Changes in Investment Needs to think about

Melbourne Mercer report deems Danish pension system best in world

Denmark has retained the only “world-class” pension system, while the Netherlands has fallen to third place behind Australia, according to the latest Melbourne Mercer Global Pension Index.

New European entrants include Finland, which came fourth and claimed the highest-ever integrity rating of 91.1, while Austria and Italy ranked 17^th and 19^th, respectively, behind France and Poland, largely due to the each country’s pension sustainability ratings.

The Index, in its sixth year and written by David Knox of the Australian Centre for Financial Studies in Melbourne, assesses pension systems on the three broad categories of adequacy, sustainability and integrity.

Italy set a record for the lowest overall sustainability rating, which takes into account coverage, contribution levels, demography and government debt, with a score of 13.4 in the category, slightly behind Austria’s 18.9.

The worst sustainability score to date was achieved in 2013 by Brazil, when it scored 26, a rating that this year improved marginally to 26.2

The final new European entrant, Ireland, ranked joint 12^th overall, the same as Germany.

Ireland earned a score of 62.2, with a higher adequacy rating than neighbouring UK but ranking significantly behind on sustainability.

Score of European countries within Index
Country (Ranking)	Score
Denmark (1)	82.4
Netherlands (3)	79.2
Finland (4)	74.3
Switzerland (5)	73.9
Sweden (6)	73.4
UK (9)	67.6
Germany / Ireland (12)	62.2
France (14)	57.5
Poland (15)	56.4
Austria (17)	52.8
Italy (19)	49.6

Denmark saw its overall rating increase to 82.4 due to improvements across all three categories and increased its lead over both second-ranked Australia and the Netherlands, with scores of 79.9 and 79.2, respectively.

The report praised the Nordic country for improving protection of benefits in cases of fraud or provider insolvency, but noted that the better score had been influenced by several minor factors including a higher savings rate.

Australia, meanwhile, was congratulated on increasing the rate of the mandatory contribution to Superannuation funds from the current 9.5% to 12%.

However, the Australian government last month announced that the current rate would be maintained until 2021, with the increase to 12% now occurring by 2025 rather than the initially planned 2019.

The Netherlands, which saw its score increase by 0.9 points to 79.2 compared with 2013, was praised for changes to the conflicts of interest policy.

Top 10 Countries within Index
Country (2013 ranking)	Score
Denmark (1)	82.4
Australia (3)	79.9
Netherlands (2)	79.2
Finland (-)	74.3
Switzerland (4)	73.9
Sweden (5)	73.4
Canada (6)	69.1
Chile (8)	68.2
UK (9)	67.6
Singapore (7)	65.9

It is unclear if the research was already able to take account of the recent changes to the financial assessment framework (FTK).

Knox stressed the importance of communicating clearly and concisely with fund members, as the effectiveness of a system was undermined by lack of community trust.

He also said the increasing importance of private provision over state pension payments meant communication would be key.

“This shift means communication to members has never been more important or come under more scrutiny from members, regulators, employers, consumer groups, politicians and the media,” he said.

France and Germany both saw significant increases in their overall ratings, with France’s 4 point rise to 57.5 credited to an increase in the minimum level of pension.

Germany, which saw a slightly smaller score increase of 3.7, nevertheless saw its grade improve from a C to C+, as its score rose to 62.2 due to changes to the provision of annuities.

Ireland was told it could increase its score by introducing a minimum level of contributions to occupational pensions, a move that would be made possible through the Irish government’s potential auto-enrolment reforms.

Auto-enrolment, and the rising contribution rates, benefited the UK, which saw its score rise by 2 points to 67.6, resulting in its overtaking Singapore and remaining ninth, despite Finland’s entry into the Top 10.

Poland slipped behind France to 15^th after its score fell to 56.4 after declines in both its adequacy and sustainability ratings, while its integrity rating remained unchanged over 2013.

