2 April 2020
Dear Investors,
RE: Goldleaf Australian Income Fund (GAIF) Market Perspective
Robert F Kennedy said in his Day of Affirmation Address in South Africa in 1966 “Like it or not, we live in interesting times. They are times of danger and uncertainty; but they are also the most creative of any time in the history of mankind.”
Certainly, the world’s brightest and most creative minds are together focussed like never before on preventing and curing Covid-19 and the economic crisis it has caused. It is well out of my scope to predict the exact economic fallout and recovery timeline, however it may be of some interest to reflect on the deal flow that the Covid-19 crisis has caused from GAIF’s perspective.
There can be no doubt that very few businesses had planned contingencies that were stress tested for the current drastic circumstances. Many of the businesses that were best positioned were fortuitously so and similarly some very well run businesses will unfortunately struggle to survive. In some cases nuances within industries will sift the survivors from the fallen. An example is gym memberships which seem to have become an obsession with millions of Australians. Now forced to close temporarily due to social distancing regulations the gyms themselves are on life support. An interesting consequence has been the huge spike in demand for free weights and portable gym equipment. As people are forced to stay at home due to job loss or changed working circumstances they have increasingly looked to break the monotony of isolation through home exercise. Will all these home gym’s forgo their newly purchased equipment and head back to the corporate gym post Covid-19? Many will, many will not. GAIF would lend to gym equipment suppliers but not gyms.
A constant of crisis such as we are experiencing now is that weak industries will be exposed and consigned to history. Clearly the retail industry has been undergoing brutal change caused by the significant cost advantages enjoyed by online retailers vis-à-vis bricks and mortar retailers. Added to this, bricks and mortar retailers have increasingly suffered as the risk balance of their relationship with landlords has shifted unfairly in favour of the landlord. Rents are unrealistically high and have not adjusted down given the loss of business to online stores. Consequently, in my opinion, valuations for commercial property, which are based on unjustifiable rents, are also overinflated. Sir Frank Lowy and his family built and ran the incredibly successful Westfield empire. When he sold his last remaining stake in shopping centre manger Scentre in October 2019 the top was in! Why any business that has online competitors would pay exorbitant rent to Scentre and its peers is beyond me. Many companies will adjust and justifiably employ many more stay at home workers. With the technology available now it is entirely possible for most professional services to be done online. For all those who believe that there is no substitute to face to face work environments look at the use of LinkedIn and Zoom amongst others. A consequence may be that the city skyscraper marquee tenants may look at their rent bills and think that they will save huge amounts employing stay at home workers. Less demand for marquee buildings must eventually lead to lower rents and lower commercial property prices.
More specifically for GAIF, what have we seen as far as deal flow? Firstly, most businesses were caught out to some extent. Fortunately, the secured nature of our loans and the conservative credit metrics we use have largely insulated GAIF thus far. We expect that we may offer some clients the option of interest only repayments provided we are comfortable with the value of the underlying asset we own which backs our loan.
In a worst case scenario and the borrower goes bust we expect to recover our full principal and interest owing through the asset recovery and sale. Thus far no loans have reached this stage.
With all crisis comes opportunity and once again GAIF is benefitting from the temporary withdrawal of funding by the major lenders to quality borrowers. Basically, the major banks have all hit pause as they scenario assess where their exposures are and what the plethora of Government policy announcements mean for them and their customers. We have had a number of enquiries for cashflow finance for businesses and high net worth individuals. We are likely to close on 3 new deals this week which are all for quality borrowers who can offer ample security. These deals are being completed at rates in excess of 16% p.a. and are all backed by residential property and other physical assets. As markets return to more normal conditions, we expect some of these clients to refinance at lower rates which will lead to early repayment fees for GAIF. We are also seeing a number of interesting larger deals which GAIF cannot fully finance. We are interested in presenting these deals to potential wholesale co-investors.
Wishing you all good health and safety.
Richard Wallace