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Pallas Capital launches mortgage fund in bond format

Eureka Report .

With benchmark interest rates falling and the search for yield getting harder, Elizabeth Moran looks into Pallas Capital’s newly launched high yield bond issue.

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Over the last few months, we’ve been watching benchmark interest rates fall and the search for yield getting harder and harder.

One sector that offers high rates of return that we previously discussed is private debt and mortgage funds, where non-bank lenders step in to fulfil some of the gaps left by heavily regulated banks. The mortgage funds do not have to hold risk-weighted capital, giving them more flexibility to tailor solutions to borrowers’ needs.

This week Pallas Capital launched a new high yield bond issue. Hoping to raise $30 million, with the capacity to raise $100 million, the bond will have a 7.5 per cent fixed rate yield and a four-year term.

The fund will be used as a first mortgage warehouse facility and hold a range of investments covering construction, land and investment. Most of the loans will be in Victoria and NSW and have a maximum loan to value ratio (LVR) of 65 per cent.

Two things make this bond unusual:

  1. A total of 5 per cent or $1.5 million (assuming an initial $30 million raise) will be set aside as protection and applied to any missed interest or loan shortfall, providing comfort to investors.
  2. The Australian Bond Exchange is lead manager of the transaction and will make the bond available through the digital IRESS platform, meaning there will be real-time prices and data on the security, a first.

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