Monthly Commentary

Investment Vehicle Manager Market & Portfolio Commentary - June 2020

31.07.2020

June saw another strong performance for risk assets, capping off a very strong Q2. In fact, the S&P 500 had its best quarter since Q4’98 with a 20.5% increase. The market mostly shrugged off the resurgence in Covid-19 infections across some US states and focused on the improving macro data. In general, there was a strong rebound in employment data and PMIs during the month that supported both credit and equity markets.

European Sub Investment Grade Highlights

Loan issuance in Europe picked up in June and we saw €7.51bn of new issuance. This is double the €3.53bn that was issued in May but below the €8.60bn that was issued in June 2019. New issue yields were on average E+438 which is a material pick up from pre-Covid levels. In the European High Yield market, new issuance was even stronger with €13.66bn of issuance compared to €3.88bn in June 2019.a

The Credit Suisse Western European Leveraged Loan Index, hedged to Euro, was up 1.57% in June. The Year to Date ("YTD") performance is now -3.80%. Higher beta names continued to outperform lower beta names with the CCC index up 6.02%, the single B index up 1.51% and the BB index up 0.11%. The average cash price on the index is now 92.74 which is up from 83.64 at the end of March but still below the 98.32 at the beginning of the year. The average price for BBs is 96.82, single Bs 94.30 and CCCs 79.43. The Credit Suisse Western European High Yield Index, hedged to Euro, was up 2.34% in June and is now - 5.77% YTD. In High Yield, CCCs also outperformed Bs and BBs.

The impact of Covid-19 in credit fundamentals continues to play through every industry be it in defensive or opportunistic segments of the market. The balance from a portfolio management perspective is that as economies open up whilst we see pockets of rising infection rates, we could see some isolated regional closures which stall the economic recovery. However, against this concern, global central bank and fiscal policies are firmly pushing forward to provide more stimulus and support if this does occur.

Thematically, we have seen stronger-than-expected numbers on both the cost management and cash balances or liquidity positions across the portfolio in assets reporting monthly, however this is compared to forecasts constructed at the start of the Covid-19 crisis with significant unknowns. Clearly, we are waiting for Q2 reporting to get a real sense of the fundamentals but, as an early indicator, balance sheets are better than anticipated.

Looking at Q2, the performing portfolio has seen stable price appreciation following the market sell-off in March/April. 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 or 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 June close, performing credit (including cash) was at 38.1% of the portfolio with a weighted average price of 96.1, trading at a YTM of 4.6%, delivering 4.0% cash yield to the portfolio.

Within credit opportunities, the portfolio remains very focused on exiting exposures which require more proactive engagement and management. As noted previously, individual earnings reports and guidance for Q2 and Q3 respectively have tended to be better than anticipated, owing to swift cost action and supportive fiscal or government programs. Within the small structured finance portfolio, having actively traded this book through Q1 and early Q2, this portfolio recovered with the broader market as the underlying collateral value appreciated through the quarter and spreads tightened.

As of June close, credit opportunities was 61.9% of the portfolio, trading at a weighted average price of 83.0 and a YTM of 13.4%, whilst delivering a 7.0% cash yield to the portfolio.

On a total portfolio basis, as of June month end the weighted average market price was 86.9, trading at a YTM of 10.4%, and delivering 7.1% 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 86.4% of the portfolio. Senior Secured 82.6%. The portfolio had a cash position of 8.2% (including leverage) with leverage at 1.3x assets.

On balance, we are pleased with the portfolio performance and recovery through Q2. 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. Worth noting in June, Dubai World, one of the largest credit opportunities positions was repaid at 100 (traded as low as 87/88 in March) through a refinancing supporting the underwriting and credit thesis. We see a number of these events moving towards our exit thesis in the quarters to come further, underpinning the performance of the strategy. Excitingly, across credit opportunities, new 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 - July 2020

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