Monthly Commentary

Market & Portfolio Commentary - July 2022

23.08.2022

July 2022 may be remembered as the month in which ECB brought deposit rates to 0% after 8 years in negative territory. Inflation prints continued to surpass to the upside across the world but some macro indicators including jobs data, food and commodity prices and housing activity signal that we may be close to peak inflation levels. Central banks remained firm in their policy to tackle inflation which included a further 75bps by the Fed and 50bps hike by the ECB during the month as well as establishing a Transmission Protection Instrument to help prevent a new sovereign crisis. As fears of a recession mount, the market is starting to discount a less hawkish policy at some point in the future.

Fundamentals remain fairly robust - over half of the S&P 500 companies have reported so far and 60% beat on top line while 73% beat expectations on earnings. We've seen similar trends in Europe with just over half of STXE 600 companies having reported so far and 76% beat on top line but only 50% beat earnings expectations.a US GDP came out at -0.9%, the second consecutive quarter of negative growth, which is the traditional definition of a recession, while GDP data in Europe surprised to the upside with +0.7% growth.a

Sub investment grade highlights

July was a strong month for the European loan market as the Credit Suisse Western European Leveraged Loan Index return, hedged to Euro, was at +2.37% for the month. Defensives were +2.82% and cyclicals +1.94%% in July. CCCs in July were up +1.54%, single Bs +2.66% and BBs +2.19%. As at the end of July, the 3-year discount margin on the index was 651bps. The Credit Suisse Western European High Yield Index, hedged to Euro, was up +4.45% breaking the trend of six consecutive negative return month (Year-to-Date (“YTD”) -11.1%) as investors priced in a less hawkish approach by central banks.b

Primary loan issuance remained low in July vs. historical levels however there is a sequential improvement in the loan market reaching €6.4bn new issuance in July, vs. €2.6bn in June.  This brings YTD issuance to €34.4bn, down materially from the €95.3bn in the first seven months of 2021, which was a record year. High Yield issuance in Europe continues to be negligible at €1.3bn versus €8.9bn a year ago. YTD high yield issuance stands at €16.5bn of which over half was done before the Russian invasion of Ukraine. At the end of July 2021, total high yield issuance was €85.5bn.c

Portfolio commentary

July was a month of two halves. In the first half of the month, the European loan market continued the downwards trend that we saw in May and June. As discussed in previous months, we believe that the majority of the downwards move can really be explained by market technicals (supply/demand imbalance) rather than fundamentals. This was evidenced in the second half of July when it became clear that bank trading desks didn’t have much inventory, and that primary issuance wasn't going to happen, the market started recovering and rallied quite hard into month end. The structured credit market also came back and we saw CLO issuance pick up in the second half of the month.

During the month, we added some risk both in the performing credit book and in the credit opportunities book. In the performing credit book, we added to some high conviction names, that were trading at a discount to par and where we believe we can get some good income. Even though primary was slow during the month, we participated in one new primary deal, which is a European healthcare name we as a platform are very familiar with. The loans priced with a coupon of E+525 and a considerable OID, to make the all-in yield to maturity around 8.4%.

We also remain active on the credit opportunities side where, on two occasions, we sold some long held $ denominated bonds back to the company at a premium to the market price. The cost of hedging $ bonds had gone up and we managed to re-deploy this freed up capital into better floating rate opportunities, with a lower entry price and higher FX-adjusted coupon. As the European high yield market rallied faster than the loan market, we used the opportunity to sell some fixed rate high yield bonds into the floating rate loans of the same issuer – but at a lower cash entry price thereby improving the convexity on the portfolio. Finally, we added to a number of positions where the sell-off in the market allowed us to lower our average entry price into some positions.

Across the entire portfolio, as of July month end, the weighted average market price was 86.3, trading at a YTM of 13.8% (€ hedged) / 15.7% (GBP hedged) and delivering a 9.1% (EUR hedged0/ 10.9% (GBP hedged) running cash yield, versus a weighted average price of 96.5, YTM of 8.3% and 7.9% as of December 2021. The increase in YTM is partially due to an increase in base rates, and partially due to the lower average cash price across the portfolio. Floating rate instruments comprised 83.6% of the portfolio while 73.4% was invested in senior secured assets. The portfolio had a cash position of 1.3% (including leverage with leverage at 1.4x assets.

