Aren’t we at the ‘peak of the cycle’? BNP Paribas responds

The asset manager has big plans for its SME lending project.

BNP Paribas Asset Management made quite a splash earlier this year by announcing its move into SME lending.  

In an exclusive interview with AltFi, Stéphane Blanchoz said the firm plans to originate €1 billion a year in SME loans in Europe, with at least €400m in the UK. Blanchoz is heading up the operation as head of SME alternative financing.

BNP is working with a number of origination partners, including CODE Investing and Caple, but also plans to originate loans itself.

The operation will focus on ‘medium enterprises’, with loans ranging from £500k to £5m. According to a presentation delivered at its offices last week, the asset manager sees this as an underserved segment of the market, populated by around 34,000 companies. Companies within this segment are turning over between £1m and £50m a year.

Peer-to-peer lenders like Funding Circle – which Blanchoz speaks highly of – specialise in lending to what BNP describes as ‘micro and small enterprises’, which number around 1.3 million in the UK.

As one might imagine, Blanchoz and BNP have faced a fair few questions about the SME financing project. Perhaps most pressing of those, as worded in last week’s presentation, is: aren’t we at 'the peak of the cycle' to invest?

Blanchoz presented two charts in response.  

The first simply highlighted the fact that UK SME loans offer a significant premium over most mainstream fixed income investments, including high yield corporate bonds. BNP will be targeting a gross yield of 8 per cent.

The second slide showed annual default rates for SME debt from 2007 to 2015, based on the asset manager’s research. It had defaults peaking at the height of the crisis in 2008 at 2.60 per cent, before falling year after year till 2014 and 2015, in which default rates were 1.20 per cent.

BNP sees SME debt as carrying a credit risk comparable to a BB/BB risk profile, with ‘a default rate volatility through the cycle far lower than Europe HY (high yield)’. Underlining this, the firm pointed out that between 2007 and 2015 the European High Yield default rate peaked at 6.6 per cent in 2009, bottoming out at 0.7 per cent in 2013.

Blanchoz admitted that SME debt is in some way linked to the cycle, but argued that the link is weaker than in other asset classes.

In sum, BNP Paribas’ research, and indeed its overall investment rationale, seems to underline a point that has often been laboured by alternative lenders: that private debt is a good source of consistent returns, with low volatility and low correlation with other asset classes.