June Fund Commentary

Fund Commentary – June

The Coral Cove Private Credit Fund (the “Fund”) returned 0.92% (Class I Units) in June.  Annualized returns since inception (January 2021) are 9.76%.

Fund Insights

The Fund’s underlying portfolio (the “Portfolio”)  has exposure to approximately 47 invoice factoring, ABL, equipment finance, lender finance, specialty finance or similar type loans. Presently, the geographic weighting of the Portfolio is approximately 79.96% to the US and 20.04% to Canada. Of these positions, the largest portfolio weights are 51% to invoice factoring, 30% to commercial finance (which includes asset-based lending, real estate and equipment financing), and 13% to lender finance.

Notes from Underwriting

Proper upfront diligence is key to securing a good client. Diligence discussions begin from the first introduction to the prospect and get more in-depth as we work through the process. We take what we learn in those first meetings and apply that knowledge through the detailed diligence we perform. Sometimes, that information conflicts, and what we uncover can directly contradict what we initially understood and can significantly impact our desire to move forward with a client.

We want to share a recent example with a potential client who operated a factoring business in the US, predominantly in apparel. The company had enjoyed years of success and a portfolio in excess of $100 million before covid. The prospect shared with us that their retail apparel business suffered significant losses during the pandemic. They had to unwind their portfolio, which resulted in even greater losses than expected. However, after our thorough investigation, we discovered these losses were not due to pandemic-related business closures or credit defaults. Instead, they were pre-pandemic problem accounts that had to be written off during the portfolio unwinding process.

In working the metrics of the write-offs to the relative size of the portfolio at the time, the default percentages were not necessarily alarming and actually made sense for the type of financing the company provided; however, the misrepresentation to us of the situation was concerning, and we ultimately declined the transaction on that basis.

Proper diligence will likely always uncover the truth, which is why we consistently work toward understanding our potential client’s situation and then proving that understanding through detailed diligence.

Notes from Account Management

As we head into the summer months, we generally see a slowdown in business development activity. Vacation season starts, and activity around deal amendments and facility increases tends to slow down.

On a bittersweet note, we did receive a large repayment as our client successfully completed a sale of their core business. The sale and repayment were all part of their business strategy; after nearly three years as a client, it was thrilling to see them succeed but also sad to see them go.

We are seeing sustained performance across regions and business sectors in our portfolio, notably in transportation, consumer goods, energy, health sciences, and road maintenance are benefiting from improved activity, some of which is seasonal, but traction in many sectors appears to be steady.

As interest rates continue to rise, we remain focused on growing our portfolio in near-to-cash transactions, particularly in factoring.

Our factoring volumes halfway through the year are tracking 15% above 2022 levels and have us not far off pre-pandemic highs. We are excited to see what the rest of the year brings.