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Investment Vehicle Manager Market & Portfolio Commentary – January 2019
January started with an escalation of geopolitical tensions between the US and Iran, which led to a spike in oil prices. Markets rallied as tensions de-escalated quickly, but soon thereafter reports about coronavirus in China put pressure on markets again. Most macroindicators were pointing towards some recovery in global growth however it’s too early to tell what the impact of recent events will be on growth.
European Sub Investment Grade Highlights
- January leverage issuance was €32.15bn, well ahead of the market driven weak new issuance of €3.84bn of Last Year ("LY"). Monthly volumes were €19.15bn in loans versus €1.84bn LY, and €13.00bn in High Yield ("HY") versus €2.00bn LY.a
- January loan volumes have been 57% acquisition and 43% refinancing. Euro denominated issuance comprised 95% of the volumes for the month with the balance being GBP. Deal volume has been 34% UK, 24% Germany and 11% Netherlands. Industry volume has been 24% food and beverage, 22% healthcare, 12% servicing and leasing and 11% aerospace and defence.a
- January bond volumes have been 81% refinancing and 18% M&A, with the balance for general corporate purposes. Sources of funding were 78% secured and 22% unsecured. Composition was 96% Euro, with the balance being GBP. YTD issuance has been 51% B, 27% BB and 12% split with the balance being others. Deal volume has been 20% Germany, 17% Netherlands, 14% Serbia and 14% France.a
- TL B new issue spreads in January were E+364bps, continuing a theme of tightening seen since August 2019 when new issue spreads were E+394bps. Average net leverage was also higher than we have seen in the previous six months at 5.43x, which had been in a range of 4.9-5.4x.a
- In the HY space, single B debt issued in the last 3 months priced at 4.25% yield, which compares with 6.74% for Q4 2018 (249bps tighter) and 4.82% for Q3 2019. For the BB space the YTM on a rolling 3-month basis was 3.08%, 87bps tighter than the new issue for Q4 2018 of 3.95%. The spread between BB and B new issue has come in from 279bps in Q4 2018, to 194bps in Q3 2019 and now just 117bps for last three months ending January 2020.a
The Credit Suisse Western European Leveraged Loan Index hedged to Euro was up with a return of 0.51% in January. The Credit Suisse Western European High Yield Index hedged to Euro returned 0.12% for the month.
Across the performing segment of the credit portfolio, both the US and European loan markets were dealing with a wave of new issue as well as repricing action by borrowers across the rating spectrum. As the market tightened up, allocation or rotation into new issue assets remained very selective, focusing on appropriately structured and priced credit. Duration in fixed income continued to compress, with the portfolio continuing to hold performing HY issuers in the single B range where we expect to see some outperformance to the BB space.
Within the credit opportunities portfolio, the month focused on increasing structured credit exposures as pricing relative to the wider HY space for strong issuers looks mispriced. We believe the existing book remains well positioned to support performance in the coming months. In addition, as the market sees stability following a more positive economic outlook, and where stressed issuers have been technically weak in secondary, it is anticipated that the credit opportunities portfolio will seek to increase exposures in Q1 across this segment of the market.
As of January close, performing credit (including cash) was at 59.4% of the portfolio with a weighted average price of 98.3, trading at a YTM of 4.7%, delivering 4.4% cash yield to the portfolio. Credit opportunities was at 40.6%, closing the month at a weighted average price of 90.8, trading at a YTM of 8.9%, and delivering 6.7% cash yield to the portfolio.
Floating rate instruments comprised 84.5% of the portfolio. Senior Secured 72.3%. The current yield is 5.7% (gross) with a weighted average market price of the portfolio of 95.5 as at 31 January 2020. The cash position was 13.2% compared to 15.3% as of the start of 2019.
a LCD, an offering of S&P Global Market Intelligence – February 2020