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Market & Portfolio Commentary - November 2021
November started off on a reasonable strong tone, but sentiment changed quickly in the last few days of the month as concerns arose about the Omicron variant of Covid-19, and how this could impact global growth going forward. The worst performing asset class in the month was WTI Oil which was down around 20%, the worst monthly performance since the initial Covid-19 outbreak in March 2020.a The travel and leisure came under a lot of pressure in the last few days of the month as investors questioned the recovery path for this industry.
Sub Investment Grade Highlights
Total European loan issuance during the month of November was €8.84bn, compared to €4.1bn same month last year. The average new issue spread is E+407.32 with 4.35% yield to maturity which compares to tighter levels seen early in the year +376bps and 3.92% in February 2021, respectively. The year-to-date ("YTD") loan issuance now stands at a record €128.6bn, considerably more than the €64bn issuance we saw in the first eleven months of 2020. On the HY side, we saw €10.7bn of bond issuance during the month, bringing YTD issuance to €122.5bn.b
The Credit Suisse Western European Leveraged Loan Index return, hedged to Euro, was at +0.15% for the month, which brings YTD returns to +4.20%. Defensives (+0.17%) outperformed cyclicals (+0.12%). CCCs underperformed all other rating categories at -0.56% mainly driven by a cautious approach from investors regarding the Omicron Covid variant. As at the end of November, the 3-year discount margin on the index was 413bps. The Credit Suisse Western European High Yield Index, hedged to Euro, was down -0.43% for the second consecutively month. YTD returns stand at +2.94%.c
Portfolio Overview CEC A
During the month of November, the performing book remained active across deployment, trading, and risk management in the wake of volatile markets. With a shifting macro backdrop, we sought to capitalize on movement in risk markets while protecting and optimizing the portfolio. Throughout the month, we added four new names to the book, largely within the primary market, in addition to one new name added in secondary. Each new name offered attractive current income relative to issuer risk profiles. On the trading side, we reduced exposure in certain names trading at or near parity, while rotating into names trading at a discount in an effort to pick up convexity. We also added to certain existing positions at opportunistic levels amidst market weakness. Our trading and deployment continue to favour optimization heading into year-end, and the book remains well-positioned for current income. As of November close, performing credit (including cash) was 49.1% of the portfolio, trading at a weighted average price of 99.4 and a YTM of 4.5%, whilst delivering a 4.4% cash yield to the portfolio.
The credit opportunities book saw another active month amidst continued volatility in risk markets. During the month, we added two new names to the book. Both instances of deployment came in the primary market, providing capital to issuers that the global CVC platform has intimate familiarity with. In terms of secondary deployment, we added to an existing position opportunistically as supply in the name emerges infrequently, while also topping up on a core position on the back of market weakness. In order to fund these purchases, we continue to reduce risk in a name that recently underwent a successful amend-to-extend, and also exited an illiquid commodity-exposed position near our view of fair value. Within the structured products book, following our successful auction last month, we re-deployed into the B-rated paper – as well as the equity – of a new-issue CLO backing a familiar manager. We also rolled an existing B-rated position as part of a successful deal reset. As of November close, credit opportunities was 50.9% of the portfolio, trading at a weighted average price of 93.5 and a YTM of 8.6%, whilst delivering a 7.7% cash yield to the portfolio.
Across the entire portfolio, as of November month end, the weighted average market price was 96.4, trading at a YTM of 8.2%, and delivering 8.0% 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 78.8% of the portfolio. Senior Secured 79.6%. The portfolio had a cash position of -1.2% (including leverage) with leverage at 1.3x assets.
The fund underperformed the European loan indices for the month but continues to be well ahead of the indices on a YTD basis. The underperformance was a result of the overweight exposure to CCCs and the exposure to HY bonds and US leveraged loans, both of which underperformed the European loan market. As the macroeconomic outlook remains volatile, and as a new strain of COVID emerges, the performing book remains well-positioned from a risk perspective in light of near-term volatility. The credit opportunities book continues to offer convexity, and we will maintain our diligent investment approach while managing existing risk and screening new names.
a Deutsche Bank
b LCD, an offering of S&P Global Market Intelligence - Dec 2021
c Credit Suisse