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Moelis Australia Secured Loan Series - Class A and Class B

Overview

The Moelis Australia Secured Loan Series (“the Fund”) was established in April 2018 and
provides investors with a diversified exposure to a portfolio of commercial loans secured
by a first lien mortgage on Australian real property. As an open-ended vehicle, the Manager
has the ability to accept additional applications, with the current application process a
continuation of the general bi-monthly capital raises. The Fund was established by Moelis
Australia Asset Management Limited (the Trustee) which, in turn, appointed Moelis Australia
Funds Management Pty Ltd (the Manager) as investment manager. In response to changing
market conditions and Moelis’ intention to remain ahead of market developments and
provide attractive risk-adjusted returns to investors, the existing Fund was restructured to a
two class basis - Class A and Class B effective December 2019. The distinction between the
two is the maximum LVR, specifically 60% vs 75%, and the target LVR of 55% and 70%,
respectively. We also note maximum loan tenor has been extended from 12 months to 24
months. Consistent with the different risk profiles, the Manager is targeting a distribution
yield of 6.0% p.a. net of fees for Class A and 10.0% p.a. net of fees for Class B. IIR stresses
that all loans will be first mortgage and subject to exactly the same due diligence processes
which have held the Secured Loan Series in good stead to date. This restriction to first
mortgage loans is a critical point, as the difference between first and second mortgages
is very considerable. Under a first mortgage, at all times, the Manager retains control of
the loan and is aware, through monitoring and either direct or indirect contract with the
borrower, the status of the loan. This level of control, information flow, and ability to act can
be considerably greater than that of a second mortgage. Class B unitholders represent the
first loss component on any co-invested loans in which a default and forced sale recoups less
than the principal amount. IIR stresses that the property market would have to experience
unprecedented declines in value for such a situation to arise on any given loan. Unitholders
with an existing investment in the Fund were invited to nominate their preferences as to
allocation of their investment between the Classes.
INVESTOR SUITABILITY
Existing and new investors have the choice, based on their preferred risk-return profile, of
choosing the lower risk-return option of Class A, the higher risk-return option of Class B, or a
mix of both in their desired proportion to generate a melded risk-return profile. In IIR’s view,
we agree with the Manager that this is a superior structure to simply increasing the risk
parameters of the existing Fund, as the former has the benefit of choice for investor based
on their investment preference. From a risk spectrum, we view the Class A units as being
at the very lower end of the spectrum, especially as Class B units represents the first loss
component and in the event of a default and where the Manager takes control of the property
and proceeds to seek to recover the outstanding principal (and any interest payments)
through enforcement, the Class A component of the loan must be fully repaid before Class B
unitholders begin to receive repayment proceeds. For Class A, IIR views the 50% - 60% LVR
as a particularly prudential level, and even more so given the short duration of the loans. IIR
deems Class B units to be at the mid-level of the risk spectrum, with the risk elevated by the
first loss aspect.
RECOMMENDATION
IIR ascribes a “Recommended Plus” rating to the Moelis Australia Secured Loan Series. The
investment strategy is managed by an experienced team and an investment manager with
an established history in the property sector. The Manager has delivered on its performance
objective on the Fund and existing comparable investment strategies to date, which has
enabled the Fund to continue meeting its performance objectives. While there is a material
difference in the risk profile of Class A versus Class B, in IIR’s view we believe Class B
unitholders are being attractively rewarded with a target return of 10% p.a. For Class A, the
55% target LVR is extremely conservative, and even more so for any given loan in which Class
B is co-invested.