IIR Initiates Coverage on Metrics Income Opportunities Trust (ASX: MOT) with a Recommended Rating


August 15, 2022
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Metrics Income Opportunities Trust (ASX:MOT) (“MOT” or the “Trust”) listed in April 2019 raising $300m through the issue of 150m units at a price of $2.00 per unit. Since listing the Trust has grown to a market cap of in excess of $490m as at 30 June 2022 and has 265m units on issue. The Trust is managed by Metrics Credit Partners (“MCP” or the ‘Manager’) and is the second LIT issued and managed by MCP, the first LIT being Metrics Master Income Trust (ASX: MXT). MCP is an Australian debt-specialist asset manager founded in 2011 and with significant expertise in the Australian corporate loan market. MOT provides exposure to a portfolio of private credit investments. It does so through an investment in and
alongside four wholesale funds managed by MCP, with the Trust seeking to provide exposure to the full spectrum of private credit investments. The Trust is mostly exposed to loans, however may also provide investors with the potential for upside gains through exposure to private equity and equity-like securities. The portfolio will be exposed to low investment grade and sub-investment grade loans (BBB to Not Rated), with the portfolio historically having a focus on sub-investment grade exposure. The portfolio is positioned to provide exposure to the higher-end of the risk spectrum in private credit. This is reflected in the enhanced target cash distribution of the Trust of 7.0%p.a. The Trust has a target total return of 8%-10%p.a., which reflects the potential for capital gains as well as income with the Trust having the mandate to invest in private equity and equity-like securities in addition to loans and notes. The Trust pays MCP a management fee of 1.03%p.a. on the gross assets of the Trust. The Manager is eligible for a performance fee of 15.38%p.a. of the total return in excess of the greater of 7.50%p.a or the hurdle rate of RBA Cash Rate + 6.0%.

The Trust provides retail investors access to an actively managed portfolio of private credit investments, predominantly to Australian corporates. The Trust is predominantly exposed to sub-investment grade borrowers, which have a higher level of default risk associated with them. In addition to this, the portfolio has exposure to subordinated loans and equity securities, which rank behind senior lenders in the capital structure and are inherently more risky. As such, the Trust is considered to be at the higher-end of the risk spectrum in the fixed income asset class. Investors are compensated for the additional risk through a higher return. 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. Investors should note that distributions are exposed to default risk and there is the potential for capital loss on individual loans and securities. The diversified nature of the portfolio reduces concentration risk to any individual loan.

Independent Investment Research (IIR) has assigned MOT a Recommended rating. MOT is intended to provide a higher risk/return profile to that of the Metrics Master Income Trust (ASX: MXT) to provide those investors with a greater risk appetite access to an enhanced income. The portfolio has historically
had a focus on sub-investment grade loans and therefore entails the additional default risk associated with these companies. Investors should be mindful that defaults generally tend to cluster during periods of prolonged economic weakness. During these periods a robust investment loan assessment and loan management process are integral to mitigate default and loan recovery risk. MOT has not met its cash distribution target in recent times with declining interest rates resulting in the Trust not being able to achieve the fixed rate target. We expect the increasing interest rate environment will assist with achieving this objective more regularly moving forward. Given the floating nature of the target distributions of
the underlying wholesale funds we view a floating rate distribution target would be more appropriate for the Trust.

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