Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your experience. Save up to 40% More details

Canadian pension funds, insurers seeking private debt face shrinking pool of lower-risk firms

Economic Indicators Dec 04, 2020 10:33PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
© Reuters. The Caisse de Depot et Placement du Quebec sign shown from their headquarters in downtown Montreal

By Nichola Saminather and Maiya Keidan

TORONTO (Reuters) - Canadian pension funds and insurers are facing a shrinking universe of higher-quality private debt investments to lift returns in a low-yield world, as the coronavirus pandemic has crushed many businesses, while banks maintain lending to better ones.

The tightening supply of this high-yielding credit comes as many Canadian institutional investors have been accelerating their exposure to the private debt.

Private credit is issued primarily by closely held companies, offering a premium over corporate bonds due to fewer disclosures and less liquidity. It is dominated by institutions and high-net-worth individuals.

They offer about 10% yield compared with some 5% generated by Canadian high-yield corporate bonds, according to Deloitte.

That has encouraged institutions including Caisse de dépôt et placement du Québec (CDPQ) and Sun Life Financial (NYSE:SLF) to increase their private debt allocations, while fund managers like Ninepoint Partners have seen increased investor demand.

But the pandemic-induced repeated lockdowns have slammed smaller and privately-held business more than their larger rivals, limiting their need and ability to raise debt capital.

"Ironically, for the companies that need the help, the banks don't have the appetite to lend to them, but neither do many private credit funds," said Andrew Luetchford, capital advisory partner at Deloitte Canada.

The dearth of opportunities is pushing institutions to either accept lower returns or invest in lower-rated firms. They are offsetting the risks by including stricter covenants and lowering lending amounts, said Ramesh Kashyap, managing director of alternative investment at Ninepoint Partners.

"There has definitely been a ratings migration from higher ratings to lower ratings," said Fitch Ratings Director Dafina Dunmore, adding this is likely to continue through 2021.

    "For firms that are solely focused on investment grade credit... the universe is smaller than it was a year ago."


Despite the shortage of higher quality credit, some pension funds are forging ahead with their plans to increase private debt exposure.

CDPQ, Canada's No. 2 pension fund, expects to hit C$50 billion ($39 billion) of private debt investments in the next four years, after nearly doubling them to C$35 billion since 2016, Head of Corporate Credit Jérôme Marquis said.

He partly attributed its ability to deploy capital to its continued investment during the coronavirus crisis, even as others retreated.

For investors still looking to tap private credit market there is some hope.

Brad Meiers, debt capital markets head at HSBC Securities Canada, said he expects debt issuance to rise after a lull in the run up to the U.S. presidential election and fears of a second coronavirus infection wave.

But "we will not make up the deficit of issuance supply that we normally see this time of the year," he said.

Canadian institutions with global exposure can also look for investments elsewhere if they can't find them at home, Fitch's Dunmore said.

Of annual global private debt issuances of up to $100 billion, about 60% comes from the U.S., according to SLC Management, Sun Life's alternative investment arm, which bought a majority stake in U.S.-focused credit manager Crescent Capital in October to boost its private debt exposure.

But for some others, the lower quality is not worth it.

Manulife Financial (NYSE:MFC), which focuses solely on investment-grade credit, is allocating less to private debt this year due to lower borrower demand, said Chief Investment Officer Scott Hartz.

"We do not compensate by going down in quality," Hartz said, adding Manulife is satisfied with public corporate debt returns as credit spreads widen.

($1 = 1.2985 Canadian dollars)

Canadian pension funds, insurers seeking private debt face shrinking pool of lower-risk firms

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
Sign up with Email