The report urged Poland to maintain a “significant” role for the country’s second pillar – months after the state transferred all of the second pillar’s domestic sovereign debt to the Social Insurance Institution (ZUS) – and to allow at least part of the private savings to be drawn down as an income stream.

Sweden retained its strong position in the Index, increasing its overall rating and only falling to sixth due to the addition of Finland, with Switzerland’s rating remaining constant and also falling one spot to fifth.

The Rise and Rise of Direct Lending

Both a slew of announcements on new platforms and the hard data point to the rise of direct lending.

Private Debt Investor - PEI article
 I joined Private Debt Investor two weeks ago. And over those two weeks, announcements about new direct lending funds have dominated our reporting. They have also dominated our top ten most read stories.
I am very excited about my new role here at PDI – to head up a publication about an up and coming asset class as the market grows, develops and forces people to pay it some attention is a great opportunity.
We’ve had a slew of stories about new direct lending moves by Sankaty Advisors, Angelo, Gordon & Co., Blackrock, Cowen Group and Benefit Street Partners. And all these in my first two weeks in the job have just served to boost that sense of excitement.
Sankaty are targeting a fund of $700m to $1bn to invest globally. The firm, the credit arm of Bain Capital, will focus the new fund on senior secured debt for mid-market companies. Michael Ewald’s direct lending team will manage the sector-agnostic fund.
Blackrock is in the very early stages of launching a direct lending strategy. They have hired Stephan Caron, formerly chief commercial officer at alternative lender GE Capital, as European head of direct corporate finance – a newly created role.
Angelo, Gordon & Co. have hired former Madison Capital Funding duo, Trevor Clark and Christopher Williams. The new direct lending platform will target mid-market companies with EBITDA of between $3 million and €5 million.
Not to be outdone, Cowen Group also announced their new direct lending strategy last week. The group will initially invest $125m in Cowen Finance, which will originate and syndicate loans to the firm’s corporate clients.
Also making a strategic hire to lead their move into direct lending is the credit arm of Providence Equity Partners, Benefit Street Partners. They have hired Tim Murray, formerly managing director at GSO Capital Partners, to effectively open an office in Houston, Texas and establish a mid-market energy company credit business.
Benefit Street is both moving to tap the trend for direct lending, and take advantage of the US domestic energy boom prompted by the rapid expansion of shale gas production.
All these stories are not a coincidence, the data backs up the anecdotal evidence. Funds raised for private debt strategies have grown over the last few years, up from $39.61 billion in 2011, to $50.85 billion in 2013. More importantly, the proportion of those funds dedicated to debt origination, rather than strategies focused on buying debt in the secondary market, has exploded.
In 2011, funds raised for origination made up 3.6 percent of the total. After a small increase in 2012, it surged to 25.6 percent. In the first six months of 2014, the proportion of origination funds raised has risen to 30 percent, according to research by PDI Research & Analytics.
The trend has been driven by both push and pull factors.
European banks, in particular, are deleveraging. Loan growth in Europe has been negative since 2012, with lenders shedding assets and avoiding taking on new exposure. That has opened up a clear gap in the financing market with mid-market borrowers especially under-serviced.
For banks globally, the new Basel III standards will require them to hold more capital against loans, making corporate bank loans, already sometimes a loss leader, an even less attractive business.
On the push side, many of those moving into direct lending cite the low yields on offer in other asset classes. Mid-market corporate lending has generally low default rates and companies in need of capital, will pay for it.
So far, so familiar – none of these factors are earth shattering news to most financial market participants.
The really interesting question is how many of these new direct lenders will manage to find the right opportunities to scale-up? The other issue is returns – will the apparent rich pickings of low risk with decent yield meet expectations?
And for me, the most interesting points – will these new ventures still be here five years from now? And what form will they have taken by that point?
It’s a vibrant and growing market. We’ll be watching its progress with interest.
 

