- As part of the ongoing management of our loan portfolios, we engage with borrowers to understand their expected financial position over the coming twelve months.
- In general, our observations suggest that their business activities are stable and underlying asset values are performing well, however wage and raw material costs are forecast to impact profitability in the coming year.
- Our “boots on the ground view” suggests businesses will be looking to pass price rises from rising costs to the market in the second half of 2022.
- As central banks and economists ponder the persistence of inflation, our bottom-up lens suggests the further need for general marked preparedness for the sustained impact of rising rates and lowered money supply.
- Our portfolio has been constructed in anticipation of the potential for this economic climate by lending at modest LVRs with floating rate loans.
After canvassing our borrowers across logistics, construction, hospitality, agriculture supply chain we believe that Australia and New Zealand will continue to experience growth in inflation during 2022. A general scarcity in available labour is causing wage pressure, but more importantly we have observed a general lack of product supply across these sectors. The second-round effect of rising raw material prices and primary production wages is expected to translate into ongoing higher prices of consumer products with new year catalogue tenders and pricing expected to be higher for the foreseeable future. In the absence of an unexpected demand shock (economic slowdown) our base case scenario planning indicates higher interest rates and moderating asset prices will prevail.
All our funds consist of senior secured loans, with predominantly floating rate interest rates.
With sub-60% LVRs across the portfolio, investors are expected to benefit from rising floating rates without increased risk of loan impairment. As a manager, we have observed very little borrower distress for several years, however inflationary pressure may pinch points for parts of the supply chain such as construction, which may require more active management of borrowers as they navigate the impact of general economic conditions on their businesses.
The portfolio has been positioned for several years in anticipation of rising rates and the unwinding of the global asset price bubble induced by unprecedented central bank stimulus. We expect investors to continue benefiting from stable returns that benefit from the protection senior secured loans and various forms of portfolio insurance are expected to continue providing.
Merricks Capital Partners Fund returned 8.2% for the 2021 calendar year and we continue to have portfolio “insurance” via long CDS for any macro shocks.
Merricks Capital Agriculture Credit Fund had an annualised return of 9.4% since its inception in June 2021, with agriculture showing little correlation to global equity markets.
We believe private credit to be an attractive asset class in the current market environment with rising interest rates and inflation creating a strong opportunity set across our diverse strategies. Our investment pipeline remains strong with over $1b across Commercial Real Estate, Agriculture, Energy, Infrastructure and Corporate opportunities under due diligence and term sheet negotiation phases.
