Sector developments and company hires

BDC fair value assessed
On the back of tightening BDC spreads and growing investor interest, JPMorgan CLO research analysts have published a report aiming to assess fair value in the sector. In addition, they compare BDCs to their closest relative – middle market CLOs.  

“Differentiating between BDCs is a challenge; thus, we used attachment points as a reference point to understand the risk behind the structures,” the JPMorgan analysts say. “We estimate around 50bp of spread pick-up for unsecured debt of BDCs as compared to the triple-A tranche of middle market CLOs, highlighting that there is still some value left in the BDC structure.”

They continue: “The average attachment point for BDCs under coverage of 52% at the sector level and considering the level of secured debt compares favourably to the historical triple-A tranche attachment point of MMCLOs of around 45%. We estimate a 2.72% return over a five-year period for the triple-A tranche of recent MMCLOs, compared to an average YTM at 3.20% for the three-to-five-year notes of BDCs under coverage.”

The JPM analysts observe that the CLO structure has notable advantages to investors, compared to BDCs from the standpoints of disclosure, covenants, term funding, liquidity and depth of the market. On the other hand, they say that the BDC structure for unsecured bonds also has significant advantages relative to structured instruments.

“The ability to raise equity or de-lever the structure, combined with the fact that BDCs don’t default but are basically acquired by other managers at below NAV, lower the risk for unsecured bond holders in our view,” the JPM analysts conclude. “As well, CLOs have more duration uncertainty (call risk) as compared to BDC senior unsecured debt, which is typically issued in bullet structure.”

EMEA
Barclays has appointed Steven Penketh as head of securitised products solutions for Europe and the Middle East. Penketh will report to Scott Eichel, global head of securitised products. He will work alongside individuals across the investment bank to provide securitisation and structuring solutions, financing and arranger services to institutional clients in Europe.

Remote working implications stressed
Fitch has stressed the potential credit implications of hypothetical declines in demand, rent and net cashflow on the 2012-2020 vintage office single-asset/single-borrower CMBS it rates, due to Covid-induced remote working. Under scenarios of moderate and severe stresses, 4.4% and zero respectively of 114 SASB bonds maintain their current ratings.

The moderate stress scenario assumes employees work remotely 1.5 days per week, resulting in a 20% decline in office workers and a 10% decline in office space demand, reflecting the agency’s expectation that space may not shrink in direct proportion to the reduction in workers in the office. The severe scenario doubles these assumptions. Fitch assumes that rents decline at 1.25x the decline in space demand, as increased vacancies magnify declines in rent levels.

The stresses result in declines in net cashflow of 15% and 30% under the moderate and severe scenarios respectively. The two scenarios use cap rates from Fitch's most recent surveillance review - 7.23% on average - which are significantly higher than the appraisal cap rates at loan origination, which are 4.73% on average.

These assumptions result in average market-value declines from at-origination appraised values of approximately 44% and 54% respectively for moderate and severe scenarios. Were these declines in value to occur, Fitch suggests that downgrades are possible, with 25% and 55% of investment-grade bonds potentially moving to below investment-grade under the moderate and severe scenarios respectively. The stresses applied in its current rating analysis already reduce property values by 38% on average.

US office property values fell approximately 43% during the 2008 Great Recession and recovered over a three-year period. The secular shift to working from home may prolong the recovery in values following this recession, however.