Parallel loans: beneficial for asset managers and banks

Parallel loans allow managers and banks to offer attractive lending solutions.

Gianluca Oricchio, CEO of Muzinich & Co. SGR and global leader of AI Solutions

For 15 years, banks have been trying to reduce debt by giving way to asset managers in the lending segment. Recently, “parallel loans” have developed, with managers lending to companies at the same time as banks. Indeed, under Basel III rules, banks can optimize the net return / risk-weighted assets ratio by investing in term loans with managers who provide loans under a single loan agreement.

Win-win script

In this way, the bank reduces its risk, while the manager benefits from the distribution network and numerous operations of the bank. The manager can then choose one of these transactions to create a diversified portfolio, benefiting from short-term bank financing and stress recovery mechanisms. The global potential market is 96.2 trillion US dollars[1] and 4,900 billion euros in Europe[2].

2022.06.21.  Capital structure
An example of a senior loan in the capital structure of the company
Source: Goldman Sachs Asset Management Private Credit, Senior Direct Lending Platform, April 2022 (p. 11).

Shadow lending strategies invest mainly in priority loans /club loans and older secured assets, ie the safest / priority and most frequently secured assets.

A diversified and significant portfolio (minimum ~ 100 loans) allows you to protect capital by maximizing profits, limiting “black swans” through diversification and given that the overall probability of default is lower than that of an individual. Thanks to this focus on risk reduction, the portfolio can receive an Investment Rating and benefit from long-term financing from banks at very competitive rates.

However, managers must be independent and have direct access to the surveyed companies to perform them due diligence. They should also have the same quantitative instruments as European banks (extended domestic Basel III rating models).

Artificial Intelligence

We advocate an investment process based on 3 pillars: qualitative / fundamental analysis, advanced internal Basel III rating models (and risk-adjusted pricing tools) and artificial intelligence / deep learning systems (or advanced risk tools). AI should be used to improve decision-making due to its ability to analyze large amounts of data, rather than as an opaque algorithmic credit selector.

Multilayer neural networks are powerful analytical tools where AI in combination with human analysis can improve the accuracy and quality of results, and therefore better distinguish wheat from chaff during due diligence. However, the final investment decisions are made by the people.

Funds focused on parallel loans are expected to grow as they offer attractive returns, low volatility (without daily valuation) and low interest rate risk as most loans have a variable rate.

This trend appears against the background of declining indebtedness of banks with high supply of credit (especially in the lower middle market), protection of bank capital and innovative methods of credit analytics that use big data on loans that are underused by SMEs.

Given the current recession and inflation, a well-diversified portfolio of senior floating-rate loans makes sense.

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