Monthly Commentary

September starts strongly but moods turn quickly on news of rising Covid-19 infections and political uncertainty in Washington.

28.10.2020

September started off on the same strong tone as August, but the mood in markets turned quickly. The rising number of Covid-19 infections, accompanied by more stringent containment measures, as well as political uncertainty on further stimulus in Washington, caused some nervousness amongst investors. Towards the end of the month, equity indices recovered part of the lost ground as new cases stabilised.

European Sub Investment Grade Highlights

Loan issuance totalled €6.77bn in September, up versus August due to seasonality. September 2020 however was down versus both September 2019 at €9.74bn and July 2020 at €7.40bn. The lower issuance is mainly a result of a halt in M&A activity during the pandemic. New issue spreads were on average E+427bps, still above September last year at E+394bps. High Yield (“HY”) issuance was €10.24bn for the month and €58.77bn on a Year to Date (“YTD”) basis.a

The Credit Suisse Western European Leveraged Loan Index, hedged to Euro, returned 0.74% for the month. The YTD return on the index is now -1.13%. Cyclicals (0.95%) continued to outperform defensives (0.53%). Similarly to August, CCC loans showed the strongest returns at 3.02%, while single Bs returned 0.63% and BBs 0.50%. The average price on the index is now 94.59 and the 3-year discount margin is 549bps. The Credit Suisse Western European High Yield Index, hedged to Euro, returned -0.52% for the month and YTD returns are now at -3.24%.

After a seasonal slow-down in August, portfolio activity and primary market activity picked up in September, as did market volatility and news flow.

September saw the performing book sell down certain line items and low coupon positions across bonds and loans, as we rotated a little more into HY space given the relative underperformance of HY credit versus loans in the last few weeks. We trimmed down early the limited UK exposure due to the increasing lock down restrictions and added a couple of new secondary bond positions in high quality names at attractive levels. While we nip and tuck the portfolio, we remain pleased with the overall positioning, being of a more defensive nature with good income generating assets across a diverse range of large stable issuers at attractive levels. As of September close, performing credit (including cash) was at 37.6% of the portfolio with a weighted average price of 97.3, trading at a YTM of 4.5%, delivering 4.2% cash yield to the portfolio.

Credit opportunities was less active this month as we saw several credit positive events in the portfolio, including an announcement of an acquisition, an intention to float, a targeted refinancing plus several strong earnings report and an upgrade from CCC+ to B-, all coming from core positions. This once again drove material outperformance relative to the indices. As we look at the structured products book, we participated in one new deal and recycled capital in an earlier funded deal where we crystallised P&L from the tightening spread environment (owing to improved underlying pricing of loans and supportive central banks). With regards to the positioning of the credit opportunities book at the end of the month, while we have seen several of the positive credit events we had been working towards, there still remains significant upside in the portfolio that we expect to realise in the short to medium term. As of September close, credit opportunities was 62.4% of the portfolio, trading at a weighted average price of 87.5 and a YTM of 9.1%, whilst delivering a 6.5% cash yield to the portfolio.

On a total portfolio basis, as of September month end, the weighted average market price was 90.8, trading at a YTM of 7.5%, and delivering 6.6% cash yield (on a levered basis) 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 84.0% of the portfolio. Senior Secured 81.6%. The portfolio had a cash position of 6.2% (including leverage) with leverage at 1.3x assets.

Consistent with prior comments, we remain pleased with the portfolio performance and recovery. Since March, the portfolio has outperformed the market due to our active management at the height of the volatility as well as the recovery of the credit opportunities segment of the portfolio, which culminated in several events in the past months. There remains an abundance of new situations for the credit opportunities team to evaluate, however we remain cautious and selective on industries, geographies and individual issuers.

 

a LCD, an offering of S&P Global Market Intelligence - October 2020

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