Sub-investment grade credit market matures as credit cycle turns
Targeted returns are up to 15% as banks see risk and exit the market.
By Lachlan Colquhoun, 10 May 2023
One of the allocations to the private debt strategy run by Arbitrium Capital Partners is from an international asset manager that was pondering entering the Australian market on its own.
Instead of being a competitor to Arbitrium, the asset manager chose to be an investor, a move that says something both about the maturing of the sub-investment grade credit space in Australia and also about Arbitrium’s first mover advantage.
Founded in 2020, Arbitrium plays in the private credit market with smaller corporates, with a minimum ticket size of $20 million and going up to $100 million. The deals come in three buckets: special situations, stressed debt and distressed debt.
Arbitrium’s co-founder and managing director Mukhtader Mohammed describes the strategy as opportunistic, lending into mergers and acquisitions, restructurings and refinancing with double-digit returns.
So far, the fund has raised about $230 million through managed accounts, and is now seeking another $300 million to create a co-mingled fund. The fund was recently added to the Macquarie Wrap platform.
‘We’ve probably got a pipeline of about $450 million right now, and that is across all sectors and industries,’ said Mukhtader.
“We’re seeing a lot of opportunities in manufacturing, technology and in food and beverage, and there’s so much happening in the market because of inflationary pressures.’
The credit cycle is playing to Arbitrium’s advantage.
While not pushing mid-corporates into widespread defaults, where they would present with distressed debt, Mukhtader says the most active space is stressed debt. Several leading banks have made calls against lending to stressed mid-corporates in several sectors, opening up opportunity for a non-bank credit provider such as Arbitrium.
The firm has some internal rules for investment. It doesn’t lend to startups and only lends in situations where the lender has tangible assets to put up as collateral, such as plant, equipment or land.
Mukhtader says that because Arbitrium plays in the sub-investment grade space it needs to be rigorous in its analysis. Of 42 opportunities the firm has looked at so far, it has done only three.