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Understanding Syndicated Credit Investments
Syndicated credit investments, or broadly syndicated loans (“BSLs”), can be misunderstood as they sit between traditional bank lending and private credit. In reality, they operate much like conventional loans, with only a few core differences that affect investor outcomes.
In this article, we will cover what syndicated loans are and why they have become a core part of Invico Capital Corporation’s (“Invico”) lending strategy, given their increased liquidity and paths to return.
What is a Broadly Syndicated Loan?
A BSL is similar to any loan between a borrower and a lender. The core difference is that, rather than a single lender providing the capital, multiple lenders share the loan under a single credit agreement. These syndicates can range in size from 10 to 250 contributors of capital.
The BSL market became more prominent following the financial crisis of 2008, when banks shifted to an originate-to-syndicate model. Rather than lending directly to borrowers and holding loans on their balance sheet, banks began syndicating them to institutions such as Invico.
There are several defining characteristics of syndicated credit:
- Loans are primarily interest-only, so there is less principal repayment from the borrower. Typically, they will refinance in the debt capital markets.
- Maturities are typically longer than traditional direct lending, often five to eight years for syndicated loans compared to three to five years.
- Loans trade in an active secondary, over-the-counter market, where credit funds and other institutions can buy and sell parts of these loans. Increasing the investment’s liquidity.
- These loans receive daily valuations due to the volume of trading that occurs.
Why Syndicated Credit Plays a Key Role in Invico’s Investment Philosophy
Syndicated credit is an important part of Invico’s investment strategy primarily due to the interest income it generates, which supports monthly distributions to investors in the same manner as direct lending. In addition to income, there is capital gains potential, with the ability to purchase loans below par and later sell or be refinanced out of our position at or above par.
What truly differentiates this market is its scale and flexibility. With the asset class approaching US$2 trillion, syndicated credit offers a broad opportunity set that enables greater diversification through thoughtful position sizing, depending on how the investment team wants to shape the portfolio.
How Invico Evaluates Syndicated Credit Opportunities
From a return perspective, syndicated credit opportunities are evaluated primarily by the interest income generated from the investment and, secondarily, by any capital gains potential.
Taken together, these form the investment thesis and expected internal rate of return (“IRR”). Because these loans typically do not repay principal through cash flows, it is key that we invest in credit that can be refinanced within our two- to three-year timeline.
On the risk side, this strategy focuses on performing credit and not distressed situations. The due diligence analysis is bottom-up and fundamentally-driven, with a focus on capital structures that can be refinanced in virtually any economic environment. Key attributes include:
- Low net-debt-to-EBITDA
- Low loan-to-value
- True free cash flow after CapEx and debt service
- Contracted revenues
- Strong market share and barriers to entry
Case Study: A New-Issue Opportunity
New-issue opportunities in the syndicated loan market allow Invico to access well-established businesses at the point where they are actively reshaping or optimizing their capital structures. These transactions are typically led by experienced agent banks and come to market with clearly defined terms, robust disclosure, and broad institutional participation.
In this example a publicly-traded company came to the debt capital markets looking to refinance its existing capital structure with:
- A five-year first-lien term loan
- An eight-year unsecured bond
Fundamentally, the credit met all of Invico’s investment criteria: low leverage, strong free cash flow, hard asset coverage, and solid covenants. Call protection also created the potential for capital gains if the loan was refinanced early.
The investment team invested in the five-year first-lien term loan, with a strong position in the capital stack. Through established relationships with the agent bank, the team received a significant allocation, and the loan was issued at a discount to par.
Post-pricing, the loan traded above 101, validating our team’s investment thesis.
Case Study: Buying Below Par in the Secondary Market
Secondary market opportunities often emerge when short-term issues create loan values that are disconnected from long-term business performance. For Invico, this part of the syndicated loan market can offer compelling returns, particularly when loans trade below par for technical rather than credit-driven reasons.
In this scenario an opportunity was identified in the U.S. secondary market to lend to a private company that was a leader in outsourced services to the hotel industry.
The loan originated in 2018, and despite COVID-related challenges, the equity sponsor injected additional capital into the business.
This extra capital, combined with long-term contractual revenues, long-standing customer relationships, substantial barriers to entry and a clear path to EBITDA growth, painted a positive picture when it came to evaluating the opportunity.
The loan was priced substantially below par, primarily because it was a smaller, non-rated tranche, with Invico’s investment team able to purchase the loan in the low 90s.
Consequently, the loan was refinanced sooner than expected, and along with EBITDA growth exceeding expectations, the loan was taken out at par.
With the team maintaining conviction in their investment thesis, Invico subsequently re-invested in the new loan.
In Summary
Syndicated corporate credit offers access to performing public and private credit with scale, liquidity, and multiple paths to achieve a return. By focusing on strong business fundamentals and refinancing-driven outcomes, this strategy aims to deliver consistent income with the potential for capital appreciation.
Invico offers access to its syndicated credit strategy through a number of investment opportunities, including:
- Invico Diversified Income Fund, an award-winning evergreen mutual fund trust offering Canadian investors diversified income through credit and energy investments.
- Invico Credit Opportunities LP, an open-ended fund offering Canadian accredited investors access to USD-denominated income by investing in senior secured corporate debt across North America.
If you want to learn more about Invico’s syndicated credit strategy and how you can incorporate it into your portfolio, get in touch with our investment sales team.
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