We wanted to provide an update on the market and our performance since our last update.
At a macro level, the global economy faces continued economic headwinds resulting from the impacts of Covid-19, as fiscal support is pared back in the medium term, offset to a degree by accommodative monetary conditions.
Since markets bottomed at the end of March, significant global fiscal and monetary government programs reduced market volatility, pushed down rates and resulted in buoyed market confidence supporting a steady rise in market valuations. Global economic growth has diverged from markets as illustrated by Japan’s 2Q GDP collapse of -7.8% QoQ (-27.8% annualised) and China, where in spite of re-opening in April, retail sales are still -1.1% YoY and have declined every month of 2020. COVID-19 remains with us. In our home markets of Australia and New Zealand, we have seen a resurgence of cases and Stage 4 lockdown in Victoria and a small outbreak in Auckland. As a result, the Australian economic outlook has been tempered somewhat but we will still expect modest quarter on quarter growth through the remainder of calendar year 2020. New Zealand is likely to see modest YoY GDP declines for the remainder of the year as it deals with the effective shutdown of its borders, however the current expectation is that the economy should rebound in early 2021. We will be focused on the economic impacts from early 2021 of the phasing out of government stimulus packages, rent relief concessions and mortgage holidays/deferrals, coupled with renewed tightening of banks’ capital requirements in the face of rising RWAs.
TCP’s disciplined approach to credit selection, which saw us avoid investing in economically cyclical and discretionary industries such as retail, gyms, restaurants, tourism and outdoor advertisers, has resulted in our portfolio performing very well despite the economic impact of COVID. To date we have not had any writedowns as a result of credit impairment, and have only one investment, which was impacted by the QLD border restrictions, which is not current on its interest payments.
From an investment perspective, there has been a significant increase in new deal opportunities as banks and other lenders have shifted their focus to existing portfolio issues and reduced their appetite for new lending. Whilst we have been highly selective in the current heightened risk environment, we have committed to four new deals over the past three months. These investments involve strong-performing, COVID-resistant businesses delivering very compelling risk-adjusted returns in the tech (data centres), healthcare and infrastructure service sectors.
TCP will continue to focus on defensive, cash generative investments with strong lender protections. TCP’s Asia-Pacific Fund I is >70% deployed and delivering consistent cash spreads in excess of 500 bps over BBSY from a modestly-leveraged, tightly-structured, 100% senior secured portfolio. Our four recent investments have spreads at ~100bps premiums to pre-COVID levels. We believe market dislocation will continue to deliver compelling investment opportunities in the medium term in private credit – especially when contrasted against public bond markets which are characterised by minimal lender protections and increasing default rates – but investment selection is critical. TCP’s deep networks across Australia and NZ gives us access to the very best financing opportunities in the region.
TCP will soon be launching its Asia-Pacific Fund II. Despite the uncertainty that lies ahead, we remain confident in our ability to originate high-quality direct lending investments delivering attractive risk-adjusted cash flows to our investors. TCP’s team boasts vast experience through multiple credit cycles, making us a great partner for outperformance in these uncertain times.