Korean Teachers’ Credit Union (KTCU) has decided to commit €50 million ($52.4 million) to a $1.5 billion~$2 billion fund which will take over senior secured loans of European banks at a discounted price, targeting double-digit annual returns.
Cross Ocean Partners, a credit investments-focused U.S. asset manager, is in the process of raising European Special Situations (ESS) fund II to purchase senior secured loans owned by banks in the secondary market, according to investment banking sources on Dec. 15. The fund targets an internal rate of return of 15~20% a year, far higher than other debt instruments’, despite low default risks of senior loans.
As European banks are expected to accelerate asset sales and curtail new lending to meet tightened capital regulations, offshore debt funds have whetted the appetite of South Korean institutional investors. Market observers estimate that the volume of domestic institutional investors’ commitments to offshore PDFs this year would reach 1 trillion won ($848 million).
Steve Zander, who heads Cross Ocean’s ESS team as co-chief investment officer, said in a speech during the ASK 2016 Global Private Equity & Hedge Fund Summit hosted by the Korea Economic Daily in May that of €2.3 trillion of assets which European banks needed to sell, €1 trillion was classified as normal assets, not as non-performing loans.
The loan-purchase ESS fund II compares with direct lending funds which have become the mainstream in Europe’s private debt fund (PDF) market. Unlike PDFs which lend the principal directly to companies and make interest incomes only, special situation funds take over banks’ loans in the secondary market at a discount and redeem them at a face value upon maturity, so they can make not only interest incomes but also capital gains, said one of the IB sources.
KTCU, the $25 billion savings fund for school teachers and personnel, also put about €30 million into the $1.5 billion ESS fund I that Cross Ocean had raised in 2013.
In November Korea Post selected Guggenheim Partners, Park Square Capital and Partners Group to invest $300 million mostly in senior secured loans. In September the Police Mutual Aid Association picked Benefit Street Partners and Park Square Capital to invest $20 million in private debt funds focused on North America and Europe, respectively.
The Government Employees Pension Service (GEPS) and the Public Officials Benefit Association also awarded $100 million PDF mandates each to HPS Investment Partners and Crescent Capital Group; and Benefit Street Partners, Babson and Europe-based Pamira.
According to the capital requirements under the Basel III, globally systemically important banks should increase their capital ratio against risk-weighted assets to 13.6% from 8%. The ratio should be lifted further to 15.5% by 2019.
By Chang Jae Yoo
<Edited by Yeonhee Kim>