Metrics: Where we see opportunities for lending

A desire to forge his own path led Andrew Lockhart from a 26-year career with National Australia Bank to strike out to form what is now one of Australia’s most successful non-bank lenders, Metrics Credit Partners.

The Metrics co-founder and Managing Partner reflects on the people and experiences that shaped his path and instructed the approach that underpins the corporate lender and alternative asset manager.

Lockhart describes how his grandmother kicked off an early passion for investing; walking away from a quarter-century banking career to co-found his own venture, and how Metrics’ approach has enabled it to survive and thrive since launching in 2013.

In the following interview, Lockhart outlines how his team sidesteps transactional risk and reveals the blacklisted sectors that have helped to preserve his investors’ capital.

Edited transcript

What was your first experience of investing – what was your first buy, and how did it perform?

I was quite fortunate. My grandmother was a very strong advocate for investing her own money. Her husband – my grandfather – died when my mother was very young, and off the back of that, she had to look after herself. It wasn't in the days where governments were providing a lot of support to widowed women. She had built up a considerable amount of wealth and decided it was important that her grandchildren understood how to invest and how to manage money.

I was probably about 13 when she transferred a number of shares in a company called Queensland Cement and Lime, which then had a stock code QCL but has since been taken over and folded into large multi-national LafargeHolcim. But back then, I had 300 shares in QCL allocated to me.

I used to wake up in the morning, run down and grab the newspaper and check out the local prices – because there was no “online” then, you couldn’t follow intra-day prices on Bloomberg or anything like that back then. I’d just check out how the price of QCL performed on any individual day. But from that moment, I was really interested in finance and the share market, and I thank her for that experience, really.

Having had a 26-year career at NAB culminating in a senior role in its lending business, is there a single person or an event that really shaped the way you think about investing?

One of my early experiences at NAB was obviously the stock market crash in 1987. And as a result of that, I was moved into a part of NAB where I was responsible for the workout and restructuring of a range of assets as a result of what occurred.

Back then in Brisbane, you had a quirk of the system that meant a lot of the Western Australian corporates were based in Brisbane. You had groups like Larry Connell's Group and Bond and others that had exposures that were banked out of Brisbane. I learned a lot about different corporates in the way that all worked.

One of the books that I've always enjoyed reading was Bold Riders, by AlanSykes that goes and gives a recount of all of the 1980s disasters and the like. Those sorts of things have all been good to learn from and understand the way in which larger businesses and people have operated. And the shortcomings of those businesses, and what has resulted in the collapse.

As a lender, you see a lot of different industries, different people, you meet a variety of people through that period of time and you learn a lot. I look back on it and say 26 years at NAB was a long time in one organisation, but I did a range of different roles and had a range of different responsibilities that kept the opportunity or the work environment quite relevant to me.

Early 2020 was a difficult period for everyone, and at a time when Metrics remains quite a young operation. From the perspective of the MXT and MOT listed vehicles, is your part of the market out of the woods of this COVID shakeup?

It's too early to say. When I look at the businesses that we lend to, and particularly the corporates that we lend to, those that are owned by private equity sponsors and the like, we did some work recently where obviously FY20 you can draw a line through that and say it was a bit of an aberration in terms of the financial performance of those businesses. But it was important for us to understand what management teams are expecting for the year ahead in FY21.

When we look at 2019 and then compare where management is forecasting 2021 today, about 75% of those companies that we lend to are projecting higher earnings in FY21. And while it's early days, the early indicators are that 90% of those companies that we lend to will exceed their FY21 budget numbers. The expectations of management and the owners of those businesses is for improved performance, and the early stages are that they are delivering on that.

Part of that comes from cost savings and improving operational efficiency. But while there's disruption, the real challenge is whether or not that flows through into more long-lasting changes in consumer and business behaviour. 

Are there business models now that are going to be impacted as a result of the disruption and dislocation that's occurred over these last 12 months?

From that perspective, as a lender, we're not so interested in the upside. We're interested in ensuring that obviously the downside is protected in that equity wears that risk of loss. And across our portfolio, I would say we're in a good position.

Across our commercial real estate business, for instance, around 40% of our book is in commercial real estate-related lending, predominantly short-term development funding. The performance of our borrowers in that part of the market has been very strong. And ASX listed corporates have good access to equity capital, as a lender, that's performing well.

Our project and infrastructure-related funding, again – often with government payment as your source of revenue to support the debt facilities – are performing well. And then on the operating companies that are private equity-owned, as I say, around 75% of those businesses are projecting better results in FY21 than in 2019. Again, as we sit here today as a lender, the risk is clearly that equity capital should wear that risk of loss and we're in a good position to obviously preserve and protect our invested capital.

I think one thing that I look at is obviously as well as the dynamic in terms of the market. You've got a situation where a lot of banks are flush with cash and have the capacity to lend, but I think they're probably a little bit more conservative. It's difficult for banks to coordinate themselves with people working from home and the like. That presents some opportunities for us in terms of being able to respond more quickly and more responsibly to our borrowers' requirements, and hopefully, that will give us an edge in terms of winning market share.

So in terms of risk, you're less concerned about short-term default and more interested in understanding any long-term changes in business dynamics?

It should be a very rare moment for a lender to wake up one day and see that their borrowers in default. Credit quality should deteriorate over time, and that's largely to do with underperforming management or underperforming business models. But in our case, what that requires is you may need to make adjustments. It might be that you require the company to raise additional equity, or you might require the company to sell assets to repay debt. There might be a range of things you do to respond to a deteriorating credit environment, but that's recognising where you sit in the capital structure.

