MIM’s Private Credit business originated $11.3 billion1 in private placement debt and private structured credit for year to date third quarter of 2021, across 181 transactions. This includes $2 billion of investments originated on behalf of institutional clients. Our private credit debt portfolio grew to $102.4 billion in AUM as of September 30, 2021, which represents nearly 80% of private capital group AUM.
Corporate Private Placement Market
Private Placement Market2
Including revised 2Q numbers, private corporate issuance through 3Q YTD totaled $67.7 billion, up from $66.4 billion over the same 9-month period in 2020. Issuance in 2021 has primarily been driven by opportunistic refinancing opportunities as global economies continue to recover from pandemic uncertainty. The average deal size for 2021 was $184 million across 368 transactions compared to the 369 transactions in 2020 with an average deal size of $180 million.
During the third quarter, issuance came in at $20.8 billion across 124 issuers, down from $28.0 billion across 146 issuers during 3Q 2020. The reduction was driven by less traditional industrial origination with issuers generally having strong liquidity. Private issuance was led by activity in North America with 72% of total issuance. European volume (primarily the UK) was 18%, Australia 7%, Latin America 21%, and Asia < 1%. USD made up 82% of issuance with Euro at 9%, Sterling at 9% , AUD < 1% and CAD < 1%.
Ratings and Delayed Funding 3
A-rated (NAIC-1)6 names comprised 47% of total quarter issuance, a marked increase from Q2 2021 (28%) driven by highly rated financial consultancy firms, sports leagues, and utilities. Delayed fundings continued to be utilized by issuers with 16% of issues having a delay. We expect this trend to continue as private issuers approach the market for refinancing opportunities with concerns of anticipated inflation and an eventual rise in interest rates.
Spreads and Treasuries
Private credit spreads, following public spreads, continued to tighten from the peaks seen at the height of the pandemic in 2020. Quarterly spreads tightened roughly 45bps YoY, as the economy continues to normalize and vaccination distribution increases. Private spreads have maintained a healthy public premium but have started to contract towards historic averages, particularly with more broadly marketed deals from agented banks.
MIM Corporate Private Placements
MIM activity for Q3 2021 was $1.8 billion in origination bringing YTD origination to $5.8 billion, as MIM origination continues to benefit from both direct and club transactions leading to larger allocations. During the quarter, MIM transactions averaged an MA3 (internal rating4 ) credit quality, 13.0-year weighted average life and an average UST equivalent of +155bps. MIM-originated quarterly transactions were issued out of the US (77%) and the UK (23%). Origination was spread out across industries and subsectors, with Financial Other leading the quarter at 25% as market conditions have improved.
MIM Fourth Quarter 2021 Outlook
With continued economic growth, MIM expects 2021 issuance to finish the year strong. MIM’s US GDP forecast calls for +5.5% growth YoY for the FY21 off a very low 2020 base.
MIM’s US inflation rate forecast is 4.3% with an anticipated rise in 10-year UST rates to 1.75%.
We feel the market will remain competitive, with increased investor demand for privates. Deal structures could continue to see some minor weaknesses, but overall MIM expects the private market to remain more disciplined.
MIM will continue to use our sector specialist approach in our effort to uncover the broadest range of appropriate opportunities.
Infrastructure Private Placement Market
Global infrastructure activity increased 7% in the first three quarters of 2021 to $513 billion compared to $480 billion for the same period in 2020. The Capital markets - which represents MIM’s investible infrastructure market - had a strong increase in issuance of 42% to $53 billion as equity sponsors looked to private capital to finance needed infrastructure projects.
The increase in the overall market was led by large M&A transactions across energy and telecom sectors as the world recovers from the pandemic. Notable deals included mega billion sized energy projects in the Middle East and North America. Through September, energy related transactions (27% of total global infrastructure activity) outpaced renewables (22%) followed by telecom (19%), transport (15%), power (10%), environment (3%), social infrastructure (3%) and other (1%). Activity was focused in EMEA (38%), US & Canada (34%), Asia Pacific (16%), and Latin America (12%).
United States: The vote on the bipartisan infrastructure plan proposed by Congress was delayed as government funding and debt ceiling issues took priority. If passed, the plan is expected to include new spending on bridges, roads, railways, water, broadband, and new green initiatives. Funding is unclear but will likely be some combination of public and private capital. The good news is equity sponsors have not waited for a federal program and U.S. market activity has picked up meaningfully through the pandemic with activity focused primarily on renewable power, energy, transportation, and Public-Private-Partnership (PPP) sectors.
