Over the past several weeks we have posted blogs with the theme of "finding areas of resilience" that discussed how the COVID-19 pandemic is having a varying impact on Commercial Real Estate, Commercial Mortgages and Global Infrastructure. The blogs highlighted areas that have fared well against the headwinds that have accompanied the COVID-19 pandemic. In continuing with this theme, today's blog will shift our focus to Private Debt.

The COVID-19 pandemic's impact on Private Debt

The COVID-19 pandemic has exacerbated the need for accretive and durable income streams as yields reached all-time lows and high yield private debt managers dealt with a deluge of impairments. The TD Asset Management Inc. (TDAM) Private Debt strategy, which is focused on investment-grade quality private debt investments, has not experienced any impairment, including on those investments exposed to the hospitality industry. How has this been possible?

To help highlight how our private Debt Strategy has shown resilience within this space, the Private Debt Team has written a paper titled Finding Resilience During a Pandemic: Private Debt. The article has a focus on the strengths of our investment-grade quality private debt investments and what has contributed to their resilience during the COVID-19 pandemic.

Strength in the foundation of the strategy

The strengths of our investment-grade quality private debt investments can be attributable to three main factors:

• Strong contractual cash flows - When stemming from a creditworthy counterparty, contractual cash flows help ensure stable revenues and sufficient debt servicing capabilities under a multitude of economic scenarios. Examples include a long-term take-or-pay power purchase agreement between a generator and a government owned agency and an availability-based revenue contract for the construction and long-term maintenance of a social infrastructure asset (hospital, courthouse, bridge, etc.)
• Structural protection – Structural protections in private debt bolster the stable income profile of the strategy and are often the product of a long negotiation process that requires thorough due diligence. There is not a standard covenant or security package, as each industry, jurisdiction, term and deal have their own idiosyncrasies, and therefore each transaction demands unique features. Ultimately, structural protections are solely designed to ensure that income is paid, and capital is preserved.
• Diversification - Proactive geographic and sector diversification has bolstered the durability of our private debt income profile. By targeting up to a 30% allocation to non-North American developed countries, our private debt strategy provides exposure to sectors and issuers that are scarce or non-existent in the Canadian fixed income market.

TDAM brings value to the table

The economic consequences of the COVID-19 pandemic continue to unfold and, unlike previous crises, there are direct impacts to real assets in the form of income disruption due to government-imposed restrictions on business activity. For private credit managers, portfolio construction, asset quality, managing relationships and risk management are critical factors in navigating the current environment. Moreover, during this pandemic, there are areas of the market that continue to provide enhanced income stability, capital preservation and income growth potential.

Ultimately, the role of private credit within an investor’s total portfolio mix remains steadfast in providing attractive income, lower correlation and improved diversification with other asset classes, translating into higher expected risk-adjusted returns for total investment programs.