Monthly Commentary

Investment Vehicle Manager Market & Portfolio Commentary – July 2019

31.07.2019

Interest rate cuts by central banks and speculation that a trade deal between the US and China would be difficult to close impacted global risk sentiment in July.

The first interest rate cut by the Federal Reserve in more than a decade was called by Jerome Powell as a mid-cycle adjustment to combat risks he sees to the economic outlook, rather than the start of a cutting cycle. The three main threats include: weakening global growth, trade policy developments and inflation running below target. In Europe, the ECB announced that an interest rate cut in September and another programme of Quantitative Easing in Q4 2019 were likely. In the UK, the BoE expressed its assessment of the impact of domestic politics with the new Prime Minister Boris Johnson increasing the likelihood of a no-deal Brexit from the European Union.

The German 10-year Government bond yield reached an all-time low of -0.44% by the end of July. The Italian Government bond yield briefly fell below 1.5% for the first time since October 2016, whilst US Treasury yields moved slightly higher on the month.

Against this backdrop of easier monetary policy, data from Deutsche Bank shows that €600bn worth of European corporate debt now has a negative yield versus none at the start of the year.

European Sub Investment Grade Highlights

  • July’s leverage issuance was €16.78bn, materially ahead of €13.50bn Last Year (“LY”) as risk off began to set in this time LY. Monthly volumes were €8.82bn in loans (€8.19bn LY) and €7.96bn in High Yield (“HY”) (€5.31bn LY).
  • 2019 loan volumes have been 59% acquisition and 40% refinancing, with the balance for general corporate purposes. Euro denominated issuance comprised 96% of the volumes for the month, GBP 3% and 1% others.
  • 2019 bond volumes have been 65% refinancing and 18% M&A, with the balance for general corporate purposes. Sources of funding were 50% secured, 49% unsecured and 1% subordinated bonds. Composition was 90% Euro and 9% GBP, with the balance being others. YTD issuance has been 56.5% BB, 9.5% split and 29.5% B, with the balance being others.
  • TL B new issue spreads in July were E+396bps, in a similar range to what has been seen throughout 2019. Pricing was 4bps lower than the equivalent month LY. Average net leverage was stable at 5.2x, which is 0.3x lower than LY and compares with 5.3-5.8x which we have seen through H1 2019.
  • In the HY space, single B debt issued in the last 3 months priced at a 5.16% yield, which compares with 6.24% for Q2 2018 and 6.74% for Q4 2018. For the BB space the YTM on a rolling 3-month basis was 3.50%, c.45bps tighter than the new issue for Q4 2018.

The Credit Suisse Western European HY Index hedged to Euro was up with a return of 0.74% for the month taking YTD to 8.45%. The Credit Suisse European Leveraged Loan Index hedged to Euro was up 0.44% for the month taking YTD to 3.56%.

With the market heading into the summer, there was a spike of activity in the new issue leverage credit market. Given this activity, the portfolio was able to actively deploy cash balances as well as reposition weightings to performing assets into the summer as market liquidity becomes scarce.

Across performing credit, the CLO bid continued to be the main technical driver as the issuance remained strong. This allowed for the portfolio to actively rotate into higher yielding new issue loans, supporting the stable yield targets in this segment of the portfolio.

Across credit opportunities, the portfolio maintained the focus on managing around the existing positions, as has been the theme for the last 9 months, as well as continuing to allocate marginally to the CLO new issue market.

As of July close, performing credit (including cash) is at 55.0% of the portfolio with a weighted average price of 99.9, trading at a YTM of 4.5%, delivering 4.5% cash yield to the portfolio. Credit opportunities at 45.0%, closing the month at a weighted average price of 85.3, trading at a YTM of 10.9%, and delivering 7.3% cash yield to the portfolio.

Floating rate instruments comprised 84.7% of the portfolio. Senior Secured 82.8%. The current yield is 6.3% (gross) with a weighted average market price of the portfolio of 92.5 versus 90.4 as at 31 December 2018. The cash position fell from 15.3% as of the start of the year to 6.6%.

* Sources: S&P LCD – August 2019

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