MIM’s Private Credit business saw strong activity in 2021 originating $15.6 billion1 in private placement debt and private structured credit bringing our private credit debt portfolio to $103.7 billion as of December 31, 2021. The past year saw solid diversification with no one sector in corporate or infrastructure private placements comprising more than 18% of total originations in their respective portfolios. We expect 2022 issuance to remain steady in corporate private placements and continue to build in infrastructure debt as economic growth continues to normalize and issuers refinance ahead of rate hikes. In private structured credit, we expect investor demand for credit to be strong in the first quarter and we believe the consumer space, alternatives financing and commercial ABS to be attractive sectors.
Corporate Private Placement Market
Private Placement Market2
Full year 2021 private corporate issuance has come in with an initial total of $93.0 billion, up from $91.1 billion in 2020, and will likely be subject to upward revisions as these numbers are still being compiled. 2021 issuance was primarily driven by opportunistic financing opportunities ahead of anticipated inflationary pressure as global economies continue to normalize, as well as more pronounced issuance in specific sectors, such as financials. The average deal size for 2021 was $178 million across 522 transactions. This is compared to the 498 transactions in 2020 with an average deal size of $183 million.
During the fourth quarter, issuance came in at $25.2 billion across 153 issuers, up from $24.7 billion across 129 issuers during 4Q 2020. The increase was driven by issuers looking to lock in rates given increased inflationary concerns. Also of note was a significant increase in financial sector origination for 4Q2021 vs 4Q2020. Private issuance was led by activity in North America, comprising 62% of total issuance. European volume (primarily the UK) was 30%, Latin America 5%, Asia 2%, and Australia 1%. USD currency made up 80% of issuance, with GBP at 9%, EUR at 8%, CHF at 2% and CAD 1%.
Ratings and Delayed Funding 2
A-rated (NAIC-1)3 names were responsible for 42% of total quarter issuance, slightly above the historical norm (~40%). BBB-rated companies (NAIC-2) comprised 58% of issuers. Delayed fundings continued to be utilized by issuers with 18% of 2021 issues having a delay. We expect this trend to continue as private issuers approach the market for financing opportunities with concerns of anticipated inflation and an eventual rise in interest rates.
Spreads and Treasuries
Private credit spreads, following public spreads, continue to tighten from the peaks seen at the height of the pandemic in 2020. Spreads tightened roughly 29bps over the year, driven largely by continued positive economic developments. Private spreads have maintained a healthy public premium, but have continued to contract toward historic averages, particularly with more broadly marketed deals from agent banks on the supply side, coupled with new entrant buyers in the market on the demand side.
MIM Corporate Private Placements
MIM activity for Q4 2021 was $2.6 billion in origination, bringing FY 2021 origination to a very strong $8.4 billion. MIM origination continues to benefit from both direct and club transactions leading to larger allocations and more diverse deal flow. During the quarter, MIM transactions averaged an MBaa1 (internal rating4 ) credit quality, 11.8-year weighted average life and an average UST equivalent spread of +146 bps, with primary issuance out of the US (55%) and the UK (29%). Origination extended across industries and subsectors, with Consumer Noncyclical leading the quarter at 24%. For the full-year 2021, MIM transactions averaged a 12.2-year weighted average life and an average UST equivalent spread of +156 bps, led by the Financial Other and Consumer Noncyclical sectors, both at 18% of total.
MIM’s 2022 Outlook
MIM’s US GDP forecast calls for +3.8% growth YoY for the full year 2022. MIM’s 2022 US inflation rate forecast is 2.7% with an anticipated rise in 10-year UST rates to 2.00%.
With continued economic growth, still relatively low long end rates, and a strong start to the year, MIM expects 2022 issuance to remain steady. We feel the market will remain competitive, with increased investor demand for privates. This may put some pressure on spreads and deal structures, however MIM expects the private market to remain disciplined overall.
MIM will continue to use our sector specialist approach and relationships in our effort to uncover the broadest range of appropriate opportunities for our clients.
Infrastructure Private Placement Market
Infrastructure Debt Market2,5
Global infrastructure activity rose to a record $923 billion in 2021 compared to $727 billion in 2020. The fourth quarter was a record quarter with $375 billion in global activity, half as much as all of 2020 as the market rebounded from pandemic lows. The capital markets – which represents the majority of MIM’s investible infrastructure market - had a strong increase in issuance of 42% to $82 billion as equity sponsors looked to private capital to finance needed infrastructure projects.
Global market activity was led by large M&A transactions across the US and Asia in the transport and energy sectors. Energy related transactions (27% of total global infrastructure activity) led 2021, followed by renewables (22%), telecom (19%), transport (15%), power (10%), environment (3%), social infrastructure (3%) and other (1%). Activity was focused in EMEA (45%), US & Canada (31%), Asia Pacific (15%), and Latin America (9%).
