Monthly Commentary

Investment Vehicle Manager Market & Portfolio Commentary - April 2021

21.05.2021

April was a fairly strong month for financial markets with major equity indices climbing to new all-time highs during the month. Commodities was one of the strongest asset classes during the month with, for example, oil and copper extending their Year to Date ("YTD") gains. Despite the strong performance for commodities, the fear of inflation and central banks hikes abated during the month as US Treasuries generated positive performance.

European Sub Investment Grade Highlights

Total loan issuance during the month of April was €12.4bn, compared to only €1bn in April 2020. The average new issue spread in April was E+373 (3.89% yield), in line with last month. YTD issuance now stands at €53.5bn, considerably more than the €27bn issuance we saw in the first four months of 2020. On the High Yield side, we saw €12.1bn of bond issuance during the month, bringing YTD issuance to €50.5bn.a

The Credit Suisse Western European Leveraged Loan Index, hedged to EUR, returned +0.43% for the month, which brings YTD returns to +2.16%. Cyclicals (+0.48%) outperformed defensives (+0.37%) marginally for the month, while CCCs (+0.89%) again outperformed BBs (+0.19%) and Bs (+0.43%). The average cash price on the index was 98.44, while the 3yr discount margin at the end of April was 416bps. The Credit Suisse Western European High Yield Index, hedged to EUR, returned +0.67% for the month, bringing cumulative YTD returns to 2.28%. The spread to worst on the index is now 370bps, the tightest level since April 2018.

April was another active month within the performing book, thematically marked by portfolio optimization and convexity enhancement. During the month we reduced and/or exited more than ten line items in an effort to further optimize our positioning while the broader market continued to tighten. These names were generally low-spread, convexity-constrained investments trading at levels in which we felt comfortable monetizing against the backdrop of a tightening performing market. A portion of this capital was re-deployed into two new primary market investments. One of these new names funded the recapitalization of a European live-commerce player, while the second new investment funded the buyout of a European Over-The-Counter (“OTC”) pure-play self-care platform. We feel that the performing book continues to be well-positioned for current income and capital appreciation. As of April close, performing credit (including cash) was 45.6% of the portfolio, trading at a weighted average price of 100.0 and a YTM of 4.3%, whilst delivering a 4.3% cash yield to the portfolio.

Similar to the performing book, during the month of April, the credit opportunities book was also defined by optimization and convexity enhancement. A combination of performing and credit opportunities sales helped us to fund trades that improve convexity, expand current income, and capture discount. In terms of sales, we de-risked our position in a Spanish real estate servicer ahead of forthcoming maturities within the capital structure. On the deployment side, we added three new names to the credit opportunities book during the month, while also adding risk in two existing positions – all of which are characterized by attractive risk-adjusted returns. Within the structured products market, we have seen very strong demand for Collateralized Loan Obligation ("CLO") mezzanine paper. We held an auction that demonstrated this robust appetite for mezzanine, and ultimately reduced certain positions into this strength. We also realised profit on a portion of a CLO equity position that was sourced at cheaper levels. As of April close, credit opportunities was 54.4% of the portfolio, trading at a weighted average price of 91.6 and a YTM of 9.2%, whilst delivering a 7.4% cash yield to the portfolio.

Across the entire portfolio, as of April month end, the weighted average market price was 95.1, trading at a YTM of 8.2%, and delivering 7.4% cash yield (on a levered basis) versus a weighted average price of 93.6, YTM of 7.0% and cash yield of 6.6% as of December 2020. Floating rate instruments comprised 79.3% of the portfolio. Senior Secured 79.4%. The portfolio had a cash position of 3.7% (including leverage) with leverage at 1.3x assets.

We continue to feel strongly about fund positioning with Q1 earnings underway, which thus far have confirmed an impressive recovery on the corporate side since the onset of the pandemic. Our strategy has proven effective against relevant indices, and through active idea generation coupled with prudent risk management, we feel that the fund is strongly positioned for current income and capital appreciation. We will continue to be diligent in optimizing the fund while maintaining a judicious approach in managing risk.

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