Market Commentary – Q1 2020

The world took an unfortunate turn this past quarter that previously would be considered Hollywood fiction. For the past month, we have been doing a weekly webinar “Your Guide Through the Storm” where we have covered the publicly traded financial markets and related topics, so instead of discussing the markets, I’ll take a slightly difference approach and focus on how the alternative fixed income funds have done throughout the COVID crisis and market downturn.

Cortland Credit

Cortland Credit provides secured short-term working capital financing to small and medium companies. Loans range from 45 to 90 days and are fully collateralized with full recourse, including some other credit enhancements such as cash reserves and credit insurance. All borrowers undergo a strict underwriting process and Cortland reviews and approves all collateral on a weekly basis. Cortland doesn’t have to chase down payments as they have access to the borrower’s bank account where they sweep the accounts as payments are made on the accounts receivables.

The portfolio contains 49 lending facilities covering numerous sectors and locations within North America. Further diversification is achieved through an underlying collateral pool that includes over 5,000 end-obligors on which Cortland has a claim in the event of non-payment by the borrower.

The majority of businesses in the portfolio (41 out of 43) are deemed to be essential services, and the couple that are not, have been able to move to an online platform and are able to continue to do business. As an example, the loan portfolio contains IT resellers that provide networking equipment to major data users in the US such as Yale University and State Street Bank. The demands on IT infrastructure have seen a significant increase and these companies have experienced growing revenues as a result.

To date, the fund has not been materially affected by the crisis except for a small 1.8% holding of high-yield bonds which have had only a modest impact on March returns. Monthly distributions continue to be paid.


The Texas housing market experienced stronger than expected housing sales in 2019 and up to mid-March this year before COVID restrictions were enacted. A minor slowdown was expected in 2020, so the strong home sales leading up to this year and for the first 10 weeks or so were certainly unexpected. As is the case in Canada, new home construction has been deemed an essential service and construction continues for single family homes and multi-unit residential.

While the mention of a slowdown in the US housing market can resurrect bad memories of the financial crisis, Trez US was born out of the financial crisis and the opportunities that it created for specialized lenders to the real estate construction industry. The banking industry is very divided in the US with many smaller regional banks, who are saddled with banking regulations that result in lending decisions taking numerous months to complete. As a result of the COVID crisis, these regional banks have again begun to restrict their lending, creating future opportunities for Trez.

The Texas story has not changed as the general trend of population migration continues to southern states and especially to those with no state income tax, such as Texas and Florida. The economics of moving the headquarters of large corporations from high taxed states, such as California and New York, remains compelling and there could be even further incentives given the recent drop in interest rates.  Needless to say that lower interest rates also creates low mortgage rates and spurs home sales.

While Trez has temporarily closed the funds to all redemptions, this is actually good news as it protects all investors from an old fashioned “run on the bank” scenario. When the market started to drop just after mid-February, Trez experienced a significant increase in redemptions up until the redemption suspension was announced a month later. Given that loans are illiquid and cannot be sold before they mature, these sudden liquidation requests can severely harm all investors in the fund. Trez also has contractual obligations for new fundings that were made before COVID restrictions were enacted and are obliged to keep them.

Trez weathered the Global Financial Crisis 10 years ago and maintained the $10 NAV throughout the crisis; this time around, they are continuing to maintain the constant $10 NAV and pay distributions.

Productivity Media

Productivity Media was fortunate to have no productions in the principle photography stage when COVID restrictions were implemented. Almost all of the portfolio is either in post-production or the distribution phase which do require large amounts of labour and lends itself well to working remotely. Productions that are in the final distribution phase are in a very good position as online streaming services (Netflix, etc.) are clamoring for content and willing to pay for it. Netflix, Amazon, Hulu and Universal Home Entertainment have all reached out inquiring about projects available for purchase that are either completed or close to completion.

Some productions have “backstop” distribution deals where there is a guaranteed buyer at a verifiable price, however, there is no restriction to continue to shop around for another buyer willing to pay more. For example, one production had a backstop distribution deal for $250,000, however another buyer was found who was willing to pay $425,000, or a 70% increase over the original deal.

There is also good news on deal flows as there has been a significant increase in requests for funding as traditional banks outside of Canada are reducing or eliminating further funding of new projects. Not only has there been an increase in deal flow, the quality has also significantly increased as traditional lenders pull back in the entertainment space. These factors are creating excellent opportunities going forward. Short term opportunities are also emerging where some producers are looking to cash flow existing distribution deals to help with their short-term liquidity.

Overall, the fund has not experienced any negative impact on the portfolio, nor has there been a negative impact to the net asset value or the quarterly distributions.

Stewardship Alternative Income Fund

As with the other alternative funds, SAIF has not felt any significant negative impacts from the COVID19 economic fallout or market reaction. In fact, just over 13% of the fund is invested in US Dollar denominated real estate investments and have benefited from the rise in the US Dollar. These investments represent both multi-family and single-family residential properties. Construction has been declared an essential service in both Canada and the US and all projects are continuing with adjustments made according to local health guidelines.

Private corporate debt continues to perform well, and a recent deal that closed at the beginning of the year, provided debt financing with equity options to a local organic meat producer and retailer. Since March, when physical distancing started, their online sales have increased. Other businesses that SAIF provided funding, such as healthcare and car repair, also fall under the essential business classification.

Mortgages continue to perform and pay interest, with the only default occurring late last year. The property was repossessed and sold earlier this year. Unfortunately, the sale did not cover all of the principal and interest owed, and as a result, legal proceedings were initiated shortly thereafter; they are still progressing.

Overall, the alternative funds have performed very well during these challenging times – they have maintained steady Net Asset Values (NAVs) and distributions, thereby providing a strong foundation to portfolios by dampening the extreme volatility of the stock market. Stringent underwriting policies have created portfolios of high-quality loans that have continued to perform, with only minor exceptions, during these unique and challenging economic times.