MJX manages funds which source assets principally in the United States leveraged loan market, a private debt market accessed by borrowers from virtually all sectors of the U.S. economy. Leveraged loans are broadly syndicated commercial bank loans made to non-investment grade borrowers. Investors in the leveraged loan market are sophisticated institutional investors. Among the borrowers in the leveraged loan market are companies dealing with potential environmental, social or governance (“ESG”) issues such as energy and chemical companies addressing EPA issues, gaming firms undergoing licensing reviews, healthcare and pharmaceutical firms dealing with regulatory issues, defense contractors, weapons manufacturers and security firms whose activities are closely scrutinized, and companies dealing with corporate governance issues. Whether a borrower is an established firm or one new to the leveraged loan market, it is incumbent on both the agent bank syndicating the borrower’s loan and the loan market investor to review and assess carefully the credit risk presented by ESG issues facing the borrower.
As an SEC registered investment adviser, MJX owes a fiduciary duty to the investors in the funds it manages to seek the best possible risk adjusted return on investment. This obligation requires MJX to assemble and maintain portfolios which are appropriately diversified by both industry sectors and individual borrowers. The weight given to ESG factors in MJX’s investment decisions must always be measured in the light of this overriding duty. Consistent with its fiduciary duty, MJX cannot permit its own moral or ethical views concerning a borrower’s legal business activities to solely dictate its investment decisions. Accordingly, MJX does not as a matter of course exclude a borrower from its investment universe merely because the borrower is engaged in businesses or industries which at a particular point in time are out of favor with certain advocacy groups.
All the loans in the portfolios of MJX managed funds are rated by one or more major rating agencies (Moody’s, Standard & Poor’s, Fitch). During its rating process, each rating agency considers the ESG risks involved in a borrower’s business. Likewise, agent banks for broadly syndicated loan issues and private equity funds which look to the leveraged loan market to finance acquisitions also consider ESG issues facing a borrower’s business in their decisions to lend or invest. While MJX does not assign a numerical ESG risk score to a borrower, it does consider the impact of ESG issues on the borrowers’ ability to maintain its debt rating and service its debt.
Thus, although ESG considerations play their part in MJX’s holistic assessment of the borrower’s creditworthiness, they are not, and cannot be, the sole driver of MJX’s investment decisions. As has been our practice, MJX will continue to review and update its investment process and assess the impact of ESG risks as more transparency on these issues becomes available from borrowers and the market generally.
Hans L. Christensen
Chief Executive Officer
