KELLY Tanarra Capital is a private credit manager. We are relatively new in the credit space and our goal is to find opportunities to provide debt capital to interesting parts of the market. We are sector agnostic and have two performing credit strategies – one high-grade and one subinvestment-grade loan portfolio – we have been managing for eight years.

We have a new portfolio for Australian-denominated credit and we want to use this to support companies through the cycle. This speaks to our difference: we are buy-and-hold, private capital credit investors, focused on investing in companies through the cycle, rather than fixed-income investors looking for liquidity.

My observation of the current bond market is that, ultimately, fixed-income managers are seeking investment opportunities from a relative-value, yield perspective as well as a credit lens. There is a big opportunity in thebroader resources sector, in the form of companies such as APA Group and the ports that are adjacent to and support the resources sector. We believe this is a segment of the market that is undersupplied with debt capital. We want to support companies that are capital-hungry, including some that might be linked to the energy transition.

In addition, we are discussing a part of the market where there are high investment cycles and capital requirements. This is where we view the investment opportunity. In particular, companies that are critical for Australia such as those operating in infrastructure and resources.

LOW In the metals and mining space, we consider issuers with strong capital discipline, a clear capital structure and that can demonstrate corporate cost control. These are the ‘three Cs’ within a producer’s control – we know that resources pricing is not. From a credit investor’s point of view, we like issuers that tick these boxes, at least from an investment-grade perspective.

We’ve witnessed a lot of non-investment grade issuers access the US dollar market, which is great because it means supply of finance is available in this space. In the local market, the type of exposure in mining and metals we have witnessed has been indirect, through the likes of Aurizon Network, Pacific National and the ports.

Opportunities for direct exposure in mining have been few and far between. This is mostly because miners receive their revenue in US dollars, so it makes sense to raise their funding in US dollars. This is beneficial for our US funds.

We invest locally on behalf of our US mutual funds and we do a lot of the research work that we share with our colleagues offshore. While we like to see issuers come to the local market, we understand it is a matter of what works best for them – and this is more important than what might be best for the Australian dollar market.

As Violeta alluded to, as a very large US fund we often take relative-value positions and consider the outlook. But a large part of our index funds is buy and hold, and we like to invest through the cycle, too. Therefore, doing the credit work upfront, knowing who our issuers are, where they sit on the cost curve and the sort of contractual terms they have with their end customers – the basic credit investing criteria – is really important. Especially when we have no control over the price.

SCULLY The point on the limited direct exposure to metals and mining in the Australian dollar market is well made. Exposure to the resources industry comes adjacently, via infrastructure or service providers.

We can invest in US dollars, which gives us the opportunity potentially to gain exposures to Australian borrowers issuing in US dollars. My sense is that a growing cohort of domestic investors is able to do this, even though it potentially comes with additional complexity around hedging.

Even so, as there is no direct exposure to the resources sector in the local bond market it probably does not get as much attention relative to its overall proportion of the domestic economy.

Regarding second-order effects and how they influence our thinking about the economy, it depends on what is meant by the strength of the market. If it is just a commodity price play, second-order effects are somewhat limited. High commodity prices have a direct impact on the federal budget and the government’s ability to execute on some of its fiscal plans.

But if there is a huge increase in domestic capex – not Australian companies investing in new production offshore but significant new domestic production investment – this certainly has an impact on how we think about the broader economy. In this equation, there will be winners and losers.

For example, from 2008-09 through to 2013-14 there was a huge capex boom in the resources sector in general. This had ripple effects through large sections of the domestic economy. It led to big differences in regional economic growth performance. It also led to capital and human resourcing, that could have been used in other parts of the economy, being drawn into the resources industry.

SCULLY Absolutely not. It is a very different credit proposition to lend to a business that has exposure to the industry but is not taking commodity price or volume risk, versus one that is directly extracting the minerals, and thus has exposure to commodity prices and the vagaries that can come with production. The credit work and the amount of leverage an adjacent company’s balance sheet can sustain is quite different from a business that is actually doing the digging and selling the minerals.

KELLY This is the way we look at it, too. We have a fund that aims to deploy capital in longer duration. This will largely play into investment capex requirement. It is not to take a view on commodity price, and subsequently to take volume and price risk. The focus is on companies where it makes sense to deploy seven- and 10-year money, and understanding what their capex programmes look like over a long period.