IIR Initiates Coverage on Metrics Direct Income Fund with a Recommended Rating

August 15, 2022

Metrics Direct Income Fund (“MDIF” or the “Trust”) is an unlisted unit trust that was established in July 2020. The Trust is managed by Metrics Credit Partners (“MCP” or the ‘Manager’) an Australian debt-specialist asset manager founded in 2011 and with significant expertise in the Australian corporate loan market. MDIF provides exposure to a portfolio of loans to Australian companies diversified by borrower, industry and credit quality. It does so through an investment in a Sub-Trust, MCP Wholesale Investment Trust (WIT), which subsequently invests in three wholesale funds managed by MCP, all of which provide
exposure to the Australian corporate loan market but with differing risk-return investment profiles and target loan investments. In addition to the underlying wholesale funds, the Trust can hold units in the Metrics Master Income Trust (ASX: MXT). MXT provides the same exposure as MDIF, both investing in the same Sub-Trust (WIT), however MXT is listed on the ASX. From a credit quality perspective, the Manager targets investment grade through to sub-investment grade segments (A through to B rated), reflecting the Manager’s view that this segment presents a particularly attractive opportunity set in terms of market pricing relative to default risk. Through the underlying investments, the Manager is targeting a return equal to the RBA Cash Rate + 3.25% per annum, net of fees and expenses. The Trust pays distributions on a monthly basis. Where the Trust is liquid, the Responsible Entity (RE) will accept redemption requests on a monthly basis, at the end of each month, where an investor has provided 10 business days written notice. In certain circumstances redemptions may be restricted and in the event the Trust receives redemptions requests of more than 10% of the NAV of the Trust in any given month, the RE may stagger the redemptions over successive five month periods.

The Trust provides retail investors access to an actively managed portfolio of direct corporate loans, providing an enhanced yield to traditional fixed income securities such as government and corporate bonds and term deposits. Unlike bonds traded in the secondary market, the Manager’s investment strategy is very hands-on transactional, with the focus on originating transactions, conducting detailed bottom-up due-diligence, structuring the loan and managing the loan life-cycle thereafter. As such, the Manager’s ability to successfully structure and manage transactions that meet the investment objectives and avoid credit defaults is critical. In this regard, the Manager has a strong track-record with minimal defaults and recouping all outstanding capital in those loans that have defaulted. The portfolio has
exposure to sub-investment grade loans which have a higher level of default risk associated with them. Investors should be mindful that defaults generally tend to cluster during periods of prolonged economic distress. In terms of income, as a unit trust, the income that is generated on the loan asset will flow through to the investor and be paid on a monthly basis. Investors should note that distributions are exposed to default risk and there is the potential for capital loss on individual loans.

Independent Investment Research (IIR) has assigned the Metrics Direct Income Fund a Recommended rating. MDIF provides retail investors access to an unlisted version of the Metrics Master Income Trust (ASX: MXT) with a key difference being the unlisted trust can invest in MXT units. In addition to providing a source of capital, one of the primary reasons for the establishment of the Trust was to provide a mechanism to assist supporting MXT when it is trading at a discount, providing the Trust with the potential for capital gains in addition to the income component in the event the discount narrows. The unlisted trust structure removes the potential for the Trust to trade at a discount or premium to NAV which is a feature of the listed trust, however, liquidity is limited by comparison. The allocation to MXT units will vary throughout the life of the Trust depending on the capital available and the trading price of MXT. The Trust has exceeded its target distribution to date and is largely exposed to floating interest rates, therefore we view interest rate risk to be low. The Trust has a limited track record in the unlisted trust structure with the Trust established in July 2020, although we note the underlying wholesale funds in which the Trust invests have a longer track record.

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