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Investment Vehicle Manager Market & Portfolio Commentary – June 2019
Following a heavy market sell-off at the end of 2018 on the back of concerns regarding trade/global growth, the Federal Reserve (Fed) pivoted on rate increases in early 2019 which supported markets in Q1. This was further strengthened as the US-China trade talks seemed to progress positively to which growth data surprised to the upside across both the US and Eurozone. However, Q2 experienced spates of volatility as trade tensions between China and the US grew following an increase from 10% to 25% import tariffs on $200bn of imports from China, flowing weakness into the markets which were down in May. During May, the market started to price in substantial rate cuts in the Fed fund futures followed by the ECB in June confirming that an extension of QE and further rate cuts were a possibility given the outlook for growth into 2020. Whilst the themes of weaker global growth and trade tension remain, central banks are still a significant driver of market sentiment and performance. Looking into the balance of 2019, risk markets will remain supported by this shift in accommodative central bank policies; trade tensions will remain however an agreement is anticipated; geopolitics will headline and global growth will continue to be under pressure.
European Sub Investment Grade Highlights
- June 2019 leverage issuance was €11.64bn, down on €17.93bn last year. Monthly volumes were €7.76bn in loans (€10.41bn last year) and €3.88bn in High Yield (“HY”) versus €7.52bn last year.
- 2019 loan volumes have been 66% acquisition and 25% refinancing, with the balance being recaps. Euro denominated issuance comprised 96% of the volumes for the month, and GBP 4%.
- TL B new issue spreads in June were E+391bps, in a similar range to what has been seen throughout 2019. Pricing was 15bps wide of the equivalent month last year. Average net leverage was stable at 5.3x, in line with last year.
- In the HY space, single B debt issued in the last 3 months priced at a 4.65% yield, which compares with 6.24% for Q2 2018. For the BB space however the YTM on a rolling 3-month basis was 3.55%, c.40bps tighter than the new issue for Q4 2018, a flight to quality.
The Credit Suisse Western European HY Index hedged to Euro was up with a return of 2.22% for the month taking Q2 to 2.16% and YTD to 7.65%. The Credit Suisse European Leveraged Loan Index hedged to Euro was up 0.13% for the month taking Q2 to 1.07% and YTD to 3.11%.
New issue volumes and pricing in the performing credit markets have remained attractive. The portfolio allocated to this segment of the strategy remained active throughout H1, targeting large cap liquid structures. HY in the last 2 weeks of June saw significant inflows, supporting secondary prices whilst the issuance volume remained limited in the single B market versus the BB space. As discussed in previous monthly reports, the focus in this segment of the portfolio has been to increase the yield profile as primary new issue priced wider than the previous years.
The credit opportunities portfolio has been extremely active throughout H1. Work flows have included restructurings and refinancing positioning names to generate expected returns through the coming year. In addition, the portfolio has increased its exposure to secondary CLO equity and new issue CLO debt which has priced at the widest levels per historic averages versus the broad market. Despite thetim strong positive market tone, the credit opportunities space has been challenging resulting in higher levels of volatility, which is also an opportunity for this strategy.
As of June close, performing credit (including cash) is at 54.7% of the portfolio with a weighted average price of 100.0, trading at a YTM of 4.5%, delivering 4.4% cash yield to the portfolio. Credit opportunities at 45.3%, closing the month at a weighted average price of 86.0, trading at a YTM of 10.6%, and delivering 7.2% cash yield to the portfolio.
Floating rate instruments comprised 85.1% of the portfolio of which 80.1% Senior Secured 80.1%. The current yield is 6.1% (gross) with a weighted average market price of 92.7 unchanged compared to 31 May 2019. The cash position fell from 15.3% as of the start of the year to 8.9%.
* Sources: S&P LCD – July 2019