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March 2021 | Issue 232
Opinion CLOs
People underestimate the impact they can have with ESG
Kirsten Bode
Co-head of European private debt
Kaiserslautern, Germany
Studied European business administration with two years at Middlesex University in London and two years at ESB Reutlingen in Baden-Württemberg, south-west Germany
Hidden talent:
Bode is a qualified yoga teacher and leads one class a week
Fun fact:
Bode used to play underwater hockey, which involves a snorkel, a weighted puck and a short version of a hockey stick
Last holiday destination:
Imperia in Liguria, northern Italy
Favourite movie:
The Matrix, because it showed it is important to think outside the box
Bucket list:
Learn to do a handstand push-up
Bode started her career at Morgan Stanley in 1999 in M&A before moving to the leveraged finance team. In 2005 she moved to the buy-side in a mid market credit role with Silver Point Capital before moving to Macquarie in 2009 as part of its principle investment business. She joined Muzinich in 2015
Was founded in 1998 and is a privately-owned firm that invests in public and private credit. It has over $39 billion in AUM
How has European direct lending changed over the past two decades?
A. In the mid 2000s, when this market developed, you generally had less of an equity cushion. You were lucky if you had 20%, but that says more about the private equity world than the private debt world. When I was lending back then, the term direct lending was not even used to describe what we were doing. It used to simply be ‘private side’ deals and there were a few opportunistic hedge funds that dabbled in this, but not nearly at the same scale as today.
What are the best and worst investments in credit today?
The best opportunities are where you have great downside protection, but with significant upside. It’s not easy to source these, but in direct lending deals involving sponsorless companies you can include a warrant as part of the financing and this can take returns towards equity-like levels.
The post-covid world is obviously very different and there a lot of sectors — such as travel, consumer-driven businesses and high-street retail — which face uncertainties. However, there are pockets of value here. For example, e-commerce where the underlying retailer is involved in sectors such as pet food has been very stable, but that’s more an exception rather than the rule.
What’s the best trade you have made?
Years ago we invested in a recruitment businesses through a conservatively structured financing package with warrant upside. It delivered close to equity returns and was a win-win for both parties as we were also able to provide business acumen to the borrower.
And the worst?
At a prior firm, we invested in a company rooted in a cyclical sector, which was prone to swings in the metals trading market. I think it is best to avoid companies where your destiny is completely dependent on the market, rather than the borrower’s ability to perform.
Who is your inspiration?
Our founder George Muzinich: he is over retirement age, but still has an energy and a vision for success to which I aspire.
Where is the market heading?
Spreads increased tremendously over the first covid lockdown, but they have since normalised to a level that is slightly richer than pre-covid. The premium is only 25-50bp, but we expect that to slowly shrink. Defaults could go up, but less so than predicted as there has been so much government support, particularly in the middle market.
Investors used to say they couldn’t invest in European direct lending because the market had not been through a crisis. In this regard, 2020 was a big year from an investor’s perspective.
What needs to change about the way your industry does business?
I’m going to hop on the ESG bandwagon here. People underestimate the impact it can have. As a direct lender you are often the sole lender, or one of two, and with that comes a lot of power to negotiate terms. There have been a few ratchet provisions linked to ESG recently, but these sorts of things need to be a discussion on every deal.
Where do you see future opportunities for your business in credit?
We are super-positive on the growth of direct lending as we are still in a heavily bank-centric world. Specifically, we think sponsorless deals could become a bigger part of the market.
At Muzinich, we have expanded on a geographic basis in the US and we’re set to launch an Asia Pacific private debt strategy.
We see the next big wave coming from Asia. In addition, we are looking to tap into other parts of the capital structure, whether it be mezzanine debt or minority equity.
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Global credit funds & CLO's
March 2021
| Issue 232
Published in London & New York.
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