Investment philosophy and process: A differentiated approach
Marble Point has a conservative, differentiated approach to credit investment, with four key elements to its philosophy:
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Margin of safety – a safety cushion is sought to protect against possible impairment by focusing on new first lien investments with a moderate loan-to-value (LTV) ratio, as well as examining qualitative attributes.
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Relative value – credits possessing similar risk profiles are grouped and the loans ranked by internally assessed upside potential. Lower-ranked loans are generally candidates for sale in favour of loans with a more attractive perceived risk/return profile.
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Active trading – a continual focus on relative value leads to an active trading style that is integral to the pursuit of building par value and mitigating losses in the portfolio, and this also helps avoid ‘stale’ positions.
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Active sourcing of investments – Shandell and Geis have deep, longstanding relationships with major banks and dealers. With private equity firms playing increasingly significant roles in the loan allocation process, active relationships are maintained with deal sponsors to understand and communicate how Marble Point can support their needs.
Marble Point has a well-defined, disciplined and repeatable investment process, which breaks down into two main stages: loan selection and credit approval.
The loan selection process incorporates the following considerations:
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Safety cushion – the investment team conducts in-depth analysis of the borrower, covering a wide range of factors, to assess possible impairment risk:
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Fundamentals – LTV ratios for non-distressed assets should provide a significant safety cushion, based on a detailed fundamental analysis of enterprise value, including comparison with other public and private company valuations, as well as an assessment of sensitivities to the borrower’s forward projections and macroeconomic assumptions.
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Intangible attributes – other factors assessed include a company’s track record of repaying debt, and expected levels of free cash flow, with sought-after characteristics including low capex and working capital requirements; company or industry structural advantages; businesses with high barriers to entry or leading market share; superior returns on invested capital; and a fundamentally good reason for the business to exist.
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Catalysts – triggers are identified for potential change in two main areas:
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Credit improvement – accelerated earnings/cash flow, asset sales, operational restructuring/cost reduction.
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Total return and price appreciation – company sale (M&A), equity issuance, debt refinancing, operational/financial restructuring.
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Relative value – comparison is made to other names in the portfolio based on similar credit quality, not just within the same industry, but taking industry volatility into account. Comparison metrics include LTV, effective spread, yield to worst (YTW – the lowest potential IRR without the issuer defaulting), free cash flow as a proportion of debt, cash flow volatility, business momentum, and capital intensity. A new credit must compare favourably to other names in the portfolio and be accretive to returns.
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Other considerations – further factors assessed across two categories include:
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Liquidity – size of tranche, number of dealers, quality of agent bank, market familiarity with credit, size and riskiness of underlying credit.
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Credit documentation – EBITDA addbacks, limitations on debt (including incremental and other allowances), mandatory repayment terms, limitations on restricted payments.
Credits that meet the loan selection criteria are eligible to be considered for investment via the credit approval process, which comprises the following stages:
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Idea selection – the industry-specialist credit analysts select suitable credits for further review, based on an assessment of the following main considerations: industry; credit metrics; structure; lead agent; spread, pricing, rating and return; recovery ratio; and diversification.
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Idea review – the credit analysts present investment ideas for review at the investment team’s morning meeting. This involves a preliminary discussion of credit positives and negatives, a preliminary relative value assessment, and review of further information required. Executable opportunities are ranked in order of priority, taking into account the timing of each opportunity.
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Credit analysis – the credit analyst conducts detailed research, involving a meeting with the originating bank; review of financial statements, current and historical offering documents, call replays and transcripts; conversations with agent bank professionals; and independent due diligence. The analyst develops a comprehensive, bottom-up financial model that incorporates macroeconomic and industry trends, the competitive environment and other external factors.
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Investment team decision – an investment memo is prepared by the credit analyst for review by the team. Further analysis is performed if requested by the CIO, head trader or another investment team member, and the memo revised as needed. The investment decision is discussed and an appropriate portfolio weighting determined.
