Monthly Commentary

Investment Vehicle Manager Market & Portfolio Commentary – March 2019

05.05.2020

The month of March was dominated by the spreading of the Covid-19 virus to Europe and the US. This, in combination with a Saudi-Russia price war on oil, sent risk assets tumbling. At the beginning of the month, the number of non-China Coronavirus cases stood at 4,600 while at the end of the month, there were over 700,000 confirmed cases outside China. The S&P 500 was down -12.4% on a total return basis, but equity indices in Southern Europe were even worse at -22.4% for Italy's FTSE MIB and -22.1% for Spain's IBEX.

The market experienced large price moves across a wide selection of credit instruments. Some were down 20-30 points regardless of rating, industry or priority ranking in the capital structure, and it appeared that there was indiscriminate de-risking across loans and High Yield ("HY") as the market sought liquidity at any price. As the global central bank actions and stimulus packages became reality, some technical pressure subsided resulting in recovery in parts of the higher-rated spectrum of the credit universe.

The Credit Suisse Western European Leveraged Loan Index, hedged to Euro, was down -13.57% for the month with the average loan price dropping from 97.29 at the end of February to 83.64 at the end of March. This is the lowest level since Q4 2011 in the middle of the Euro crisis. The Credit Suisse Western European High Yield Index, hedged to Euro, was down -13.66% for the month.

Given the market environment through March, risk management was a challenge whilst navigating minute-by-minute updates on the impact of Covid-19 across Europe and into the US, including (i) global growth outlooks changing as economies shut down, (ii) corporate fundamentals shifting, driving dramatic flows across risk assets, and (iii) a stream of government and central bank policy actions to support liquidity which was breaking down.

Across the performing credit book, portfolio management focused on (i) reducing risk in the hardest-hit sectors of leisure, entertainment, retail and travel, (ii) reducing exposure to Italy, and (iii) consciously retaining cash whilst rotating into defensive sectors within technology, media & telecoms and food retailer/grocers, a

Floating rate instruments comprised 87.6% of the portfolio. Senior Secured 73.4%. The current yield is 7.1% (gross) with a weighted average market price of the portfolio of 77.0 as at 31st March 2020. The cash position was at 17.9% compared to 13.2% as of the start of the year.

In the current environment, we believe that the opportunity sits squarely in the credit opportunities strategy which is anticipated to provide a deep pool of investable assets in the coming months as (i) the fundamentals or impact of Covid-19 shut-downs on levered corporate balance sheets materialise, (ii) dislocations persist as higher rated and lower rated credit continues to bifurcate, and (iii) the new issue market re-opens at attractive relative yields.

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