital constraint, which are creating a gap for private debt managers.
“In emerging markets, about 90 per cent of the funding needs of corporates come from the banking sector,” he explained. “You do not have the depth of local capital markets, there is limited availability of insurance company capital, so you have this overreliance on the banking sector.
“It’s very rare to hear about EM private credit strategy, there are not that many managers out there looking at this. In Europe alone you have 200+ managers. It is a fully developed market that is sponsor driven. They just put a package on the table and say you’re in or not, some terms are prebaked.
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“You don’t have any of that in EM. The vast majority – more than 90 per cent – of what we look at is sponsorless transactions, family owned, sometimes listed companies. You have a shrinkage of the banking sector, you don’t have 20 funds coming into a market trying to lend. You’re able to dictate a lot of terms of the documentation.”