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Investment committee review – only ideas supported by the investment team are submitted to Marble Point’s investment committee, which comprises Marble Point CEO Tom Shandell, Marble Point Head Trader Corey Geis, Eagle Point Managing Partner Thomas Majewski and Eagle Point Principal Dan Spinner. Majority approval is required for investment recommendations to be implemented.
Following investment, there is an ongoing assessment and risk management process, with the covering analyst responsible for monitoring every position in their specialist sectors, while the team sits in an open environment, which fosters regular communication.
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Risk management – a proprietary portfolio monitoring report is used to evaluate credits and help make relative value decisions by comparing credit metrics and yield across portfolio holdings. The report enables the investment team to assess whether the investment thesis remains on track for each credit, and also whether portfolio yield is being optimised. Investments are designated as ‘performing’ or ‘watch list’ credits, and monitored accordingly.
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Performing credits – each analyst is responsible for following earnings reports and updates on relevant external factors (macro trends, cost inputs, currency, product pricing, capacity or new entrant additions, regulation). The investment team regularly discusses the relative value of performing credits.
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Regular meetings – the portfolio is reviewed in regular investment meetings, with a focus on credits where there has been a change to the investment thesis. During quarterly reviews, the investment case for each credit in the portfolio is reassessed by the covering analyst and presented to the team for consideration.
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Watch list credits – credits that have not achieved projected financial results, par credits where the LTV has climbed meaningfully above 50%, and credits that have appreciably underperformed the portfolio average are discussed frequently within the team.
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Ad hoc credit updates – analysts provide timely updates on financial results, industry developments and changes to the investment outlook via morning meetings and other real-time communications, facilitated by the open trading floor environment.
MPLF primarily obtains exposure to loans through its subsidiary MPLF Funding (which invests in loans directly), through investments in Marble Point CLO equity and debt securities, and also via Marble Point LAFs. MPLF invests in Marble Point CLOs directly and also has indirect exposure through holding minority stakes in Marble Point’s CLO manager subsidiaries, which maintain risk retention interests in each CLO they manage, generally to the extent required by law or regulation.
Depending mainly on an assessment of market conditions, a Marble Point CLO manager may initiate the securitisation of a Marble Point LAF, or loans within MPLF Funding, into a Marble Point CLO; the issuance of a new Marble Point CLO; or the refinancing or reset of an existing Marble Point CLO. To the extent it has available capital, MPLF intends to obtain exposure to each new Marble Point CLO when it is issued, thereby gaining vintage period diversification across its portfolio of CLO securities, which is considered important from a risk management perspective.
MPLF may acquire Marble Point CLO securities on the secondary market, and is permitted to invest directly or indirectly in other related investments, such as CLOs or LAFs managed by third-party CLO managers; interests in other pooled investment vehicles that invest in loans or CLOs; interests in CLO collateral managers; other types of loans; and any other investment that the manager believes is consistent with MPLF’s investment objective and policy.
Current portfolio positioning
Exhibit 2 shows MPLF’s portfolio investments at end-January 2019. The most significant valuation changes from end-December 2018 were c 5–11% gains across MPLF’s CLO equity holdings in MP CLOs III and VIII and Marble Point CLOs X and XI as these were marked up to prevailing market prices. These gains largely offset the declines reported in December 2018, confirming that no material deterioration was seen in the underlying loan portfolios of these CLOs. In December 2018, loans held by the Marble Point LAF were securitised into Marble Point CLO XIV, and capital was reallocated from MPLF Funding to a newly formed Marble Point LAF, which explains the majority of the decline in value of these investments from US$54.0m and US$27.8m at end-November 2018.
