Enhanced Middle Market Credit: Investment Case Studies

Enhanced Middle Market Credit: Investment Case Studies

Time to read: Minutes

Key Takeaways

Middle market deal: A leading helicopter transportation provider to the oil & gas and air medical industries, with a clean balance sheet and low leverage, repaid around 300 basis points above the estimated yield to maturity at the time of underwriting.

Project finance deal: A cobalt mining company, which was well positioned to benefit from growth in electric vehicle production, had its deal economics improved by our team, leading to a well-structured transaction that resulted in an IRR around 90 bp above the estimated yield to maturity at the time of underwriting.

Private placement deal: A power supplier with long-term power purchase agreements with multiple investment grade counterparties had our team lead negotiations on deal structure and documentation, which achieved structural improvements that resulted in the company prepaying at 104 cents on the dollar.

The Voya Enhanced Middle Market Credit Strategy’s allocation to higher-collateral industries is more than double the sector average. The Strategy also offers diversification of opportunity set, investing in project finance and private placement deals that many other funds can’t access. Here are some examples.

Investing through a credit-centric lens

Over the decade that the Voya Enhanced Middle Market Credit (EMMC) Strategy has been running, it has invested 56% of its assets in higher-collateral industries, versus a middle market fund average of 26% (based on the $295 billion Cliffwater Direct Lending Index). Its top investment sectors are industrials, manufacturing, chemicals, and aerospace & defense. And, unlike many of its peers, the Strategy has invested 0% in software and tech (Exhibit 1).

Exhibit 1: Loan collateralization: Voya’s EMMC strategy vs. the market
Exhibit 1: Loan collateralization: Voya’s EMMC strategy vs. the market

As of 03/12/2024. Source: CDLI, Voya IM.

Given current market technicals—specifically, the prevalence of low-collateral loans in many large middle market funds—bringing a higher-collateral strategy such as EMMC into the mix can both add alpha and provide risk mitigation, with little to no overlap with existing allocations. 

In fact, 44% of EMMC’s historical capital deployment has been in loan types where the mega-funds simply don’t—and in many cases can’t—participate: project finance and private placement. 

To help familiarize investors with the EMMC process, we present past transactions highlighting various deal types, as well as the value the team adds and the level of collateral we prefer.

3498966

Risks of investing 

Middle market, private placement and project finance loans: The principal risks are generally those attributable to bond investing. Holdings are subject to market, issuer, credit, prepayment, extension and other risks, and their values may fluctuate. Market risk is the risk that securities may decline in value due to factors affecting the securities markets or particular industries. Issuer risk is the risk that the value of a security may decline for reasons specific to the issuer, such as changes in its financial condition.

Disclaimer 

Past performance is no guarantee of future results. All investing involves risks of fluctuating prices and the uncertainties of rates of return and yield inherent in investing. All security transactions involve substantial risk of loss. 

This market insight has been prepared by Voya Investment Management for informational purposes. Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Any opinions expressed herein reflect our judgment and are subject to change. Certain of the statements contained herein are statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) interest rate levels, (4) increasing levels of loan defaults, (5) changes in laws and regulations and (6) changes in the policies of governments and/or regulatory authorities. The opinions, views and information expressed in this commentary regarding holdings are subject to change without notice. The information provided regarding holdings is not a recommendation to buy or sell any security. Fund holdings are fluid and are subject to daily change based on market conditions and other factors. 

Canada: Please be advised that Voya Investment Management Co. LLC is a non-Canadian company. We are not registered as a dealer or adviser under Canadian securities legislation. We operate in the Provinces of Nova Scotia, Ontario and Manitoba based on the international adviser registration exemption provided in National Instrument 31-103. As such, investors will have more limited rights and recourse than if the investment manager were registered under applicable Canadian securities laws. 

For financial professional use only. Not for inspection by, distribution to or quotation to the general public.

Top