Despite the fledgling recovery that began to take root in Europe last year and is slated to continue this year, many European companies are still finding it hard to access credit.
Without sufficient credit, it is tough for businesses to grow, said Michael Forman, CEO of Franklin Square Capital Partners, particularly when the macroeconomic environment remains shaky. In Europe, banks, which traditionally have dominated corporate lending , are still struggling with the many non-performing loans on their balance sheets, and increased regulation imposed by Basel III is making it harder for them to extend credit.
As such, many viable companies across the continent are going to find it difficult to continue to fund operations, and this creates uncertainties for investors.
Keeping those companies going is one of the main strategies behind Franklin Square’s new fund, FS Global Credit Opportunities Fund, which seeks to generate an attractive total return, while also focusing on capital preservation, by investing in loans, bonds and other credit instruments of public and private companies, with a strong focus on the European and U.S. markets.
“In Europe today, there’s a real opportunity to step in as a lender of choice and fill the void for companies that need to refinance their bank loans,” Forman said. “We want to be a lender of choice in Europe to companies that need to refinance their bank loans and with banks playing less of a lending role, we think there’s a huge opportunity here.”
Launched in early December, FS Global Credit Opportunities Fund employs an event-driven approach, focusing on companies that it believes are undervalued by the market. The fund intends to refinance the debt of European companies it believes have viable businesses by and also take advantage of dislocations that arise in the credit markets both in Europe and the US resulting from impending corporate events such as mergers, acquisitions or corporate reorganizations.
“We want to make loans to companies that need to refinance their balance sheets, are looking to make acquisitions or are in any other situation where there’s some sort of a catalyst that can affect the business,” Forman said. “For example, some of these companies may have violated a covenant or have undervalued debt. There are companies that have good stories to tell and really good assets, but haven’t operated as well as they could have. FS Global Opportunities Fund can provide them the debt financing they need. We’re there to provide them the debt financings they need. Because just about every loan could be a new opportunity for us, we will perform the necessary due diligence and look at each one separately.”
As a sector, global corporate credit—loans as well as bonds—has generally outperformed global equities over the past five years and demonstrates low correlation to traditional fixed income investments.
The new fund, Franklin Square’s fourth, is agnostic in where and what it invests in (although in Europe, there are certain geographies that Forman would still approach with care, notably countries like Spain and Greece).
The closed-end fund also allows Franklin Square to lend to mid- and large-cap European companies, Forman said, and he expects the size of the loans might increase over time.
The FS Global Credit Opportunities Fund is sub-advised by GSO Capital Partners LP, the credit platform of Blackstone. “GSO’s credit platform is extremely robust and tracks thousands of different companies,” Forman said.