KKR Credit Income Fund (Expected ASX Code: KKC)

Full Report can be accessed on

OVERVIEW
The KKR Credit Income Fund (‘the Trust’ or KKC) is expected to list on the ASX on
21 November 2019, with a minimum and maximum raise of $200m to $750m (with
oversubscriptions up to a further $75m), respectively. The Trust is managed by KKR Credit
(the ‘Investment Manager’) and its 120 person strong global credit team and which manages
approximately US$70bn in credit strategies. The Trust provides exposure to two underlying
credit investment strategies, specifically a long-term target portfolio allocation of 50-60% to
the Global Credit Opportunities Fund (‘GCOF’) and a long-term target allocation of 40-50% to
the European Direct Lending (‘EDL’) investment strategy, via the soon to be launched KLPE II
fund. GCOF, which is based on KKR Credit’s Opportunity Credit Strategy (‘OCS’), is managed
according to a high conviction, market-driven opportunistic investment strategy with 60 to
80 core credit investments. It invests in a portfolio of sub-investment grade (‘sub-IG’) traded
credit securities, mainly bank loans and high yield bonds. The underlying OCS has an 11-
year track record and has performed exceptionally well across the full credit cycle. KLPE II
is a European direct lending strategy targeting upper middle-market companies in Western
Europe by largely first lien, senior secured private debt, with a very selective provision of
second lien secured facilities. The EDL strategy has a 7+ year track record and has generated
a realised unlevered IIR of 13.4% p.a. and a weighted average all-in-yield of 8.5% p.a. to
date. While the two strategies differ, they are united by a common KKR wide philosophy,
fundamental bottom-up investment process and access to KKR wide resources. The Trust’s
target net return is 6 – 8% p.a. with an estimated current net yield of 4 – 6% p.a.
INVESTOR SUITABILITY
Strong underwriting skills, cautious credit selection, and prudent full credit cycle portfolio
management translates into consistency of income and the minimisation of default loss.
IIR has a high degree of confidence in KKR Credit and the Trust delivering a stable and
consistent monthly distribution and, over the long term, generating accretive NAV. While
there are distinct differences in the two underlying strategies, both are based on the same
fundamental bottom-up assessment of cash flow variability and debt serviceability, driven
by a mindset acutely aware of the asymmetry of downside risks in debt investments.
Importantly, both underlying strategies are not only well positioned to perform well in a
late-cycle credit environment but to capitalise on any fall-out from a potential end of cycle
credit environment. Investors should note that GCOF is not only a sub-IG strategy but one
predominantly invested in the lower ratings spectrum of the asset class, specifically B and
CCC. While KKR Credit does so due to the appealing opportunity set presented in these
segments, investors should accept that doing so may lead to heightened NAV volatility.
RECOMMENDATION
IIR ascribes a “RECOMMENDED PLUS” rating to the KKR Credit Income Fund. IIR has a
very high degree of conviction in the Investment Manager’s ability to at least achieve the
stated investment objectives over the foreseeable future and continue to generate well
above broad market performance over the medium and long term. KKR Credit ticks every box
with respect to track record, resources, and mandate flexibility. The risks in debt currently
are not only cyclical but structural, with significant market inefficiencies in the traded sub-IG
market and a general deterioration in underwriting in the private debt market (and an influx of
untested managers that lack full cycle resources). In such an environment, the dispersion in
performance by investment manager and strategy is not only likely to increase, but is almost
guaranteed to do so while ever the current structural market inefficiencies persist. KKR
Credit, with its full cycle tested deep fundamental bottom-up credit assessment and flexible
and market-driven opportunistic strategies is well placed to continue its excellent track record
of outperformance. While IIR understands performance fees are standard in private debt and
accepts the justification, IIR makes the point the performance fee has the potential to elevate
total fees to a level above the majority of ASX-listed credit LITs.