Monthly Commentary

Investment Vehicle Manager Market & Portfolio Commentary - July 2020

01.09.2020

July was another reasonably strong month for financial markets, despite the increasing number of Covid-19 infections globally. The market strength was driven by improving macroeconomic data and better than feared Q2 earnings, all met with buoyed hopes of a vaccine. Tech stocks continue to be the standout performer with the NASDAQ now up 20.5% on a Year to Date (“YTD”) basis. As for bond markets, we saw another month of declining yields with the US 10- year now only yielding 0.55%. As a result, the US High Yield market had its best month since 2011.

European Sub Investment Grade Highlights

Loan issuance totalled €7.40bn during the month, below the €9.38bn issued in July 2019. YTD issuance now stands at €45.47bn, marginally below the €48.69bn issued over the same period in 2019. High Yield issuance was €11.36bn for the month and €48.53bn on a YTD basis. In 2019, HY issuance was €8.16bn in July and €37.88bn for the first 7 months of the year. New issue spreads continue to look attractive versus historical spreads with average spreads of E+423 and average yields of 4.9%. This compares to average spreads of E+394 and yields of 4.1% in July 2019.a

The Credit Suisse Western European Leveraged Loan Index, hedged to Euro, was up 0.82% for the month, which brings YTD returns to -3.02%. Cyclicals (0.96%) again outperformed defensives (0.67%). CCCs returned 1.61% while single Bs returned 0.89% and BBs returned 0.81%. As at the end of July, the 3- year discount margin on the index was 598bps. The Credit Suisse Western European High Yield Index, hedged to Euro, was up 1.84% for the month bringing YTD returns to -4.03%. The Yield to Worst on this index is now 5.49% with a spread to worst of 599bps, in line with the loan market.

While the global influence of Covid-19 remains closely watched, as economies and business open up and adjust to the new norms of operating, we have started to see the impact on top lines, earnings and cashflows, shedding some light on uncertainty that had caused significant asset pricing volatility. In general, we have seen Q2 reporting and Q3 guidance ahead of expectations, albeit these 'expectations' were set at the start of the crisis with the highest level of unknowns. This was combined with new optimism of a vaccine to propel the markets higher.

July saw the performing book participating in new issues, focused on defensive sectors that are a core feature, offering robust cashflows, strong creditor protection and good income; while we also add to strong existing credits at discounts, rotating out of similar risk profiles positions at lower returns, to further enhance the book while the opportunities presents themselves. The themes around portfolio management in this segment remain: (i) taking profit where the relative value became unattractive as the new issue market opened up at attractive spreads; (ii) reducing sectors/geographies where credit fundamentals are weak or where CCC downgrade is high, and; (iii) maintaining exposure to defensive stable and liquid capital structures in light of our concerns regarding the longer term strength of the market. As of July close, performing credit (including cash) was at 36.9% of the portfolio with a weighted average price of 95.2, trading at a YTM of 4.6%, delivering 4.0% cash yield to the portfolio.

Within credit opportunities, the book remains focused on exiting exposures which have required more engagement and management. As noted, individual earnings reports and guidance have tended to be better than anticipated; this is true for many of our core holdings here, with earnings/cashflow outperformance being a key driver to the fund outperforming the indices as these core holdings drove significant gains, a trend we anticipate to see continue. Within our short book, we cleaned up several line items and positions for which the catalyst had played out, leaving us ready to step in when we see market enthusiasm push suitably beyond fair value. Within the structured finance portfolio, having actively traded this book through Q1 and early Q2, this portfolio recovered further with the broader market as the underlying collateral value appreciated through the quarter and spreads tightened.

As of July close, credit opportunities was 63.1% of the portfolio, trading at a weighted average price of 84.8 and a YTM of 10.9%, whilst delivering a 6.9% cash yield to the portfolio.

On a total portfolio basis, as of July month end the weighted average market price was 88.6, trading at a YTM of 8.7%, and delivering 7.4% cash yield versus a weighted average price of 94.7, YTM of 6.6% and cash yield of 5.7% as of December 2019. Floating rate instruments comprised 84.1% of the portfolio. Senior Secured 84.2%. The portfolio had a cash position of 4.7% (including leverage) with leverage at 1.3x assets.

We remain pleased with the portfolio performance and recovery on a YTD basis. Since March, the portfolio has outperformed the market due to our active management at the height of the volatility as well as through the recovery of the credit opportunities segment of the portfolio, which we believe we will continue to see playing out. New situations in credit opportunities are abundant, however, we are being very selective on industries, geographies and individual issuers as we believe that the recovery in credit is still at an early stage.

a LCD, an offering of S&P Global Market Intelligence - August 2020

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