BNP Paribas AM: Alternative fixed income: reaching the mainstream

The alternative fixed income asset class can offer investors attractive returns and diversification, with opportunities looking set to flourish.

In a market with potentially 24.5 million borrowers – the number of companies of all sizes in Europe – and attractive growth prospects, the public markets offer access to only 1 000 of them, leaving a substantial opportunity for other platforms as channels for investors to invest in loans to small to medium-sized enterprises (SMEs).

This asset class can offer investors attractive spreads and returns and, given the breadth of this market segment, considerable opportunities to diversify their fixed income portfolios.

The BNP Paribas Asset Management SME loans platform focuses on loans to SMEs where the ‘illiquidity premium’ is 2% to 3%, resulting in potentially attractive returns for investors. That premium is linked to the complexity of the asset class: the effort to get access to this segment and to realise a loan, and the degree of competition with other platforms. To be able to benefit from the opportunity, substantial expertise is required.

Over-the-cycle assessment and sound credit analysis

On the BNPP AM platform, companies are granted loans with a maturity of up to eight years, covering an entire business cycle, so it is important to assess how the company’s business model operates through such a period before awarding a loan.

Selecting a company for a loan involves the use of ‘knock-out’ criteria in the first phase. For example, the company must be profitable over time, the leverage should be capped and the cash flow should be sufficient. At the start of the credit process, this should create clarity for the company as to the chances of a successful award.

The second phase comprises a highly automated and industrialised credit analysis carried out by experienced professionals. This enables a healthy portfolio of SME loans to be built and managed for investors.

Read more expert analysis of the opportunities offered by the increasingly mainstream alternative fixed income asset class.