Debt fund bets big on Trump’s NATO push

TORONTO • A private debt fund in Canada is gambling that U.S. President Donald Trump’s push for more NATO defence spending will bring fortune north of the border as contractors seek high-yielding loans to fund their businesses.

The Sprott Canadian Senior Debt Fund is targeting small-to-mid-size Canadian companies that manufacture parts for defence giants like and to make and distribute high-yield, firstlien secured loans. It aims to raise an initial $500 million to chase deals from among a select set of about 800 companies in Canada, according to Ramesh Kashyap, senior vice-president in the alternative-income group at Ninepoint Partners LP.

“Trump is asking all the NATO members to pick up a bigger share,” said Kashyap. Ninepoint is the new name of SPR & Co., which runs the Canadian diversified assets of Sprott Asset Management, with about $3 billion under management. “The defence spending overall as part of NATO is going to go up.”

Private credit funds have emerged in Canada as pension funds, endowments and life insurance companies search for higher returns in a low-yield world. These nontraditional sources of funds are filling a gap as new regulations and capital requirements make it too onerous for the country’s big banks to lend to smaller and riskier companies.

The goal is to raise at least $200 million by the end of January 2018 from institutional investors, Kashyap said. The fund seeks a nine per cent to 12 per cent net return to investors, through deals that have an average loan size of $15 million, but which could go as high as $30 million. Target companies will typically have revenue under $200 million and be over-leveraged, with their business concentrated with a few big clients, which means that big banks generally won’t lend to them, Kashyap said.

The fund, which is subadvised by Waygar Capital Inc., will focus one-third of its business on lending to the defence sector. Another third will come from restructuring and turnaround, and the rest from traditional asset-based lending, Kashyap said.

Trump has called for North Atlantic Treaty Organization allies to meet a two per cent spending goal to help the U.S. pick up the tab. The U.S. is projected to spend 3.58 per cent of GDP on defence this year, down from 3.61 per cent in 2016.