July 2021 was also the month where 3M Euribor turned positive for the first time since 2015. Most European loans have a 0% Euribor floor but with 3M Euribor closing the month at 0.23%, the EUR share class benefits for the first time in 7 years from positive base rates. The market currently prices in further ECB rate hikes which should lead to a further positive impact on the income generated by the fund. August is usually a quiet month in European loan markets. However, there is still a lot of macroeconomic and geopolitical uncertainty out there and a lack of liquidity in markets can sometimes create additional volatility in August. Against this backdrop, we believe we are well positioned to continue to generate income, whilst the weighted average cash price provides upside potential.

Finally it's worth noting that towards the end of July, the leverage facility was refinanced with a different bank, resulting in a lower cost of capital.

Important disclaimer and terms of use

These written materials are not for release, publication or distribution, directly or indirectly, in or into the United States, Australia, Canada, South Africa or Japan or to "U.S. persons" as defined in Regulation S under the US Securities Act ("US Persons"). The information contained herein does not constitute or form part of any offer or solicitation to purchase or subscribe for securities in the United States, Australia, Canada, South Africa or Japan or any other jurisdiction where to do so might constitute a violation of the relevant laws or regulations of such jurisdiction. The Company has not been and will not be registered under the US Investment Company Act of 1940, as amended (the "Investment Company Act") and, as such, holders of the Company’s securities will not be entitled to the benefits of the Investment Company Act. The securities discussed herein have not been and will not be registered under the US Securities Act of 1933, as amended (the "US Securities Act"), or with any securities regulatory authority of any state or other jurisdiction of the United States and may not be offered or sold in the United States or to, or for the account or benefit of, US Persons absent registration or an exemption from registration under the US Securities Act in a manner that would not require the Company to register under the Investment Company Act. No public offering of securities will be made in the United States. No securities may be offered or sold, directly or indirectly, into the United States or to US Persons absent registration or an exemption from registration under the US Securities Act and in a manner that would not require the Company to register under the Investment Company Act.

In addition, in the United Kingdom, these materials on this website are only being distributed to and are only directed at (i) persons who are outside the United Kingdom or (ii) to investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the "Order") or (iii) high net worth entities, and other persons to whom they may lawfully be communicated, falling within Article 49(2)(a) to (e) of the Order (all such persons in (i), (ii) and (iii) above together being referred to as "relevant persons"). Securities to which the materials relate are only available to, and any invitation, offer or agreement to subscribe, purchase or otherwise acquire such securities will be engaged in only with, relevant persons. Any person who is not a relevant person should not act or rely on the materials or any of their contents.

Any communication on this website is only addressed to and is only directed at persons in any member state of the European Economic Area ("EEA Member State") where any required notification or registration for "marketing" as that term is defined in Article 4(1)(x) of Directive 2011/61/EU on alternative investment fund managers ("AIFMD") has been made and who are both:

  1. "qualified investors" in that Member State within the meaning of Article 2(e) of EU Prospectus Regulation (EU/2017/1129), as amended, including any relevant implementing measure in EEA Member State which has implemented the EU Prospectus Regulation; and
  2. "professional investors" in that EEA Member State within the meaning of Article 4(1)(ag) AIFMD.

A list of EEA Member States in which a notification or registration has been made for marketing to professional investors under AIFMD is available on request.

This website should not be accessed by persons in any EEA Member State who are "retail investors" within the meaning of Article 4(1)(aj) of the AIFMD ("retail investors").

Access to electronic versions of these materials is being made available on the webpage in good faith and for information purposes only. Making press announcements and other documents relating to any offering of securities available in electronic format does not constitute an offer to sell or the solicitation of an offer to buy or subscribe for securities, nor does it constitute a recommendation by any party to sell or buy securities.

By clicking on the "Accept" button, I confirm, represent, warrant and agree that:

I am not a US Person or located in the United States, Australia, Canada, South Africa or Japan or any other jurisdiction where to proceed to view the materials on this webpage would constitute a breach of securities law in that jurisdiction, and I confirm that I am permitted to view electronic versions of these materials; I will not forward, transmit or show the materials contained in this webpage to any US Person or person located in, or a resident of, the United States, Australia, Canada, South Africa or Japan or any other jurisdiction where it would be unlawful to do so; and I have read and understood the disclaimer set out above and will read carefully any additional disclaimers or important notices attaching to or forming part of the materials or information on this website. I understand that this may affect my rights, and I agree to be bound by their terms.

I am not a retail investor located in an EEA Member state.