What is investment grade private credit?

When considering credit investments and funds, a common question is, “How safe are these investments?” and “How do they compare with loans issued by banks?”

Credit investments can vary in terms of safety, depending on the underlying assets’ credit rating and risk profile. Understanding the level of risk associated with public and private credit investments is crucial for investors seeking stable and reliable returns. In this article, we will explore the safety aspects of private credit investments and funds, shedding light on the factors contributing to their risk profile and the advantages they offer to investors with different risk appetites.

How to determine if a credit investment is safe?

Credit ratings are a valuable way for investors to compare fixed-income assets such as bonds, bills, and the different types of loans credit funds invest in. A credit rating refers to the ‘default risk’ for an individual debt, government, municipal bond, or mortgage-backed security. They represent an organisation’s or individual’s creditworthiness and credit risk regarding meeting its financial requirements.

Assets, including bonds, notes and private loans, are considered investment grade if they have a low risk of default. Where an investment grade credit rating indicates a low risk of credit default, a speculative grade refers to an asset, business or loan with a higher risk level or likelihood of default. Like businesses and individuals, investments also have credit ratings that lenders and investors can use to help decide if it is the right choice for their risk profile.

Funds and investment accounts in the credit space have a range of corporate loan options to choose from. Lower-risk funds primarily focus on senior secured and investment grade debt, which can be desirable to investors during rate cycles when bonds or shares might be underperforming. Higher-risk funds that focus on investing in sub-investment grade options can result in higher returns but also have a higher risk profile.

Which securities are considered investment grade?

Investment grade assets are determined based on a standardised credit rating scale by agencies such as Standard & Poor’s and Moody’s. The credit rating outlines the borrowing organisation’s or business’s ability to repay debt. In short, it is their creditworthiness based on varying financial and economic factors.

BBB from Standard & Poor’s and Baa3 from Moody’s indicate the lowest rating for a security or asset to be deemed investment grade. This rating shows investors that the company or bond has the ability and capability to meet its obligations. Still, it can sometimes depend on changes in economic or financial circumstances.

Investment grade private credit

As Australia’s credit market expands rapidly and more private credit assets are offered to investors for their attractive returns, portfolio diversification, capital protection and liquidity. There are several different types of credit, including senior loans, private placements, mortgage-backed securities (MBS), residential mortgage-backed securities (RMBS), asset-backed securities (ABS), mezzanine finance, Real Estate construction/development finance and distressed debt.

It is important to determine a Fund’s strategy, typically private placements, senior loans and a portion of securitised bonds (MBS, RBS, and ABS securities) are classed as investment grade credit due to their structure and characteristics and the borrower’s underlying risk of default, but importantly not all credit issued or purchased by Funds is classified or rated Investment Grade.

Investment grade credit is considered a low-risk, stable investment option for retail and wholesale investors with a low-risk profile looking for a conservative alternative to traditional market investments such as shares or bonds.

The table below outlines the likelihood of default for investment grade credit based on the borrower’s underlying credit rating or structural protections within the lending vehicle.

How does investment grade credit compare to loans issued by banks?

Looking at the average credit ratings of the various banks and large lending institutions in Australia paints an interesting picture and highlights the strength of investment grade credit. CBA, NAB, Westpac, and ANZ all share average credit ratings of A+, while Macquarie carries an average rating of A. AMP and Challenger carry average credit ratings of BBB- and BBB+, respectively.

When we  look back at the earlier table illustrating the credit ratings of investment grade private credit, we can see that, in most cases, the ratings match or exceed those of the major banks and lending institutions. For investors considering investment funds or cash management accounts backed by investment grade credit, they offer comparable safety compared to similar accounts offered by banks and other mainstream investment providers.

Why investment grade credit?

The continued growth, strength, and durability of investment grade credit markets reflect the many benefits they offer investors and issuers. Some of these benefits include:

Diversification

Investment grade credit funds allow investors to invest in assets not available through traditional investment avenues, affording them increased diversification across their investment portfolio.

Better lender protections

Investors in investment grade credit benefit from stronger deal structures than public market transactions. These structures include collateral and financial covenants, which allow lenders to renegotiate in case of credit deterioration. Additionally, investors have direct access to management and information that is not accessible to public investors.

Flexible terms

Investment grade credit is customisable to suit the needs of the issuer. It offers flexible terms and access to features and benefits such as delayed or multiple draw periods, non-standard maturities, and custom amortisation. The flexible terms available to the issuer, in turn, benefit the investor, lowering the overall risk profile of the investment.

Regular income

Most investment grade credit investments deliver a regular monthly income through interest repayments. Some funds allow investors the option to reinvest.

Lower portfolio volatility

By relying on the individual investments’ strength and less on market trends, private credit investment grade loans have a lower risk profile, reducing the overall risk across an investor’s portfolio.

Which Remara credit funds invest in investment grade debt?

We offer a range of credit funds, allowing investors to choose their level of risk and associated return. For investors with a lower risk profile looking for a more conservative approach, we offer different Cash Management Funds backed by investment grade private credit.

Our At Call Account – Cash Management Fund invests in asset-backed securities and direct lending loans with AA or greater credit ratings. It currently offers investors 5.35% p.a. calculated and paid daily. There are no lock-in contracts or withdrawal limits as long as the minimum account balance of $1,000 is maintained.

Our Term Account – Cash Management Fund invests in investment grade credit via asset-backed and mortgage-backed securities with a BBB or higher credit rating. This account offers up to 8.25% p.a. over a fixed 12-month period.

The bottom line

Credit ratings help lenders, financial institutions, and banks determine the likelihood of consumers and businesses repaying their debts. Investors can also use them to assess the investment grade of specific investment funds, cash management accounts, or individual loans. The higher the rating, the safer or less risky the investment.

In many cases, investment grade credit loans carry similar, if not identical, credit ratings to those issued by the Big 4 banks and other prominent lenders. This should comfort conservative and low-risk investors who are looking at the credit space to add regular income and diversification to their investment portfolio or are looking for a higher interest rate on their hard-earned savings.