Exhibit 2: MPLF investment portfolio as at 31 January 2019
Investment |
Fair value |
Portfolio weight |
Effective yield* |
Annualised cash yield** |
CLO size |
Equity tranche |
Marble Point ownership |
Junior OC cushion*** |
Non-call date |
Reinvestment period end |
CLO equity |
US$m |
% |
% |
% |
US$m |
US$m |
% |
% |
|
|
MP CLO III |
13.3 |
6.5 |
12.9 |
15.4 |
400.7 |
55.1 |
71.2 |
4.7 |
20-Oct-19 |
20-Oct-22 |
MP CLO IV |
0.7 |
0.4 |
7.6 |
7.6 |
398.3 |
48.4 |
5.0 |
4.1 |
25-Jul-19 |
14-Jul-21 |
MP CLO VII |
11.1 |
5.4 |
14.0 |
28.5 |
540.2 |
45.5 |
61.2 |
5.0 |
12-Sep-19 |
18-Oct-20 |
MP CLO VIII |
14.1 |
6.8 |
17.9 |
24.3 |
503.4 |
50.0 |
51.7 |
5.2 |
11-Nov-18 |
28-Oct-19 |
Marble Point CLO X |
23.5 |
11.4 |
8.3 |
19.2 |
502.2 |
50.0 |
86.0 |
5.4 |
15-Apr-20 |
17-Oct-22 |
Marble Point CLO XI |
18.5 |
9.0 |
13.7 |
19.6 |
501.3 |
48.5 |
59.8 |
5.2 |
18-Jan-20 |
18-Jan-23 |
Marble Point CLO XII |
18.9 |
9.2 |
14.6 |
23.6 |
500.5 |
48.7 |
59.5 |
5.1 |
22-May-20 |
16-Jul-23 |
Marble Point CLO XIV |
26.2 |
12.8 |
12.0 |
N/A |
400.0 |
38.0 |
86.8 |
5.0 |
31-Dec-20 |
20-Jan-24 |
Total Marble Point CLO equity |
126.3 |
61.5 |
12.7 |
|
|
|
|
|
|
|
CLO debt |
|
|
All-in yield |
|
|
Debt tranche |
|
|
|
|
MP CLO IV (Aaa) |
11.0 |
5.4 |
4.0 |
|
398.3 |
259.0 |
5.0 |
4.1 |
25-Jul-19 |
14-Jul-21 |
MP CLO IV (Aa2) |
1.8 |
0.9 |
4.6 |
|
398.3 |
42.0 |
5.0 |
4.1 |
25-Jul-19 |
14-Jul-21 |
MP CLO IV (A2) |
0.8 |
0.4 |
5.2 |
|
398.3 |
19.4 |
5.0 |
4.1 |
25-Jul-19 |
14-Jul-21 |
MP CLO IV (Baa3) |
1.0 |
0.5 |
6.4 |
|
398.3 |
24.6 |
5.0 |
4.1 |
25-Jul-19 |
14-Jul-21 |
MP CLO IV (Ba3) |
1.0 |
0.5 |
9.8 |
|
398.3 |
24.0 |
5.0 |
4.1 |
25-Jul-19 |
14-Jul-21 |
Total Marble Point CLO debt |
15.6 |
7.6 |
4.7 |
|
|
|
|
|
|
|
Marble Point CLO fee participations |
5.7 |
2.8 |
14.8 |
|
|
|
|
|
|
|
MPLF Funding NAV |
38.2 |
18.6 |
N/A |
|
|
|
|
|
|
|
Marble Point LAF |
19.6 |
9.6 |
N/A |
|
|
|
|
|
|
|
Total investment portfolio |
205.3 |
100.0 |
|
|
|
|
|
|
|
|
Source: Marble Point Loan Financing, Edison Investment Research. Note: *Yield to maturity based on projected cash flows. **Latest cash distribution relative to market price. ***See page 19.