EMEA: Activity within EMEA was flat compared to last year as Europe trends towards recovery. Given the increase in energy prices, parts of the region were active in the energy and oil & gas space. After energy, telecom continues to grow rapidly demonstrating the sector’s resiliency to the pandemic.
Latin America: LatAM is recovering as vaccinations gradually increase throughout the region. Consequences from Covid-19 have affected some fiscal budgets which have led to sovereign downgrades in certain countries. Critical and essential infrastructure assets have shown resiliency to these downgrades as volumes recover. Brazil continues to lead LatAm in energy and telecom transactions followed by the power sector in Chile.
Australia: Infrastructure activity in Australia has remained slow YTD due to the pandemic as well as a slow-down in M&A activity. With major States in lockdown, half of Australia’s population is under restrictions resulting in depressed volumes across transportation assets. Activity has been limited to the power and telecom sectors. We anticipate a growing pipeline of transactions from Australia as privatization and M&A activity has meaningfully increased.
MIM Infrastructure Debt Activity
MIM has invested $3.5 billion across 55 transactions through 3Q 2021 compared to $2.6 billion across 38 transactions in the same period last year. The increase in activity was due to a rebound in the broader market and higher direct origination. Transactions averaged an MBaa2 (internal rating) credit quality, 14.3 year weighted average life and an average UST equivalent spread of +203bps. MIM transactions by region and sector are illustrated further below.
MIM Fourth Quarter 2021 Outlook
We remain cautiously optimistic on the outlook as vaccines continue to rollout globally. We saw a significant increase in infrastructure activity in 3Q and we expect that momentum to continue into the fourth quarter
We believe MIM has a strong pipeline with opportunities in renewables, pipelines, public-private-partnerships, digital infrastructure, and energy transition assets.
Private Structured Credit
MIM Private Structured Credit
We had a strong pipeline of new transactions in Q3 - committing over $1 billion during the quarter. Notably, we expanded our investment in the C-PACE sector and closed a large delayed draw facility as the sole lender in the transaction. We believe the sector is likely to continue to see strong growth as municipalities adopt legislation to allow PACE financing to facilitate ESG-friendly, energy efficient upgrades and projects in commercial buildings. For example, New York City recently launched its C-PACE program which is expected to generate multibillion dollar C-PACE financing volume in the coming years.
YTD MIM activity through Q3 2021 was strong with $2.0 billion of committed investments with a weighted average credit quality of A3 (NRSRO rating)7 and a weighted average spread of 246 bps. Commitments were diversified across alternatives financing, RMBS, commercial and CMBS sectors.
MIM Fourth Quarter 2021 Outlook
Despite ongoing concerns of stretched equity market valuations and a temporary bout of widening in corporate bond spreads this summer, we believe the structured products market should continue to see solid issuance with a bias towards spread tightening driven by a firm bid from investors seeking yield. One important trend we expect to continue into Q4 is deal flow which typically would be done in the private market is now going to the public market as public investors are willing to participate in esoteric sectors that offer higher yielding opportunities. MIM will seek to add value by working directly with issuers to provide customized financing solutions not available via public markets. Solid economic growth expectations, employment gains, strong consumer demand and increased vaccination rollout to younger children could continue to help continue to support risk assets and portfolio performance in the near term. However, uncertainties remain including impacts of COVID variants, sustained inflation, and Fed tapering.
MIM YTD activity for 2Q 2021 was $848 million investments at a weighted average credit quality of A3 (NRSRO rating). 6 Investments included a mix of commercial, residential mortgages, alternatives financing and CMBS sectors.
1 Represents assets originated by MIM as of September 30, 2021 on behalf of MetLife general accounts and unaffiliated investors. There can be no assurances that such origination volume will be achieved in the future. Actual results may vary. Origination is defined as all commitments made during the period, some of which will be unfunded. 2 MetLife Investment Management, Private Placement Monitor. 3 Private Placement Monitor. 4 Credit quality assessments were performed internally by MIM’s Corporate Private Placement team and have not been verified by independent sources. Any internal ratings (i.e., MIM ratings) presented in this document were developed internally by MIM. Such ratings are not recognized ratings used by other investment managers or funds, including those investing in the sectors in which MIM invests. Other ratings, including those published by an independent credit ratings agency, may be more relevant in evaluating creditworthiness or may present the credit quality of issuers or assets in a more or less favorable manner than such internal ratings do. MIM’s internal ratings are subjective; MIM has an incentive to assign internal ratings in a manner that more closely meet investor and/or yield expectations, or otherwise provides an advantage to MIM. Accordingly, such internal ratings should be viewed as one factor among other factors for evaluating creditworthiness, and you should make your own determination as to the weight you place on such internal ratings. Please contact MIM for additional information on how such ratings are derived. 5 MetLife Investment Management, InfraDeals 6 NAIC-1 generally corresponds to deals rated the equivalent of A3 or higher. NAIC-2 generally corresponds to deals rated the equivalent of Baa1 to Baa3. 7 All of PSC assets are rated by either Moody’s, S&P, Kroll or DBRS/ Morningstar. We take the outside ratings convert to a Moody’s scale and calculate a weighted average. A3 represents the equivalent outside rating based on a Moody’s scale.