From a shareholder or an equity investor's perspective, that volatility is of concern because it immediately reflects people's views of the forward earnings projections of those companies. Whereas for us, what we're looking at is to ensure that there's sufficient equity buffer that is at risk of loss before we as a lender are exposed to any potential downside risk of loss.

We've seen rates falling and they have continued to fall. Yet, you've been able to hold your distribution guidance. Why is the distribution guidance not impacted for Metrics when other asset classes are falling?

A lot of our income that we generate for investors, we seek to try and do that through fee income. A big driver for our investors are two things. I would say, why do investors invest in our asset class? One, they want the preservation of capital. Through our origination and structuring skillset, you're seeking to put in place appropriate terms, conditions, imposing covenants, taking security to mitigate the downside risk of loss. That's the capital preservation piece.

But people also are investing in our funds because they believe that we can negotiate appropriately with borrowers to drive the right outcome for them in terms of the return. What we're looking for is a blend of what's the risk, and are we getting an appropriate market-based price for the risk that we take? Our funds are blended in the context of the risk that we take.

But what we find is in times of, whilst base rates may have declined, you've actually probably seen a little bit of an upward bias in terms of credit spreads. Particularly in certain sectors, I can tell you now that between 100 to 200 basis points increase spread are required to lend to certain companies. That would be the market rate.

What you tend to find is our market and our activities are influenced more about the level of competition that we're exposed to from banks rather than market volatility in terms of credit spreads and rates. For instance, if I look at the regulatory driver for the banks that push them into high investment-grade credit, they're very active in terms of investment-grade ASX listed corporates or project and infrastructure related funding, but that creates opportunities for us in other parts of the market where they don't necessarily compete as aggressively.

You’ve suggested there's an expectation that banks could become more active. What's your observation?

I think the liquidity facility put in place by the Reserve Bank was designed to ensure that volatility and dislocation in public credit markets didn't find its way through to the end corporate in terms of impacting economic activity – because those borrowers were paying higher costs for their funding.

Even though the banks are awash with cash and the cost of funding has probably declined, credit spreads have increased, reflecting the more conservative nature of lenders. 

How have loans to companies in the hardest-hit sectors of hospitality and retail held up?

We've avoided a number of those sectors. For us, we had a very clear position going into this that there is a range of sectors where we felt it was not an attractive lending opportunity. Things like aviation, we had no exposure to Virgin for instance. We also have no exposure to:

• consumer discretionary retail
• student accommodation
• retail property trusts or commercial property trusts.

Part of it is about ensuring credit quality and the discipline around the lending activity. We support companies where we believe they're sensible transactions, where the risk is with equity and you as the lender are well-protected.

Across our portfolio, there've been ups and downs across the valuations. It's not as though all of the loans within our portfolio held par. That's far from it. 

There have been loans where we've marked the value of those assets lower, and others where the asset value has been marked higher, reflecting the performance or the maturity profile.

When we look at our loan transactions in our portfolio, the bulk of our portfolios are very short-dated and are maturing regularly, and we do that deliberately. We lend for shorter-dated periods because, in our mind, we think it reduces investor risk. It reduces your credit risk, your market risk – and the increased level of churn and liquidity through your portfolio actually gives you the opportunity to generate additional fee income for your investors.

In terms of commercial real estate exposures, we had probably four or five developments completed over that period between March and June, where the development was completed. The settlements occurred and we were fully repaid. That gives you the ability to then re-churn and re-lend that capital to new transactions at change market pricing on different terms and conditions.

We always have to have a very strong pipeline of opportunities. We're always looking for opportunities to lend, but across our portfolio in the last 12 months, we've probably proceeded with about 16% of the transactions that we would have seen and originated. This means that there's an awful lot of transactions that we decline.

How much of your book's rolled off during this turbulent time?

Quite a significant volume. Across the different funds, it varies. For example, our real estate lending book is probably the shortest-dated book, where the average maturity is probably around about one year. More than 40% of it rolled off between the beginning of March and the end of June. So that's evidence of successful lending repayment at par, redeploying the capital. That's evidence of track record when you can say, well, across our portfolio we operate close on $6 billion of assets under management, and the maturity profile of the assets borrowers are repaying, or they're being refinanced, and new transactions are being entered into.

What are some of the industries or sectors where you feel there are good opportunities and which you're most excited about at the moment?

We don't really try and pick winners. Our view is that we seek to build good long-term relationships with borrowers and corporates and we look to try and provide what we think is an important source of non-bank finance to those companies to support their growth, to support them completing projects. For us, everything is very much transaction-specific. Here's a particular opportunity to lend. Do we feel comfortable that the risk is acceptable, and then are we getting an acceptable return for our investors for that capital?

We consider every transaction on its merits. Some can support a higher level of leverage, but the nature of other borrowers’ businesses and the cash flows they're generating – or the level of equity buffer in the structure – doesn't support that level of leverage. Every transaction you consider on its merits, you do the due diligence, assess the risk, price it for the appropriate market return that our investors should be receiving, and then manage the asset.

Looking for an alternative source of consistent income?

Metrics Credit Partners is a leading Australian non-bank corporate lender and alternative asset manager. Metrics seeks to provide regular and consistent income to investors through its portfolios of directly originated loans to Australian companies and projects.