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Canadian pension funds and insurers are facing a shrinking universe of higher-quality private debt investments to lift returns in a low-yield world, as the coronavirus pandemic has crushed many businesses, while banks maintain lending to better ones.

The tightening supply of this high-yielding credit comes as many Canadian institutional investors have been accelerating their exposure to the private debt.

Private credit is issued primarily by closely held companies, offering a premium over corporate bonds due to fewer disclosures and less liquidity. It is dominated by institutions and high-net-worth individuals.

They offer about 10% yield compared with some 5% generated by Canadian high-yield corporate bonds, according to Deloitte.

That has encouraged institutions including Caisse de dépôt et placement du Québec (CDPQ) and Sun Life Financial to increase their private debt allocations, while fund managers like Ninepoint Partners have seen increased investor demand.

But the pandemic-induced repeated lockdowns have slammed smaller and privately-held business more than their larger rivals, limiting their need and ability to raise debt capital.

“Ironically, for the companies that need the help, the banks don’t have the appetite to lend to them, but neither do many private credit funds,” said Andrew Luetchford, capital advisory partner at Deloitte Canada.

The dearth of opportunities is pushing institutions to either accept lower returns or invest in lower-rated firms. They are offsetting the risks by including stricter covenants and lowering lending amounts, said Ramesh Kashyap, managing director of alternative investment at Ninepoint Partners.

“There has definitely been a ratings migration from higher ratings to lower ratings,” said Fitch Ratings Director Dafina Dunmore, adding this is likely to continue through 2021.

“For firms that are solely focused on investment grade credit… the universe is smaller than it was a year ago.”


Despite the shortage of higher quality credit, some pension funds are forging ahead with their plans to increase private debt exposure.

CDPQ, Canada’s No. 2 pension fund, expects to hit C$50 billion ($39 billion) of private debt investments in the next four years, after nearly doubling them to C$35 billion since 2016, Head of Corporate Credit Jérôme Marquis said.

He partly attributed its ability to deploy capital to its continued investment during the coronavirus crisis, even as others retreated.

For investors still looking to tap private credit market there is some hope.

Brad Meiers, debt capital markets head at HSBC Securities Canada, said he expects debt issuance to rise after a lull in the run up to the U.S. presidential election and fears of a second coronavirus infection wave. But “we will not make up the deficit of issuance supply that we normally see this time of the year,” he said.

Canadian institutions with global exposure can also look for investments elsewhere if they can’t find them at home, Fitch’s Dunmore said.

Of annual global private debt issuances of up to $100 billion, about 60% comes from the U.S., according to SLC Management, Sun Life’s alternative investment arm, which bought a majority stake in U.S.-focused credit manager Crescent Capital in October to boost its private debt exposure.

But for some others, the lower quality is not worth it.

Manulife Financial, which focuses solely on investment-grade credit, is allocating less to private debt this year due to lower borrower demand, said Chief Investment Officer Scott Hartz.

“We do not compensate by going down in quality,” Hartz said, adding Manulife is satisfied with public corporate debt returns as credit spreads widen.

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