Merricks Capital provides innovative investment solutions that deliver consistent performance for its investors while operating with financial discipline and prudent risk.
Our investment strategies include private credit across commercial real estate, agriculture and infrastructure and specialised industrial.
Established in 2007, Merricks Capital delivers a truly differentiated multi-strategy offering, with extensive investment capability and global experience spanning multiple asset classes.
The Impact of Consolidating Bond Yields for Private Credit
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As bond yields consolidate and macroeconomic conditions show cautious optimism but fragility, the importance of strategic investment decisions made in recent years is underscored. These decisions, such as focusing on senior ranking security against hard assets, play a critical role in the resilience and performance of private credit portfolios.
Bond yields are consolidating lower (AU 10y 4.04%, NZ 10y 4.24%, US 10y 3.97%) and have been providing a more stable rate environment for real estate transactions to pick up. This is particularly evident in New Zealand (NZ) with more than 50% of our repayments coming from NZ during the period NZ 10y bond rates converged from its peak of 5.5% to 4.2%.
Softer-than-expected Australian Q2 inflation data (0.8% QoQ CPI Trimmed Mean) has mitigated the risk of higher forward rates on our senior secured debt portfolios, with easing cycles in the EU and Canada and the Fed pricing 85bps of rate cuts for 2024.
Easing interest rates in Australia and New Zealand are anticipated, with market pricing -60bps (AU) and -190bps (NZ) cuts over the next 12 months. Based on this outlook, we expect real estate asset values to reach a bottom in the September quarter as buyers continue to move on an opportunistic reprice (15-25% below peak) for many commercial real estate assets that have had to adjust to a +400bps base rate increase over three years.
Credit spreads remain very tight globally (US High Yield CDS 345bps, iTraxx Australia 65bps) which implies the lower risk premium investors are prepared to accept to meet borrowing demand in the current high interest rate environment. This is in line with our experience with borrowers and we remain prudent not to chase higher return loans given the risk associated with lower feasibility of projects at higher rates.
Tight credit spreads have also allowed the Merricks Capital Partners Fund to hedge macro credit risk at an inexpensive premium relative to the systematic risk in an environment where equity risk premium has been contracting rapidly and future central bank puts are less likely due to peak government debt.
As real asset prices reach a bottom in the September quarter or soon after, the increased certainty on rates will drive transaction confidence, benefiting senior secured private credit. Our diligent approach to managing credit risk and asset selection positions us well to capitalise on these market conditions and deliver stable investor returns in an evolving economic landscape.
