Monthly Commentary

Investment Vehicle Manager Market & Portfolio Commentary - May 2021

28.06.2021

Equity markets showed higher volatility during May, in particular during the first half of the month. This was driven by concerns over inflation and potential tapering by central banks. The April CPI numbers in the US came out well ahead of expectations: the year-on-year print came out at 4.2%, ahead of every economists' estimate on Bloomberg, and the highest number since September 2008. In parallel PMI data published during the month supported a healthy economic momentum, opening the debate for potential tapering. This dynamic created volatility in the equity markets but also led to investors switching between fixed rate to floating rate debt instruments. For now, central bankers maintained their view that the high inflation data points we’re seeing are transitory in nature and hence they don’t see the need to change monetary policies in the near term.

European Sub Investment Grade Highlights

Total loan issuance during the month of May was €9.8bn, compared to €3.5bn in May 2020. The average new issue spread was E+378.9 (4.01% yield to maturity), which was broadly in line with last month at E+379.3 (3.97% YTM). The year-to-date ("YTD") issuance now stands at €63.32bn, considerably more than the €30.56bn issuance we saw in the first five months of 2020. On the High Yield side, we saw €9.2bn of bond issuance during the month, bringing YTD issuance to €60.18bn.a

The Credit Suisse Western European Leveraged Loan Index, hedged to Euro, was at 0.42% for the month, which brings YTD returns to +2.59%. Cyclicals (+0.52%) again outperformed defensives (+0.32%). CCCs returned +1.77% while BBs returned 0.21% during the month. As at the end of May, the 3-year discount margin on the index was 408bps. The Credit Suisse Western European High Yield Index, hedged to Euro, was up 0.30% for the month bringing YTD returns to +2.59%.
Within the performing book, the month of May was characterised by robust primary market activity, which resulted in the addition of new names to the book as well as the refinancing of certain existing positions. During the month, across the portfolio, five individual performing names launched and completed successful refinancing transactions. We participated in the new issue component of a number of these deals. However, in some instances we were inclined to accept prepayments, which was generally a function of tight pricing on the new debt. We re-deployed this capital into more attractively priced opportunities. In addition to refinancing transactions, we saw three existing names tap the primary market for incremental financing. Lastly, we added three new names to the performing book in both primary and secondary markets, expanding the funds diversification across accretive opportunities. Our primary market participation was funded partly by paydowns that have either occurred or will occur in the near term, as well as through the right-sizing of certain existing positions at attractive levels. As of May close, performing credit (including cash) was 43.4% of the portfolio, trading at a weighted average price of 100.0 and a YTM of 4.3%, whilst delivering a 4.3% cash yield to the portfolio.

The credit opportunities book continues to be a diligent focus of the team, from screening new opportunities to adding new names and managing existing risk. During the month, we added one new name to the book in the unsecured debt of a US-based physician staffing provider. Additionally, we sourced risk in two existing positions; in one instance, we topped up at a discount, while adding risk in the second name ahead of an earnings report. Both names were introduced to the book as new names earlier this year. Away from trading activity, we saw several existing discounted positions experience significant price appreciation throughout the month. This was driven by buying activity in the secondary market, as well as operational outperformance at each of these high-conviction portfolio companies. Within the structured finance book, we participated in the add-on of an existing equity position upon a deal reset, offering attractive risk-adjusted returns at a discount. As of May close, credit opportunities was 56.6% of the portfolio, trading at a weighted average price of 93.2 and a YTM of 8.6%, whilst delivering a 7.3% cash yield to the portfolio.

Across the entire portfolio, as of May month end, the weighted average market price was 96.1, trading at a YTM of 8.4%, and delivering 8.0% cash yield (on a levered basis) versus a weighted average price of 93.6, YTM of 7.0% and cash yield of 6.6% as of December 2020. Floating rate instruments comprised 79.0% of the portfolio. Senior Secured 81.2%. The portfolio had a cash position of -1.3% (including leverage) with leverage at 1.3x assets.

The fund continues to be well-positioned heading into the summer months. Across both performing and credit opportunities books, Q1 2021 performance at our portfolio companies continued to show operational strength as economic recovery persists. We remain focused on rising input prices and our portfolio companies’ pricing power across all applicable industries. The fund continues to significantly outperform relevant benchmarks, and we feel confident in our positioning for both current income and capital appreciation heading into the end of Q2 2021.

a Source: LCD, an offering of S&P Global Market Intelligence - June 2021

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