Concerns over US life insurance company Lincoln National’s exposure to commercial real estate have prompted two hedge funds to wager that the company’s bonds will fall, or that its default risk will increase, according to a report by Reuters.
Concerns over US life insurance company Lincoln National’s exposure to commercial real estate (CRE) have prompted two hedge funds to wager that the company’s bonds will fall, or that its default risk will increase, according to a report by Reuters.
The report cites Mill Hill Capital as revealing that in the past few months it has taken short positions in Lincoln National’s credit, while according to an unnamed Reuters source with knowledge of the matter, Saba Capital has held the firm’s credit default swaps, a derivative that offers investors protection against a default.
With post-pandemic hybrid working arrangements leading to an increase in office vacancies, and higher interest rates now making debt repayment more challenging, investors have been alerted to potential losses in the CRE sector.
While Fitch Ratings, one of four agencies providing an investment grade rating for Lincoln Hill, considers the company’s CRE exposure to be modestly below-average compared with the industry, while its quality is materially stronger, Mill Hill is speculating that there could be losses in the company’s CRE portfolio, which he could lead to a rating downgrade. The hedge fund first bet against Lincoln National’s credit in the second half of 2022, and has since added to its short position.
Reuters quotes Mill Hill’s Chief Investment Officer as saying: “The real challenge for the management team is how to navigate realized losses that will inevitably trickle in, especially with their CRE assets.”