While diversified portfolios of loans have historically generated consistent returns (over its 25 year history, the Credit Suisse Leveraged Loan Index has experienced only two years of negative total returns1), the return profile of individual loans is asymmetric. That is, since loans are floating rate assets that are generally pre-payable by the borrower, it is rare for loans to trade meaningfully above par value, yet there exists the risk of a principal loss in the event of default.
As a result of this asymmetry of potential outcomes, Marble Point’s approach and process generally requires that loan investments have a meaningful margin of safety based on the investment team’s assessment of a credit’s loan-to-value ratio. Importantly, a significant cushion between the enterprise value of a corporate borrower and the amount of the senior secured loan outstanding means that the value of the borrower would be able to withstand a significant decline before the loan would be at risk of not being able to be fully repaid.
Marble Point seeks to maximize risk-adjusted return over the long-term by focusing on relative value among loans with a similar credit risk profile (not necessarily in the same industry). This approach relies on a comparison of each loan owned in the portfolio to other loans available in the new issue or secondary markets and active management of the portfolio with the objective of: (i) selling loans that the investment team believes offer a lower risk adjusted return; and (ii) purchasing loans that the investment team believes offer a superior risk adjusted return.
The active management of loan portfolios results in a higher level of portfolio turnover than is the case with loan managers that pursue a more buy-and-hold-oriented approach. Marble Point believes that this helps to avoid “stale credits” (i.e. credits for which the original investment thesis is no longer intact or for which the potential return is no longer commensurate with the risk).
1 Based on the historical performance of the Credit Suisse Leveraged Loan Index. The Credit Suisse Leveraged Loan Index tracks the investable universe of the US-denominated leverage loan market. Index returns do not reflect any deductions for fees, expenses or taxes. You cannot invest directly in an index.