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Investment Vehicle Manager Market & Portfolio Commentary – August 2019
August was an unpredictable month. The various headlines on the US/China trade war and Brexit, combined with lower liquidity in the market in a seasonally quiet summer month resulted in some large risk-on and risk-off moves in risk assets. During the month, the 2s10s yield curve inverted which heightened concerns about the risk of recession in the US. In general, economic data continued to deteriorate which resulted in a further rally in government bonds. The majority of European countries' 10 year bonds are now in negative yield territory and even Italian 10 year bond went below 1.0% for the first time ever.
European Sub Investment Grade Highlights*
- August's leverage issuance was €1.26bn, largely in line with the €1.54bn of Last Year (“LY”). Monthly volumes were €0.33bn in loans (€0.39bn LY) and €0.94bn in High Yield (“HY”) (€1.14bn LY).
- 2019 loan volumes have been 59% acquisition and 40% refinancing, with the balance for general corporate purposes. Euro denominated issuance comprised 95% of the volumes for the month, GBP 3% and 2% others.
- 2019 bond volumes have been 66% refinancing and 17% M&A, with the balance for general corporate purposes. Sources of funding were 51% secured, 48% unsecured and 1% subordinated bonds. Composition was 91% Euro and 8% GBP, with the balance being others. YTD issuance has been 56% BB, 9% split and 30% B, with the balance being others.
- TL B new issue spreads in August were E+394bps, in a similar range to what has been seen throughout 2019. Average net leverage was stable at 5.27x, which is 0.26x lower than LY and compares with 5.3-5.8x which we have seen through H1 2019.
- In the HY space, single B debt issued in the last 3 months priced at a 5.35% yield, which compares with 6.24% for Q2 2018 and 6.74% for Q4 2018. For the BB space the YTM on a rolling 3-month basis was 3.29%, c.66bps tighter than the new issue for Q4 2018.
The Credit Suisse Western European HY Index hedged to Euro was up with a return of 0.88% for the month taking YTD to 9.41%. The Credit Suisse European Leveraged Loan Index hedged to Euro was up 0.05% for the month taking YTD to 3.61%.
During the month, cyclicals underperformed defensive names which is a continuation of the trend seen in the last months.
The new issue market came to its seasonal slowdown. Given this, activity in the portfolio focused on re-positioning in the secondary market as we continue to manage volatile data flow.
Through the month, with the supportive tone from central bank policy, the portfolio took the opportunity to monetize certain HY positions which have rallied, and continued to de-risk GBP HY given the continuing uncertainty around the Brexit process. In addition, performing portfolio positioning remains focused on reducing positions where global growth and trade disputes have revised forecasts lower. As discussed in previous monthly reports, the credit opportunities segment of the portfolio continues to work through a number of “processes” repositioning these assets to continue to support performing into the end of the year.
As of August close, performing credit (including cash) was at 57.3% of the portfolio with a weighted average price of 99.8, trading at a YTM of 4.6%, delivering 4.5% cash yield to the portfolio. Credit opportunities was at 42.7%, closing the month at a weighted average price of 85.2, trading at a YTM of 9.5%, and delivering 7.3% cash yield to the portfolio.
Floating rate instruments comprised 86.0% of the portfolio. Senior Secured 81.1%. The current yield is 6.1% (gross) with a weighted average market price of the portfolio of 92.6 versus 90.4 as at 31 December 2018. The cash position was at 8.6% compared to 15.3% as of the start of the year.
* Sources: S&P LCD – September 2019