Although senior bank loans are often perceived as an ‘American’ asset class, the discussion touched on the increasing use of the instruments by companies in this region. Jeff Brunton (head of credit markets, AMP Capital Investors): I think we should all be aware of the big buildup in resources in the street, in the infrastructure that’s needed to make loans a tradeable product in Australia and Asia. Most of the players here are private banks in Asia. So when we’ve had recent deals, such as Qantas or Wesfarmers’ recent loans, the participation from Asian investors is closer to 60 to 70 per cent of books now. So that potentially will drive Asian loans a bit stronger into [global loan managers’] portfolios. Loan managers do get the benefit of being ‘over the wall’, you tend to get management accounts and information, you’ve got a much closer connection to the individual companies that you’re lending to.

In terms of that rising rate environment, it is interesting in Australia that we do have the best of both worlds at the moment, the V and the U. In terms of the V – we’ve never dropped rates as low as what the US did, and our rates have already had quite a bit of tightening. We’ve got a rate structure, when you’re thinking about the duration risk in a high-yield bond portfolio or a high-yield loan portfolio, which means you’ve got a different duration starting point. And the U, for us, is that spreads are priced globally, so spreads in Australia and in this region are still reasonably wide. You see where investment-grade credits are trading in the US and Europe – you’re lending to single-As and triple-Bs at sub-100 over, and it doesn’t make a lot of sense. Because of the deleveraging that’s going on in Australia, we’ve still got triple-Bs and single-As that are printing tickets in that 200 to 300 over for 5- or 10-year paper.

The discussion turned to the negative effect that the rise of CLOs had on credit quality in the bank loan sector, before the GFC. Sue Wang: I have to fend this kind of question all the time from clients. ‘Where’s the demand [for loans] going to come from, Sue? If it’s CLOs, I’m not coming back to the market.’ Scott Page: Well, the good news is CLOs were stable. There was a brief moment when people thought the CLOs might break, but they didn’t. They’re all still out there, some of them have zigged and zagged, but it proved to be a very stable house for bank loan assets, and they’ll drift away over the next few years. And so basically the market, which had no CLOs six or seven years ago, is going to have to find new investors.

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