Exhibit 3 shows the breakdown of MPLF’s portfolio by investment category and the underlying loan exposure by industry at end-January 2019. CLO equity exposure increased from 49.9% at end-November 2018 to 61.5% at end-January 2019, reflecting the natural cycle of loan accumulation by MPLF Funding and Marble Point LAFs (which both act as CLO warehousing facilities) followed by securitisation of the loans into a new CLO issue. MPLF’s CLO equity exposure was a comparable 60.9% at end-February 2018. The portfolio’s underlying industry exposure is broadly spread across Moody’s 35 industry groups, with the top 10 industries representing 71.9% of the portfolio at end-December 2018, compared with 70.9% at end-November 2018 and 68.5% at end-February 2018.
Exhibit 3: MPLF portfolio analysis by investment category and underlying industry exposure
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Portfolio analysis by investment category at 31 January 2019 |
Underlying loan portfolio analysis by industry at 31 January 2019 |
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Source: Marble Point Loan Financing, Edison Investment Research
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As shown in Exhibit 4, MPLF had exposure to c 300 corporate borrowers at end-January 2019, with average exposure of c 0.5%. The largest portfolio exposure to an individual borrower was 1.1% and the 10 largest exposures made up 9.7% of the portfolio (Exhibit 1), similar to end-December 2018 and end-February 2018. The average par-weighted market value of the underlying loans in the portfolio was 96.22 at end-January 2019, having recovered from 94.56 at end-December 2018, but still below the 97.11 and 99.61 average market values at end-November 2018 and end-February 2018, respectively. The underlying loan portfolio’s weighted average credit rating has remained at B1/B2 since MPLF’s launch, with loans concentrated in the Ba3, B1, B2 and B3 categories, although there has been a slight shift to the lower rating categories at end-January 2019 compared with end-February 2018.
Exhibit 4: MPLF’s underlying loan portfolio summary and rating analysis
|
Summary of underlying loan portfolio characteristics |
Moody's rating analysis of underlying loan portfolio at 31 January 2019 |
|
31-Jan-19 |
28-Feb-18 |
Unique underlying borrowers |
296 |
343 |
Largest individual borrower exposure |
1.1% |
1.2% |
Average borrower exposure |
0.5% |
0.4% |
Currency: USD exposure |
100.0% |
100.0% |
Exposure to first lien loans |
97.45% |
96.10% |
Exposure to defaulted borrowers |
0.06% |
0.1% |
Average junior OC cushion |
5.00% |
4.71% |
Average market value of collateral |
96.22% |
99.61 |
Average stated spread |
3.45% |
3.50% |
Weighted average rating |
B1/B2 |
B1/B2 |
Weighted average maturity |
5.3 years |
5.2 years |
|
|
Source: Marble Point Loan Financing, Edison Investment Research
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As illustrated in Exhibit 5, MPLF’s underlying portfolio is skewed to longer maturities, with 68.1% exposure to loans maturing in 2024 or later as at end-January 2019, similar to the distribution at end-December 2018, but more skewed to longer maturities than at end-February 2018, when exposure to loans maturing in 2023 or later was 59.7%. The manager reports that the current portfolio’s higher proportion of longer-maturity loans is consistent with the overall loan market. The price distribution of MPLF’s underlying loan portfolio changed considerably during January 2019, with 59.2% trading at 97.5% of par or higher at end-January 2019 compared with 16.5% a month earlier, marking a move back towards the 77.6% and 92.9% levels recorded at end-November 2018 and end-February 2018. This shift reflects a recovery from the significant market price declines during December 2018, which resulted from an exceptionally high level of net outflows from retail loan funds, rather than any deterioration in loan fundamentals. This redemption-driven selling typically creates an attractive buying opportunity for CLOs, which have fixed-maturity financing.
Exhibit 5: Maturity and price analysis of MPLF’s underlying loan portfolio
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Maturity distribution of underlying loan portfolio at 31 January 2019 |
Price distribution of underlying loan portfolio at 31 January 2019 |
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Source: Marble Point Loan Financing, Edison Investment Research
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