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Investment Vehicle Manager Market & Portfolio Commentary – September 2019
In September, there was a partial reversal of some of the price actions we saw in August. The European Central Bank (ECB) and the Federal Reserve (Fed) both loosened monetary policy further in September. The ECB lowered the deposit rate by 10bps with tiering and reintroduced QE at €20bn/month in an open-ended manner, while the Fed cut its benchmark rate by 25bps for the second time in three months. This resulted in a risk-on tone and equities were generally up during the month, with bank equities outperforming.
European Sub Investment Grade Highlights*
- September leverage issuance was €18.36bn, short of €20.25bn of Last Year (“LY”). Monthly volumes were €9.29bn in loans (€12.10bn LY) and €9.08bn in High Yield (“HY”) (€8.15bn LY).
- 2019 loan volumes have been 59% acquisition and 40% refinancing, with the balance for general corporate purposes. Euro denominated issuance comprised 93% of the volumes for the month, GBP 6% and 1% others. Deal volume has been 20% France, 15% UK, 14% United States, 12% Spain and 9% Germany.
- 2019 bond volumes have been 69% refinancing and 14% M&A, with the balance for general corporate purposes. Sources of funding were 50% secured, 49% unsecured, with the balance being subordinated bonds. Composition was 91% Euro, 8% GBP, with the balance being others. YTD issuance has been 57% BB, 30% B and 7% split, with the balance being others. Deal volume has been 18% France, 17% UK, 14% Germany, 9% Netherlands and 7% Italy.
- TL B new issue spreads in September were E+397bps, in a similar range to what has been seen throughout 2019. Average net leverage was stable at 5.29x, 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 4.82% yield, which compares with 6.61% for Q3 2018 and 6.74% for Q4 2018. For the BB space the YTM on a rolling 3-month basis was 2.88%, c.107bps tighter than the new issue for Q4 2018.
The Credit Suisse Western European Leveraged Loan Index hedged to Euro was up with a return of 0.56% in September, 1.05% in Q3 and 4.19% YTD. This compared to a return of 0.57% in September 2018, 1.45% in Q3 2018 and 2.37% YTD in 2018. On an LTM basis, the Index was up 2.34%.
The Credit Suisse Western European HY Index hedged to Euro was down with a return of -0.04% in September, up 1.33% in Q3 and up 9.08% YTD. In September 2018, the same index was only up 0.05%. On an LTM basis, the Index was up 4.7%.
The new issue market came back to life after its summer lull of August. The portfolio continued with the theme of allocating senior secured positions in defensible sectors whist taking advantage of the strength in the broader loan market to rotate out of lower spread, lower rated issuers in sectors exposed to global macro concerns. In addition, secondary activity in the performing segment continued to rotate HY names on relative value positioning given the strong performance post Central Banks' support while also reducing HY GBP exposure in consideration of Brexit volatility.
The credit opportunities portfolio continues to see a strong flow of ideas and initiated a new position into a name which has been followed by the platform for a while. As discussed in previous monthly reports, there have been a number of restructuring processes which have been actively worked on, which are expected to drive performance in the future. Leading into the end of the month, one of these positions exited its balance sheet restructuring with a change of control to the lenders.
As of September close, performing credit (including cash) was at 56.6% of the portfolio with a weighted average price of 100.1, trading at a YTM of 4.8%, delivering 4.5% cash yield to the portfolio. Credit opportunities was at 43.4%, closing the month at a weighted average price of 85.1, trading at a YTM of 8.9%, and delivering 7.2% cash yield to the portfolio.
Floating rate instruments comprised 85.3% of the portfolio. Senior Secured 81.5%. The current yield is 6.4% (gross) with a weighted average market price of the portfolio of 92.8 versus 90.4 as at 31 December 2018. The cash position was at 5.0% compared to 15.3% as of the start of the year.
* Sources: S&P LCD – October 2019