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All investments involve risks and there can be no assurances that any strategy will meet its investment objectives or avoid significant losses. Investments in private placements involve significant risks, which include certain consequences as a result of, among other factors, issuer defaults and declines in market values due to, among other things, general economic conditions, the condition of certain financial markets, political events or regulatory changes, and adverse changes in the liquidity of relevant markets. Investments may be subject to periods of illiquidity, and such securities may be subject to certain transfer restrictions that may further restrict liquidity. Accordingly, no assurance can be given that, if MIM were to seek to dispose of a particular investment held by an account, it could dispose of such investment at the previously prevailing market price. Any person contemplating corporate private placement investments must be able to bear the risks involved and must meet the qualification requirements of the underlying investments.
This document has been prepared by MetLife Investment Management (“MIM”)1 solely for informational purposes and does not constitute a recommendation regarding any investments or the provision of any investment advice, or constitute or form part of any advertisement of, offer for sale or subscription of, solicitation or invitation of any offer or recommendation to purchase or subscribe for any securities or investment advisory services. The views expressed herei n are solely those of MIM and do not necessarily reflect, nor are they necessarily consistent with, the views held by, or the forecasts utilized by, the entities within the MetLife enterprise that provide insurance products, annuities and employee benefit programs.
The information and opinions presented or contained in this document are provided as the date it was written. It should be understood that subsequent developments may materially affect the information contained in this document, which none of MIM, its affiliates, advisors or representatives are under an obligation to update, revise or affirm. It is not MIM’s intention to provide, and you may not rely on this document as providing, a recommendation with respect to any particular investment strategy or investment. Affiliates of MIM may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives) of any company mentioned herein. This document may contain forward-looking statements, as well as predictions, projections and forecasts of the economy or economic trends of the markets, which are not necessarily indicative of the future. Any or all forward-looking statements, as well as those included in any other material discussed at the presentation, may turn out to be wrong.
The assets under management presented herein include assets managed by MIM on behalf of the MetLife general accounts (the “GAPortfolio”) and unaffiliated investors. The GA Portfolio is a portfolio constructed using actual investments in private structured credit assets that were made by MIM solely on behalf of the MetLife insurance company general accounts for the time periods shown. The GA Portfolio includes all private structured credit investments (as categorized by MIM in its discretion) in which the MetLife general accounts invested for the relevant time periods. The MetLife general account portfolios are not managed using a private structured credit-specific investment strategy and are typically structured to match the liabilities of its insurance business, and its underlying holdings consist of positions from multiple asset classes. In addition, the MetLife general accounts are subject to insurance regulations and applicable insurance risk-related requirements. All of the past information displayed for the GA Portfolio relates only to the MetLife general accounts, and is reflective of MIM’s management capabilities for MetLife’s general accounts only. Accordingly, although the characteristics shown herein are derived in part using actual investments made by the MetLife general accounts, such characteristics of the GA Portfolio were not of an actual account managed solely in this specific strategy. Had the GA Portfolio been a stand-alone account managed solely in this strategy, MIM may have made different investment decisions which may have led to differences in the characteristics presented herein. There can be no assurance that these or comparable characteristics will be true of any third party account or that such account will be able to make investments similar to the existing and historical investments made, including in terms of size, industry type, credit rating and other material investment factors. Such differences may arise due to, among other things, economic conditions and the availability of investment opportunities. The ultimate characteristics of a third-party account will depend on numerous factors that are subject to uncertainty. There is no indication, and none is meant to be conveyed, that the same results would apply, or that performance would be better if such risk-related requirements did not apply, to a third party account that is not subject to the same regulations and requirements on investment decisions made by MIM on behalf of the MetLife general accounts.
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1 As of September 30, 2021, subsidiaries of MetLife, Inc. that provide investment management services to MetLife’s general account, separate accounts and/ or unaffiliated/third party investors include Metropolitan Life Insurance Company, MetLife Investment Management, LLC, MetLife Investment Management Limited, MetLife Investments Limited, MetLife Investments Asia Limited, MetLife Latin America Asesorias e Inversiones Limitada, MetLife Asset Management Corp. (Japan), and MIM I LLC.