Jonathan Rochford's hard and narrow road

Michael Milken made his name as America’s junk bond king. Jonathan Rochford wants to assume the same mantle down under without the prison term.

Rochford, a 34-year old Brisbane born, former Lehman Brothers asset manager who invested in high yielding assets, wants to attract some of the $2 trillion currently under management in Australia to invest in credit that is junk — below investment grade, or rated the lowest investment grade level.

He reckons that investment in BBB or BB rated paper can garner returns of 250-600 basis points above 90-day bank bills, or an annual return of 6-10 per cent.

So convinced that Australian fund managers, insurance companies and wealthy families are on the cusp of devoting more money to credit investments, Rochford left his job at Commonwealth Bank’s distressed debt department 12 months ago to form his own firm, Narrow Road Capital. The firm was named such because Rochford says, “there is a highway to average and a narrow road to excellence”.

If, as Rochford forecasts, there are more Australian investments into loan and bond funds then these funds will provide credit to companies who find it increasingly hard to get loans from Australia’s four biggest banks, who are scaling back lending as their costs of capital rises because of new global regulatory pressures. Foreign banks, who have traditionally filled a gap in corporate lending left by Australian banks, have cut back their Australian operations or pulled out altogether.

That has left an opportunity for Challenger and Industry Funds Management to launch loan funds, successfully attracting superannuation money. Superannuation funds will want to invest more of their money into credit simply because they can’t put all their increasing pool of money into stocks. Australia will have $3 trillion in funds under management by 2020 and $6 trillion by 2030, according to the Financial Services Council. A third of the money invested in 2020 may well be in debt related investments, says Rochford with more than a touch of hope.

“Australian super funds are increasingly building in-house teams, mostly in equities, but some are also bringing credit in house,” says Rochford. “I want to be part of the process that bridges the gap between the syndicated loan market and institutional investors”.

At the moment Rochford’s operation is far more modest. In one year he has two clients, from wealthy families, who have used him to analyze credit portfolios they may want to invest in. He is travelling about once a month to meet superannuation funds, insurance companies and financial planning groups to try and drum up business.

Over a bottle of Diet Coke at Sydney’s Westin Hotel, Rochford says he may have been “too early” in going out on his own.

“The key risk is that I’ve been too early in laying the ground work for the future popularity of credit investments,” he says. “Others may get the benefit in the future from institutional investors joining the loan market”.

Rochford says credit investments are different from stock investments.

“In credit you have to make sure every deal is a good deal,” he says. “A loan or a bond from a company is far easier to assess as a credit than a bank”.

Rochford says Australia’s nascent securitisation market is a case in point.

A pool of securitised loans are often basically the same types of credit that banks have on their books, he argues. But securitised loans for investors are more transparent and more easily assessed by credit rating agencies and investors, says Rochford.   

“You can physically review a securitised loan file,” says Rochford. “You can’t review what loans the banks have”.