United States: After months of negotiation, the Biden Administration passed a $1.2 trillion bipartisan infrastructure bill in November. The bill includes $550 billion of new spending on transportation (airports, roads, rail), power, broadband, water, cybersecurity, and energy transition. In the most recent evaluation, the American Society of Civil Engineers identified a $2.59 trillion shortfall in government spending on infrastructure projects. While the bill will help bridge some of the shortfall, there is still a significant gap in US infrastructure needs. Equity sponsors continue to have strong interest in core and core-plus infrastructure assets and we expect a strong pipeline in a number of sectors including renewable power, energy, transportation, digital, and Public-Private-Partnership (PPP) sectors.
EMEA: Activity in Europe continued to be strong with roughly $350 billion of transactions closing in 2021. The fourth quarter was the most active of the year with $150 billion of deals as issuers looked to close transactions ahead of year end. Themes such as renewables, energy transition, and digital continue to be prevalent in Europe.
Latin America: Recovery in LatAM continued through Q4 as vaccination rates increased across the region. Negative effects of COVID have impacted countries’ finances, leading to sovereign downgrades and populist electoral outcomes in certain countries (e.g., Peru). However, countries remain focused in reducing emissions & decarbonizing their energy matrix (e.g., Chile, Colombia). MIM has continued to support this initiative as MIM led the first USPP transaction for a portfolio of 48 PMGD solar projects in Chile with a strong pipeline for similar opportunities in 2022.
Australia: Infrastructure new issue activity remained relatively slow in the fourth quarter, primarily due to COVID and lack of M&A activity. After strict border closures, Australia started accepting international travelers in mid-December. This re-opening has led to rampant infections with the omicron virus. So far, Australia has reported 1.6MM COVID cases since the pandemic began, of which 1.3MM were in the last two weeks. There were three new issues in Q4 2021. We expect a like number of transactions in the first few months of 2022.
MIM Infrastructure Debt Activity
MIM invested $5.1 billion across 68 transactions in 2021 compared to $3.7 billion across 51 transactions in the same period last year. The increase in activity was due to a rebound in the broader market and higher stronger direct origination as pandemic concerns continued to ease and Sponsors refocused on new deal activity. Transactions averaged an MBaa2 (internal rating)4 credit quality, 14.2 year weighted average life and an average UST equivalent spread of +202 bps. MIM transactions by region and sector are illustrated further below.
MIM’s 2022 Outlook
We feel broader pandemic concerns will continue to exist but will have a limited impact on transactional activity as variants’ effects on economies continue to be lower. We expect issuance to be strong as we expect Sponsors and Issuers to refinance ahead of anticipated rising interest rates.
MIM starts 2022 with a strong pipeline driven by opportunities in renewables, transportation, pipelines, public-private-partnerships, digital infrastructure, and energy transition assets.
Private Structured Credit
MIM Private Structured Credit
MIM had a solid pipeline of new transactions during 4Q, committing over $650 million during the quarter which rounded out a strong year for MIM Private Structured Credit. Over the course of the year, we committed over $2.1 billion in new investments across a diverse set of sectors: alternatives financing, commercial, RMBS, and CMBS including expanding investments into three new sub-sectors – C-PACE, energy, and low-income housing. In addition, MIM Private Structured Credit closed its first SOFR referenced floating-rate transaction during the quarter as investors prepare to cease using LIBOR as a reference rate beginning in 2022.
Improving fundamentals and economic recovery supported sustained steady performance across structured products, with no investments on our watchlist or downgrade watch.
MIM activity was strong in 2021 with $2.1 billion of committed investments with a weighted average credit quality of A1 (NRSRO rating)6 and a weighted average spread of 281 bps. Commitments were diversified across a number of sectors.
MIM First Quarter 2022 Outlook
We feel sector credit fundamentals should remain benign and investor demand for credit is expected to remain strong during Q1 2022. While we observed modest spread weakness during Q4 in some asset classes, barring a sustained market correction across risk assets, we do not expect meaningful spread impact within private structured credit. However, macro uncertainties around accelerating inflation, Fed tapering, rising rates, and the possibility of future variants of COVID-19 could lead to increased volatility and spread weakness.
1 Represents assets originated by MIM as of December 31, 2021 on behalf of MetLife general account, separate account 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 NAIC-1 generally corresponds to securities rated the equivalent of A3 or higher. NAIC-2 generally corresponds to securities rated the equivalent of Baa1 to Baa3. 4 Credit quality assessments were performed internally by MIM’s Corporate Private Placement team and have not been verified by independent sources. Any ratings with an “M” prefix presented in this document were developed internally by MIM (i.e., “MIM ratings”). MIM ratings are not rating agency 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 securities in a more or less favorable manner than such MIM ratings. MIM’s internal ratings are subjective; MIM has an incentive to assign internal ratings in a manner that more closely meets investor and/or yield expectations, or otherwise provides an advantage to MIM. Accordingly, such MIM ratings should be viewed as one factor among other factors for evaluating creditworthiness, and investors should make their own determination as to the weight placed on MIM ratings. Please contact MIM for additional information on how such ratings are derived. 5 MetLife Investment Management, InfraDeals 6 All of PSC securities are rated by either Moody’s, S&P, Kroll or DBRS/ Morningstar. We use rating agency ratings, convert to a Moody’s scale and calculate a weighted average. A3 represents the equivalent rating agency 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.