KKR Credit Income Fund (“KKC” or the “Fund”) listed in November 2019. The Fund is structured as a listed investment trust (LIT) and seeks to offer investors exposure to a fixed income investment offering a regular monthly income stream and long-term capital appreciation over a full market cycle through an investment in two credit investment strategies: (1) the Global Credit Opportunities strategy (“GCO strategy”); and (2) the European Direct Lending (EDL) strategy. The Fund initially had a long term target of 50% to the GCO strategy and 50% to the EDL strategy, which the Fund met after becoming fully invested in the EDL strategy. However, moving forward the allocation is likely to be closer to 60% GCO strategy and 40% EDL strategy. As at 30 June 2024, 60% of the Fund was allocated to the GCO strategy and 40% to the EDL strategy. Details regarding the underlying investments is provided in the below report. KKC has a total return target of 6%-8%p.a. on average over the medium-term. The target distribution is set prior to the commencement of the financial year and will reflect the forecast cashflow for the Fund over the financial year period. The Fund has announced a target distribution of 20 cents per unit for FY25, which is equivalent to 1.67 cents per unit per month and represented a yield of 8.5% based on the NAV as at 30 June 2024. Distributions were initially paid quarterly with the distribution frequency increased to monthly from July 2021. The Manager is paid a fee of 0.88% p.a. (plus GST) of the NAV of the Fund and is eligible for a performance fee of 5.125% of the net return above the hurdle rate (RBA Cash Rate + 4.0%), subject to a High Water Mark. Fees are only charged at the Fund level with no fees charged in respect of the
direct investment in KKR funds.
An investment in KKC is suitable for investors seeking to generate an enhanced income through a portfolio offering a different exposure and risk profile to other fixed income LITs on the ASX. Given the nature of the underlying investments, we view the Fund to be at the high-end of the risk spectrum for fixed income with exposure to predominantly sub-investment grade securities. While the Fund listed in November 2019, the Manager has a long history and substantial experience in credit markets across the fixed income spectrum. The exposure of the Fund has changed over time as the capital was called for the EDL strategy. The addition of the EDL strategy to the portfolio was designed to lower the volatility associated with the overall portfolio and diversifies the portfolio from both a geographic and asset perspective. The GCO strategy is a traded credit strategy which means the portfolio will experience volatility in line with daily mark-to-market valuations. The distinction between traded credit and private credit (direct lending) is an important one and one that investors should ensure they understand.
IIR has maintained its Recommended Plus rating for the KKR Credit Income Fund (ASX: KKC). KKC provides investors exposure to one of the preeminent asset managers in the credit market globally, particularly when it comes to sub-investment securities. While the vehicle has had its challenges, the underlying investment strategies have delivered as expected. The buy-back program provided liquidity for investors seeking to exit, however we view the cessation of the buy-back program and the distribution of the capital being used for that program now being distributed to investors to be a positive, with unitholders now receiving a more attractive yield for the risk being taken. This has been reflected in the discount, with the discount narrowing substantially since the reallocation of income and capital returns to investors. There is an increasing amount of uncertainty in global markets. It is during these markets that we expect the Manager to outperform the broader market due the Manager’s diligent research and credit selection processes and active management of the portfolio.
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