Monthly Commentary

Investment Vehicle Manager Market & Portfolio Commentary - March 2021

26.04.2021

In March, we've seen more diverging trends between economies, driven by levels of vaccinations. Economies with high levels of vaccinations, such as the US and UK, are gradually re-opening whilst others, such as most EU countries, are looking at increased mobility restrictions to try to avert a third wave of infections. This resulted in US equity indices such as the Dow Jones or S&P 500 closing at or near all-time highs. Market participants are starting to look beyond the impact of the pandemic, and to focus on the impact of the large quantities of fiscal and monetary stimulus on inflation. Treasuries continued the sell-off that started earlier this year, while most commodities continued their upwards rally. There were also disruptions to the global supply chain from chip shortages in the automotive sector to the Suez canal being blocked for several days.

European Sub Investment Grade Highlights

Loan issuance totalled €20.41bn during the month, materially above the €0.66bn issued in March 2020 which was the first month directly affected by the Covid-19 pandemic. The momentum in March 2021 continues to be strong. Year to Date ("YTD") issuance now stands at €40.54bn, above the €26.01bn issued over the same period in 2020, equivalent to 56% growth. High Yield ("HY") issuance was €12.02bn for the month and €38.32bn on a YTD basis meaning that so far the year is 98% above last year. In 2020, HY issuance was €0bn in March and €19.40bn YTD. New issue spreads continue to look attractive versus historical spreads with average spreads of E+373bps and average yields of 3.89%. This compares to average spreads of E+351bps and yields of 3.69% in March 2020.a

The Credit Suisse Western European Leveraged Loan Index, hedged to Euro, was at 0.0% for the month, which brings YTD returns to +1.73%. Cyclicals (+0.05%) again outperformed defensives (-0.06%). CCCs returned +0.21% while single Bs returned -0.09% and BBs returned –0.11% during the month. As at the end of March, the 3-year discount margin on the index was 425bps. The Credit Suisse Western European High Yield Index, hedged to Euro, was up 0.47% for the month bringing YTD returns to +1.60%. In the month of March, the performing book was extremely active on multiple fronts: trading, deploying into new positions, and optimizing for capital appreciation. We made sales across a number of names trading at local highs in an effort to manage market risk while balancing the portfolio. Some of this capital was redeployed into existing conviction names that came to the primary market for incremental financing. We also added a new name to the performing book via the primary market; this opportunity was in a Greek utility company that issued bonds with an Environmental, Social and Governance ("ESG") component. These sustainability-linked bonds feature a coupon step-up if the issuer does not attain certain carbon emissions reduction targets before 2023. Rounding out our performing deployment, two conviction names in the credit opportunities book were able to re-capitalize during the month of March, and we participated in their new financings within the performing book. On the trading side, we also executed a number of capital structure and industry swaps, allowing us to take out principal while maintaining a similar risk profile. As of March close, performing credit (including cash) was 46.6% of the portfolio, trading at a weighted average price of 99.8 and a YTM of 4.4%, whilst delivering a 4.3% cash yield to the portfolio.

The credit opportunities book was similarly active during the month in spite of market compression. As previously mentioned, two conviction names completed successful recapitalizations during the month – one following a buyout, and another resulting from a refinancing. We expect these positions to be paid down in early April. Both names faced notable stress during their respective hold periods, and we relied on our fundamental conviction to grow our positions at times when each structure was under duress. Their successful recapitalizations serve as a validation of our diligent investment process and active risk management. Separately, during the month, we exited a post-reorganisation equity position trading near our view of full valuation after playing a key role in the restructuring process 18 months prior. On the deployment front, we continued to top up on existing conviction names trading at levels that still offer convexity. We also added three new names to the credit opportunities book during the month with attractive risk profiles and potential for near-term capital appreciation. In the structured products portfolio, we added a new issue Collateralized Loan Obligation ("CLO") BB position that priced wide of secondary BBs and came at a discount to par, after rotating out of select BBs above par in secondary during the month of February. As of March close, credit opportunities was 53.4% of the portfolio, trading at a weighted average price of 91.5 and a YTM of 8.4%, whilst delivering a 7.3% cash yield to the portfolio.

Across the entire portfolio, as of March month end, the weighted average market price was 95.1, trading at a YTM of 6.6%, and delivering 7.6% cash yield (on a levered basis) versus a weighted average price of 94.1, YTM of 7.1% and cash yield of 6.5% as of December 2020. Floating rate instruments comprised 79.6% of the portfolio. Senior Secured 80.2%. The portfolio had a cash position of 3.3% (including leverage) with leverage at 1.3x assets.

The fund continues to outperform relevant indices heading into the second quarter of the year. The performing book is well-positioned for current income and capital appreciation, while the credit ops book maintains convexity as we continue to add new names and analyse investment ideas. Opportunities remain abundant in both segments of the portfolio, and we will continue to remain diligent with our proven investment approach.

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