DAVID We have looked at companies from a low triple-B down to, say, a single-B type profile. Our appetite is based on this profile, so we need to maintain a shadow rating of what we think the rating profile is.

The dilemma we have from a resourcing perspective is that the amount of time it takes us to look at a triple-B company is far less than we need to look at a single-B company. At the same time, our outright volume appetite for single-B is probably going to be less. Sometimes the process is around balancing these dynamics.

We want any security to contribute to the portfolio. If we’re looking at a company like Seek, which did a A$175 million (US$139 million) deal, there is enough debt out there for investors to buy. But if we’re looking at a A$30-40 million transaction our ability to participate and have a genuine impact on our portfolio is quite a bit harder.

The questions we will have for National Australia Bank (NAB) if it is talking to us about company are: what does it do, what are the balance-sheet metrics and how much is it looking to raise?

When we have the answers to these three very simple questions we’ll know whether we will be prepared to do the credit work. The answers to these three questions might be sufficient for us to say “this is probably not for us”.

KASE We also shadow rate internally. There is a certain amount of work we have to do to get comfortable with a deal and make sure it stacks up. Ultimately, though, we want to achieve a more diversified portfolio.

If we are looking at companies going through a growth phase we know if we do the work now the issuer is likely to come back to market in the future. This promotes the longevity of the process and ensures the credit work isn’t just a one off. If we get the sense a company is only ever going to do one three-year deal at A$50 million we’d probably look for something else.

MCNABB We don’t explicitly shadow rate. As we are looking at a credit we will have an idea where it fits in our  spectrum. This is a little like a shadow rating but we don’t explicitly call it this. But when we think
about where pricing should be and what the terms are like we will compare with other deals.

One thing we have come up against – and it’s a function of how the market works – is that an unrated credit needs to pay its way in the portfolio, because we are 50 per cent investment grade. It is actually difficult for us to buy an unrated credit with an investment-grade profile if it’s priced like an investment-grade credit.

We find ourselves passing on unrated opportunities that stack up from a risk-return perspective but we can’t find a home for them currently.

DAVID It’s a bit circular, as you have to know the credit profile before you can know what the price should be. A good banker will steer you towards what they think the price should be, so it’s possible to get a sense
of this up front. But whenever we are assessing what price should be it will always come down to what we think the credit profile is.

KASE There is another element, depending on how your organisation is structured. Where we already have internal equity coverage we can leverage off that knowledge. This can be of benefit when a new issuer comes to market as we can quickly form an early view on which credits we want to be involved with.

DAVID Focus on management probably becomes more heightened in the unrated space. We will either look to leverage the resources of the lead banks or our own internal equity teams to ensure we are on the same page as the chief executive. This engagement becomes very important.

MCNABB We take the view that if we are buying a piece of high-yield debt we are in a partnership with the company. We want to know what its strategy is. Our process takes a bit of time – we like to have at least a few days to look at a credit.

It’s also a tough process. We almost always say no and we need to get universal consent from our investment committee. This usually involves us understanding company strategy. We don’t view this just as a credit – it’s more of a corporate story as well.

JONES It’s a lot harder, because we don’t have the teams to draw upon. We tend to use other information in our network: this might be other managers that we work closely with, or through NAB. Certainly it’s easier if we already deal with the company on the equity side – for example with NEXTDC and Centuria Capital Group we were able to carry out our own assessments. For smaller issues we would likely partner with a manager with expertise in the relevant area.

As direct credit becomes more prevalent in the independent financial adviser (IFA) market there will be an opportunity for specialist credit-research houses that sit outside the traditional credit-rating agencies to provide services to IFAs in this space.

TODD Keith Jones will still be able to see a chief executive, though – from this perspective access is the same. We ask management to see all customers – this could be a fund manager or indeed anyone who is interested in being an investor. We are agnostic to the name behind the investor – we think the issuer needs to make the case regardless. NAB doesn’t have some relationships that are stronger than others: it has relationships.

GORDON Through Mark Todd’s work, for those investors that can’t make a roadshow or group meetings we will make the same information available via websites and the like.

JONES We certainly want to know about strategic vision on an issuer’s part, just as Adrian David says. We’d want to understand, to start with, whether we would invest in the equity piece. But we don’t apply a shadow rating to the asset as such. Even if there was one we couldn’t really show it to our client base.