10 December 2013

Risk.net: Delta Lloyd to lead European insurers into private debt market

Delta Lloyd, the Dutch insurer, is leading efforts to kick-start the European private debt market with a plan to set up a collective scheme to provide loans to mid-sized corporates in the Nordic region.

The insurer, which has built a corporate loan portfolio from scratch over the past four years, is in talks with other European institutional investors to launch a €750 million senior debt fund early next year.

The fund will enable institutional investors to leverage Delta Lloyd's lending expertise, while sharing risk and increasing the fund's firepower. According to the proposal being pitched to institutional investors, the insurance arm of Delta Lloyd will hold a minority stake in the investment vehicle.

The move comes as insurers across Europe have been flirting with lending directly to companies after traditional lending markets seized up following the 2008 financial crisis. Insurers, however, have struggled to build up the necessary capabilities, such as credit risk assessment, in order to do so.

The fund will invest in internally rated BBB or BB corporates in the northwest of Europe with earnings of €50 million to €1,000 million. It is different from existing funds in Europe that invest in leveraged loans, usually in the context of buyouts or collateralised loan obligations.

Market observers say Delta Lloyd's debt fund, the first of its kind in the Netherlands, might help to tackle the industry's scepticism about stepping into banks' shoes.

European banks have traditionally been the leading lenders to firms in the region for decades. But new Basel III rules have forced them to deleverage and increase reserves. This has left institutional investors in Europe under pressure to fill the gap.

In addition to the lack of expertise to structure and manage loans, the illiquidity of loan notes is a major hurdle for insurers seeking to invest through private placements, where corporates source funding directly from one or a small number of investors. But illiquidity might be a low price to pay given the attractive returns of these loans in a low interest rate environment.

Private debt gives an illiquidity premium of between 100 and 200 basis points above equivalent liquid loans. The interest rate is fixed and the tenor of the loans is five to 10 years, complementary to what banks are willing to provide, but short enough from a risk and capital charge point of view.

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