European Debt Funds Scour Portfolios for Exposure to Coronavirus
(Bloomberg) -- Private credit managers with billions of euros of loans to mid-sized European companies are bracing for damage to their portfolios from disruption caused by the coronavirus.
Pemberton Asset Management SA, Kartesia Advisor LLP and Ares Management LLC are among private debt funds combing through their investments looking for exposure to markets where the virus is impacting the economy. Some are already assuming a scenario of worsening earnings and drawing up plans to limit damage to companies on their books.
Disruptions to supply chains and commercial activity around the world has already triggered a slew of warnings from global corporations that earlier profit forecasts have become obsolete.
Pemberton, which manages 6 billion euros ($6.6 billion) in assets, is investigating companies in its portfolio to gauge how much they rely on China for their supply chains, according to Symon Drake-Brockman, managing partner at the firm.
“What we’re trying to do is to make sure that the companies that we support are being thoughtful now, thinking about inventory levels, thinking about working capital, talking to us actively about their financial position,” he said.
Kartesia, with 2 billion euros under management, has also started scrutinizing its investments for vulnerabilities, according to managing partner Jaime Prieto.
“Our hope is that the health system and the approach of the summer should limit the impact in Europe and that our position in the capital structure will limit any potential losses on our portfolio,” he said. “Equity would take the brunt of the impact.”
Direct lending has boomed in Europe since the financial crisis as banks under pressure from regulators, cut lending to riskier companies. Money has poured into private-debt funds from investors lured by the yields it can offer and the sector globally had $293 billion of assets under management as of June 2019, according to Preqin.
Most of this lending is to companies in the so-called mid-market, which typically includes firms with earnings between $10 million and $500 million. Their smaller size implies greater vulnerabilities including key customer and supply risk, which in turn can affect investors’ recovery rates in case of a default, according to a recent Fitch report.
Still, some direct lenders say the fallout from the coronavirus will cause limited damage to portfolios.
“The most obvious issues from the coronavirus are travel and China supply chains,” said Blair Jacobson, Ares Management’s co-head of European direct lending, speaking on the sidelines of a conference in Berlin. “Most of our companies are not in those industries, or they’re local market leaders.”
©2020 Bloomberg L.P.