US regulators tighten grip on Wall Street lending

More scrutiny of Tech deals that are done by Private Equity firms and are supported with debt.  Aivars Lode

US regulators have started to audit loan books of Wall Street banks on a monthly basis in a major push to curb aggressive underwriting, according to Reuters IFR Magazine and Loan Pricing Corp.

Having already turned up the heat on banks after rebuking Credit Suisse, regulators will now be able to dole out punishments quickly if they deem that these guidelines have been contravened.

“Forgiveness is easier to get than permission,” said Richard Farley, a leveraged finance partner in law firm Paul Hastings.

“Monthly audits mean the regulators can tell the banks to stop right there and then, and tell them the consequences if they don’t.”

Farley said there was a whole array of punishments the regulators could deliver.

“They could change the CAMELS rating of a bank, which measures its compliance and risk management and determines whether it is safe and solvent and could impact a bank’s cost of capital if lowered,” he said.

“They could also get tougher on approving bank’s capital plans and their ability to pay dividends, as well as fines. They could even revoke a bank’s Charter and remove their membership of the Fed,” said Farley.

Until very recently, the Federal Reserve, the Federal Deposit Insurance Corp and the Office of the Comptroller of the Currency (OCC) have monitored banks’ behavior annually in Shared National Credit (SNC) reviews that take place over the summer.

The focus of the audits will be on whether banks are adhering to guidelines, spelled out in March 2013, which say that a loan can be criticized or considered “non-pass” if a company cannot amortize or repay all senior debt from free cash flow, or half of its total debt, in five to seven years.

Leverage over six times is also seen as problematic.

The Fed, the FDIC and the OCC were not immediately available for comment.

Tightening The Screws

Bankers, who have complained for months about an uneven playing field between banks watched by the OCC and the Fed, welcomed the news.

“All the banks want is a level playing field and more consistent feedback about what doesn’t fit inside the box. There’s still too much left for interpretation at the moment,” said one market source.

“This means banks will not have to wait another year for feedback following the SNC review. There is a lot more ongoing feedback and the regulators in general are just being more active…and giving guidance that is more specific.”

Two market sources said the regulatory audits were monthly.

“Regulators are asking dealers to provide them with monthly reports of things that have closed during that month,” said one.

“They are looking at the deals that have closed, relevant credit metrics and amortizations. Rather than relying on third party information providers, regulators are gathering the information themselves.”

The audits are understood to be more broad based, and go beyond just looking at loans that banks have made, in order to get a better understanding of how each lender views different credits and how their business operates as a whole.

Another market source emphasized how regulators are already embedded in banks, by drawing comparisons to the overhaul of asset-backed security lending after the financial crisis. The focus now, he said, had just shifted to leverage lending.

“The audits look at the deals the banks have turned down, look at how the banks rate and classify each loan, and the process they go through to approve the credit. It’s about looking at the deals banks decide to do as well as those they don’t,” said the first source.

Unregulated Territory

There is no doubt, however, that banks still have different interpretations of what the guidelines mean and which deals to push on.

Credit Suisse has been seen as the worst offender but JP Morgan caused a stir last week when it teamed up with unregulated lenders to underwrite a highly leveraged financing backing the $4.3 billion acquisition of business software maker Tibco.

Market sources said that the deal could contravene regulatory guidelines, as the leverage is well in excess of eight times.

Another source, however, said that JP Morgan must have been in close dialog with regulators before signing up for the deal.

Two other private equity firms have also stepped up to underwrite the Tibco buyout. Two market sources named Apollo as an underwriter on the deal, and a third named Merchant Capital Solutions, a capital markets business created by the Canada Pension Plan Investment Board, KKR and Stone Point Capital.

Apollo and KKR declined to comment.

Some people said that dynamic could become more common as regulatory moves shift risk away from banks into the shadow banking sector.

“If banks are living in fear of regulators constantly, this could accelerate shadow banking stepping in to take their place,” said Farley.

Reporting by Natalie Harrison and Michelle Sierra of Reuters IFR Magazine and Loan Pricing Corp.