Within the emerging asset class of Private Credit in Australia, fund managers vary widely in how they determine the credit rating of their loan investments. Methods range from nothing more than a finger in the air, a general assessment of key ratios, through to adoption of reputable third-party tools underpinned by a wholistic quantitative and qualitative assessment of the borrower and loan transaction. Equally, investors are grappling with how to assess the relative risks of allocating to the broad array of managers across the private credit risk spectrum.
As corporate cash flow lending specialists, Epsilon Direct Lending (Epsilon) has a tailored approach to evaluating each loan proposal. We take the time to understand the borrower’s business, the key risks and opportunities to which it is exposed, as well as assessing the historical and forecast financial performance to understand how the business might operate under a range of different scenarios. All that work culminates in a credit rating which is typically expressed as a combination of the probability of the loan defaulting over the coming 12-month period (PD) and the expected loss given a default (LGD).
As the market for private credit evolves, investors, regulators, and auditors are increasingly seeking objective and consistent measures of the risk of a loan at origination and throughout its life. To increase the rigour and transparency in our approach to assigning credit ratings, we have leveraged Moody’s Analytics’ RiskCalc™ Plus solution in our credit assessment and portfolio management processes.
Our use of RiskCalc™ Plus to date supports the robust quality of the loan investments we are making and provides an additional lens to benchmark the relative return of new loan opportunities. We are confident that Epsilon’s credit rating and portfolio management processes will be consistent across the loan portfolio and over time, providing a high level of transparency for our investors.
If you’d like to learn more about Epsilon, our fund and the Australian middle market corporate direct lending investment opportunity please contact us on +61 2 8067 8566 or investors@epsilondl.com.au.
About Epsilon Direct Lending:
Epsilon Direct Lending Pty Ltd is a private market asset manager specialising in providing financing to high quality, resilient Australian and New Zealand middle market companies.
Epsilon was established in 2019, as a purpose-driven and customer-focussed firm. Epsilon aims to provide compelling financing solutions to middle market companies, while delivering stable returns for Investors, in all cases operating with the highest levels of integrity, reliability, and transparency. Read more…
Important Note:
The PD and LGD assigned to loans made by Epsilon is subject to Investment Committee approval and includes an assessment of other factors, including but not limited to: Business and Industry risk factors; assessment of the quality, performance and capital available to the owner of the business; structural characteristics of the loan; positive and negative covenants; and other qualitative overlays assessed through the credit process.
The RiskCalc™ Plus model generates both an Expected Default Frequency (“EDF”) default probability and a Loss Given Default (“LGD”) estimate based on borrower financial information and other data supplied by and entered into the model by Epsilon. EDF or LGD results are not Moody’s Investors Service (MIS) credit ratings and should not be interpreted as such. Neither Moody’s Analytics, Inc. nor its affiliates (collectively, “Moody’s”) have reviewed the EDF or LGD results or the data used to calculate them, nor has Moody’s reviewed the process by which the data was entered into the tool by Epsilon.