Stockholm (HedgeNordic) – Both borrowers and lenders are facing challenging market conditions and economic headwinds from high inflation, rising interest rates, and slowing global economic growth. Private credit investors, in particular, face additional obstacles due to the lack of transparency surrounding financial performance and credit risk. After announcing its wind-down in May, Scandinavian Credit Fund I experienced a significant decline in its net asset value in June due to higher interest rates and changed market conditions affecting two of its borrowers.
Scandinavian Credit Fund I, which has been providing senior secured loans with maturities ranging from three to 48 months to small and mid-sized companies in Scandinavia, experienced an 8.5 percent decline in its net asset value in June. The direct lending fund ended the first half of 2023 down 7.5 percent, following a seven-year period since its inception in 2016 with an annualized return of 5.7 percent. The fund’s IFRS9 provision was substantially increased in June, reflecting markedly increased credit risk in individual holdings.
“As a result of the changes in the fund in recent years, the size of individual commitments has increased in relation to the total portfolio. The write-down in June, therefore, has a marked impact on the month’s return.”
After dialogues with borrowers’ management teams, the team running Scandinavian Credit Fund I observed “the effect of an increasingly strained market climate, resulting from, among other things, more interest rate increases and inflationary threats,” according to a letter to investors. “The fund has also been able to ascertain indications of declining profitability of individual companies as a result of reduced income and increased operating costs,” the letter continues. “As a result of the changes in the fund in recent years, the size of individual commitments has increased in relation to the total portfolio. The write-down in June, therefore, has a marked impact on the month’s return.”
Following a brief suspension of deposits and withdrawals in December to address a surge in redemption requests, Scandinavian Credit Fund I reopened for business in mid-May. However, just two weeks later, the team behind the direct lending fund made the decision to initiate the process of winding down operations in response to another wave of redemption requests. As part of the liquidation process, the fund did not engage in new lending activities in June, except for a draw carried out on already granted credits corresponding to approximately SEK 0.8 million. Future payouts to the fund’s investors will occur on a pro-rata basis, with each investor receiving their percentage share based on their ownership in the fund. The payouts will occur as the fund receives liquidity from the underlying loans.
