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Loan servicing can be labour-intensive. Chenavari outsources loan servicing, but has also recently acquired what Fery calls “advanced consumer finance servicing capabilities”. Some 400 people are on the ground, originating credit and collecting payments. Chenavari also has teams focusing on leasing activities, and handling non-performing loans in Spain. This seems quite novel in Europe, but in the US hedge fund managers have been involved in loan servicing for some years – Fortress, for instance, owns most of mortgage servicer, Walter Investment Management Corp. These servicing capabilities help to make Chenavari one of the more versatile credit managers, and they may allow Chenavari to do deals that some other asset managers cannot.


But loan servicing is really just the icing on the cake. Chenavari has for some time been particularly well positioned to take advantage of deal flow through sourcing, analysis, structuring, and origination. On sourcing capabilities Fery says, “Our origination teams are well plugged in to 80 to 100 banks in Europe, including regional banks. Our team is quite knowledgeable of the details of capital constraints and specificities arising from new regulations.” He adds, “Deep fundamental, structuring and origination expertise is required to plug into the new landscape and roll out attractive transactions.” Chenavari team members have executed in excess of $20 billion of regulatory capital transactions with more than $600 million currently invested in these transactions.


Fery states that Chenavari is not a “one-man show” and relies on numerous experts in the field of regulatory capital, particularly highlighting the roles of co-CIO, Frederic Couderc, as the senior structured finance specialist involved in a large number of Spanish balance-sheet capital efficiency deals in his former pre-crisis positions at Bear Stearns and Natixis, and senior portfolio manager, Hubert Tissier de Mallerais, who led the Credit Suisse balance sheet securitization team for a few years before helping set up the RBS non-core division. Fery headed up global credit markets at Calyon, with responsibility over structured credit, asset-backed securities and high-yield, and as such he was part of Credit Agricole’s Credit Portfolio Management group (CPM), one of the largest issuers of balance-sheet capital efficiency transactions between 1999 and 2007.


Having their fingers on the pulse of deal flows has helped Chenavari to deploy capital within their stated time frame, which is usually a two-year ramp-up period. Investors are close to fully exposed by the end of the investing phase, which may help to explain why Chenavari’s LSE-listed closed-end


fund, Chenavari Capital Solutions Limited (ticker: CCSL), trades at a good premium to NAV. Regulatory News Service (RNS) statements show that the seed investors for this vehicle included Chenavari’s own European Opportunistic Credit Master Fund LP, in keeping with the firm’s “eat your own cooking” philosophy that has seen the portfolio managers invest tens of millions into their own funds. Other anchor investors disclosed in RNS were Arbuthnot Latham, Baring Asset Management/Baring Fund Managers Limited, BNY Mellon, COIF Charities Investment Fund, COIF Charities Ethical Investment Fund, CBF Church of England Investment Fund and Sarasin and Partners. The new closed-end fund, Regulatory Capital and Deleveraging Opportunities, which is not LSE-listed, already has two anchor investors and is targeting assets of up to €1 billion.


Direct lending in niche segments The direct lending and leveraged finance bucket, at $1.6 billion, is larger than the regulatory capital assets, which were close to $1 billion as of the end of August. Some 28 investment professionals are working on direct lending, although some of them straddle other strategies – Fery and Couderc are co- CIOs of all strategies.


“The direct lending strategy differs from regulatory capital as it is seeking to originate new loans – doing what many banks do not do any more because of lack of capital,” says Fery. A full picture of historical returns has not been disclosed to us for the direct lending strategy, but a selection of trade examples gauge the potential in broad-brush terms.


Although tens of billions have been raised for direct lending funds, spreads per turn of leverage – a key metric – are still “two or three times as high as on liquid high-yield bonds,” Fery claims. Put another way, one study said that direct loans offer yields comparable to several levels of subordination. In other words, a senior direct loan, with first claim over borrower assets, might pay the same yield as a much more junior tradable loan that would likely experience far lower recovery rates in the event of default. Some 77% of the Chenavari direct lending book was senior/ first lien as of July 2014. “The yield gap partly reflects the fact that small businesses cannot access leveraged loans or high-yield bond markets, and are also too small for banks,” argues Fery.


On top of these hefty yields, borrowers are sometimes prepared to cough up arrangement fees as high as 5.5% for a five-year deal, and Fery says this is available capital for SMEs, which usually struggle to obtain adequate funding from banks. Further sweetening the deals, loans can also contain equity kickers, in the form of warrants or profit shares. But as any credible investor,


Chenavari demands sticks as well as carrots. The package of negotiated covenants includes maintenance covenants, negative pledges and cross defaults. There is already evidence that Chenavari are watching the covenants like a hawk. “Some borrowers have breached covenants but these situations are usually swiftly remedied by mutual agreement. While SME loans sometimes entail complex credit situations to efficiently manage and impair when needed, what matters eventually to our investors is the total portfolio performance,” says Fery.


Historically US private equity has greatly outperformed European private equity, but now US private equity firms are moving into the European direct lending space. The Chenavari managers, who have spent their entire careers in Europe, are presently focused on three main segments: European real estate commercial loans opportunities, with a focus on the UK and Spain; European specialty finance; and smaller and medium-sized enterprises in Europe and in Asia – with a new team brought in to do developed Asia since early 2014.


Niche commercial real estate was, in July, the largest allocation of the Chenavari Direct Lending Opportunities Fund at 43%. This incudes originating new loans and buying secondary loans, activities that Chenavari managers have been doing for many years. Trade examples suggest internal rates of return have generally been between 10% and 30%, with IRRs as high as 30% on bridging loans, where Fery argues that the fund offers “more flexible terms than many banks,” lending against some of the most expensive properties in London. Real estate specialists, Sam Mellor and Andrew Haines were hired from a specialist real estate boutique and they have done $10 billion of deals over their banking careers, including $1 billion of work-outs, with $600 million so far at Chenavari and a pipeline of $200 million meeting their criteria, including net IRRs of 10-12% and resilience to stressed scenarios.


SMEs are another core sector. The UK is currently the biggest country weight for direct lending as a whole, at 56%. Policymakers in the UK have been trying for years to encourage more financing for smaller companies, through the Funding for Lending scheme, and various tax advantaged investments such as Venture Capital Trusts (VCTs), Enterprise Investment Schemes (EIS) and the new Seed Enterprise Investment Scheme (SEIS). But British Bankers’ Association data seems to show that even as the UK economy recovers in 2014, bank lending to small and medium-sized businesses has been trending down since 2011. Chenavari even estimates the availability of finance to UK


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