S&P: Metrics Credit Partners Diversified Australian Senior Loan Fund 'BBB+/A-2' Ratings Affirmed; Outlook Stable

S&P Global Ratings today said it has affirmed its 'BBB+' long-term and 'A-2' short-term issuer credit ratings on Metrics Credit Partners Diversified Australian Senior Loan Fund (MCP DASLF). MCP DASLF is an open-ended unit trust domiciled in Australia that invests in a diversified portfolio of Australian corporate loans. The outlook on the long-term rating is stable.

The affirmation reflects our opinion that MCP DASLF has retained its low underlying credit risk relative to rated peers, strong funding profile backed by its ability to control redemptions and distributions, a solid franchise among its target investor segment, and good investment performance. The fund has posted strong net returns of 292 basis points over the Reserve Bank of Australia cash rate since inception. Furthermore, we expect that structural leverage will remain low, which should support the fund's liquidity and solvency under stress scenarios. Offsetting these factors are MCP DASLF's relatively small size (notwithstanding the steady growth in fund size to A$2.2 billion as of Dec. 31, 2017) and concentrated investment portfolio (59 individual investments as of Feb. 28, 2018), the limited track record of the fund given its inception in 2013, and key-person risk associated with its small, four-person investment management team and 12-person analytical support team.

In our view, MCP DASLF holds a unique position as the only fund in the market offering investors the ability to invest in Australian corporate debt across the credit spectrum, and further provides a distinctive investment option for those seeking higher yields. Furthermore, we are of the view that it would take a competitor several years to establish a fund that could compete directly with MCP DASLF.

The stable outlook on MCP DASLF reflects our expectation that in the next two years the fund will:

Maintain the underlying credit risk profile of the fund at its current low level relative to peers; Continue to be run without any structural leverage, derivatives, or foreign exchange risk; Carry on generating sound investment performance; andAvoid any operational or governance issues, including the loss of any of its key relationships.

Although we are unlikely to raise our rating on the fund in the next two years, positive rating momentum could build within the fund over this period. This could be triggered by the continued growth in funding from more permanent capital--such as that achieved by the IPO of the MCP Master Income Trust on the Australian Stock Exchange--whereby it formed a more material part of MCP DASLF's balance sheet. Positive ratings momentum would also be reliant on further increases in assets under management and fund diversification to a level more commensurate with peers.



We are unlikely to lower our rating on the fund in the next two years. Nevertheless, we would review the rating for a possible downgrade if any of the following--low probability scenarios in our opinion--occurred:

A deterioration in the asset quality of the fund, particularly if its loss experience varied from that of the Australian banks;A heightening of the risks within the investment portfolio, such as the fund taking on exposure to derivatives or foreign exchange risk;The introduction of any structural leverage or the drawdown of a substantial portion of its funding facility without a credible plan to pay back the debt in the short term;Sustained subpar investment performance of the fund relative to the Australian debt market, and in particular if it led to a material increase in investor redemption requests; Any operational risk event including the emergence of governance issues or the loss of key relationships such as its banking, trustee, or partnership relationships that compromise the manager's ability to do business;The loss of investor confidence as demonstrated by a single redemption that represents 5% of the fund or cumulative redemptions of over 10% of the fund in a one-month period; orThe emergence of a new competitor that undermines the fund manager's unique business and market position.
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