Monthly Commentary

Investment Vehicle Manager Market & Portfolio Commentary - January 2021

25.02.2021

January was a mixed month for risk assets. There were some clear underperformers, such as southern European equity indices, with examples being the Greek Athex -7.4%, Spain's IBEX 35 -3.9% and Italy’s FTSE MIB -3.0%. Other equity markets performed better such as Nasdaq +1.4% in the month. This however was well off the intra-month highs, as we saw some weakness towards month end. The travel and leisure space in particular showed weakness as financial markets focused on some of the difficulties associated with the vaccine distribution as well as new lockdown measures across most of Europe. However, the month was dominated with headlines on single stock moves as a result of traders from the Reddit forum WallStreetBets. Finally, US Treasuries also came under some pressure with 10-year yields rising to the highest levels since March 2020, as a result of the election results and expected stimulus.

European Sub Investment Grade Highlights

Loan issuance totalled €11.83bn during the month, below the €17.22bn issued in January 2020. The average January loan issuance in the last 5 years is €10.72bn, hence we still believe 2021 started on a healthy note. High Yield ("HY") issuance was €12.28bn for the month meaning the year closed 6% below the €13.00bn issuance in January 2020. New issue spreads continue to look attractive versus historical levels with average loan spreads of E+395bps and average yields of 4.19%. This compares to average spreads of E+353bps and yields of 3.70% in January 2020.a

The Credit Suisse Western European Leveraged Loan Index, hedged to Euro, was up 0.91% for the month. Cyclicals (1.10%) again outperformed defensives (0.73%). CCCs returned 3.42% while single Bs returned 0.82% and BBs returned 0.45% during the month. As at the end of January, the 3-year discount margin on the index was 438bps. The Credit Suisse Western European High Yield Index, hedged to Euro, was up 0.52% for the month.

Our performing book continues to be well-positioned to generate income across 84 positions. As secondary spreads tighten, we have maintained diligent focus on the primary market as a source of investment opportunity across both Europe and the US, resulting in a number of new positions. We have also initiated positions in the secondary market in select performing names that we believe offer attractive risk-adjusted returns. These purchases have been funded through a combination of select sales in low-coupon names at attractive levels, in addition to realised gains in credit opportunities assets. As of January close, performing credit (including cash) was 54.4% of the portfolio, trading at a weighted average price of 100.1 and a YTM of 5.6%, whilst delivering a 4.3% running yield to the portfolio.

The credit opportunities portfolio has remained an active focus for the team from a trading, idea-generation, and portfolio management perspective. In the month of January, we crystallized gains across three separate positions trading at or above our view of fair value, and exited one US-based retail position near par. All four of these line items traded at deeply discounted levels at various points throughout 2020, and our willingness to hold conviction positions in spite of volatility paid off. Within the credit opportunities book, January marked a new level of primary market engagement. We participated in the refinancing of a UK-based roadside assistance portfolio company, while also initiating a position in a UK-based mortgage and loan originator in the primary market. The secondary market remains a key focus, and the team screens several new opportunities each week. We initiated a position in a freight carrier bond within a capital structure we are intimately familiar with, while also adding selectively to existing positions when attractive opportunities arise.

Across our structured products book, we held a successful BWIC (Bid Wanted in Competition) on a number of assets that were acquired when spreads were materially wider. We will look to redeploy this capital into the primary structured products market in order to pick up convexity. As of January close, credit opportunities was 45.6% of the portfolio, trading at a weighted average price of 88.8 and a YTM of 8.5%, whilst delivering a 7.2% cash yield to the portfolio. Across the entire portfolio, as of January month end, the weighted average market price was 94.1, trading at a YTM of 7.1%, and delivering 6.5% 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 84.1% of the portfolio. Senior Secured 75.3%. The portfolio had a cash position of 9.6% (including leverage) with leverage at 1.3x assets.

The fund continues to outperform the market, even following a strong end to 2020. Our trading volumes remain elevated, and we constantly seek to optimize the portfolio while maintaining prudence in our investment decisions. Idea generation and positioning remain a key focus, and the team continues to seek opportunities across European and US markets. The portfolio is well-positioned heading into February as equity volatility, earnings, and macroeconomic developments gain speed.

 

a LCD, an offering of S&P Global Market Intelligence - February 2021

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