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Market & Portfolio Commentary - August 2021
August was a fairly steady month in financial markets as US equity markets hit a new all-time high at the end of the month. There was some nervousness mid-month ahead of Jackson Hole, and fear around tapering. However, Fed Chairman Powell’s dovish tone gave risk assets a boost into month end. We saw some weakness in commodities though and crude was down for the first time since March as the spread of the Delta variant and softening macro data made investors question the pace of the recovery. On the flipside, we saw signs of progress on the Biden administration’s economic agenda as the US Senate passed the $550bn infrastructure package.
European Sub Investment Grade Highlights
Total loan issuance during the month of August was €0.3bn, compared to €2.2bn same month last year. August tends to be a quieter month due to summer holidays however last year saw higher activity as the leverage market caught up on lost ground earlier in the year. The year-to-date (“YTD”) loan issuance now stands at €95.6bn, considerably more than the €47.6bn issuance we saw in the first eight months of 2020. On the High Yield side, we saw €1.3bn of bond issuance during the month, bringing YTD issuance to €86.8bn.a
The Credit Suisse Western European Leveraged Loan Index return, hedged to Euro, was at +0.48% for the month, which brings YTD returns to +3.45%. Defensives (+0.46%) marginally underperformed cyclicals (+0.50%). CCCs underperformed all other rating categories at -0.61% while BBs returned +0.35%, single Bs +0.50% and unrated companies +0.79%. As at the end of August, the 3-year discount margin on the index was 405bps.
The Credit Suisse Western European High Yield Index, hedged to Euro, was up 0.36% for the month bringing YTD returns to +3.98%.b
In the month of August, the performing book was thematically characterized by optimization. With continued strength in the secondary market, we took advantage of demand across tightly-trading names and rotated into opportunities that offered more attractive current income. We reduced two term loan positions trading at recent tights, and with continued strength in the high yield market, reduced or exited four bond positions throughout the month. With this capital, we added three new names to the performing book in the primary market. The primary market continues to offer attractive pricing relative to where certain names with similar risk profiles trade in secondary, and we took advantage of the opportunity. Additionally, we topped up on an existing position trading at a discount, and also swapped out of a newly-issued healthcare bond into the issuer’s pari-passu term loan, capturing an attractive spread differential. As of August close, performing credit (including cash) was 43.9% of the portfolio, trading at a weighted average price of 99.9 and a YTM of 4.4%, whilst delivering a 4.4% cash yield to the portfolio.
The credit opportunities book was similarly active in the month of August despite the late-summer market slowdown. We continue to have success in deploying capital into credit opportunities despite compression in stressed credit markets globally. During the month, we reduced exposure in a bond backing a company that is being acquired, while also taking advantage of liquidity in a less-liquid bond that becomes callable in the near term. We deployed this capital into two new credit opportunities names during the month; one in the primary market, and the other in secondary. Both new names are well-known to the global CVC Credit platform, and offer attractive income at comfortable attachment points. We also added to an existing position at an attractive price that resulted from technical market pressure, which has since subsided. As of August close, credit opportunities was 56.1% of the portfolio, trading at a weighted average price of 94.1 and a YTM of 8.6%, whilst delivering a 7.4% cash yield to the portfolio.
Across the entire portfolio, as of August month end, the weighted average market price was 96.6, trading at a YTM of 8.3%, and delivering 7.9% 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 79.5% of the portfolio. Senior Secured 79.8%. The portfolio had a cash position of -1.8% (including leverage) with leverage at 1.3x assets.
The fund continues to build on year-to-date outperformance against relevant benchmarks. Our active trading and primary market pulse have ensured that the performing book is well-positioned to continue to generate strong income, and we continue to have success deploying into credit opportunities while maintaining convexity. With a significant amount of primary market supply anticipated this autumn, we remain diligent in our proven investment approach in an effort to ensure continued outperformance.