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Investment Vehicle Manager Market & Portfolio Commentary - February 2021

22.03.2021

In February, investors in general positioned themselves for a much stronger than anticipated economic recovery in the next few months. The combination of the vaccine roll-out with additional monetary and fiscal stimulus drove investors to re-assess the potential for pent-up demand once economies reopen. We saw this theme play out across a number of assets classes. The rates market took the spotlight where we saw a sharp sell-off in sovereign bonds as investors started pricing in earlier than expected rate hikes. Even though equity indices in general were well off their mid-month highs by the end of the month, certain sectors, such as travel & leisure, energy and banks performed particularly well during the month. Cyclical commodities such as copper and oil posted double digit returns in February, while in credit markets, CCCs continued the strong recovery that started in early November.

European Sub Investment Grade Highlights

Loan issuance totalled €8.33bn during the month, in line with the €8.12bn issued in February 2020 supported by the continued positive momentum during the start of 2021. Year to Date ("YTD") issuance now stands at €19.91bn, below the €25.35bn issued over the same period in 2020. High Yield issuance was €12.72bn for the month and €25.35bn on a YTD basis compared to €6.41bn in February and €19.4bn YTD in 2020.a

The Credit Suisse Western European Leveraged Loan Index, hedged to Euro, was up 0.81% for the month, which brings YTD returns to +1.73%. Cyclicals (+1.07%) again outperformed defensives (+0.55%). CCCs returned +3.3% while single Bs returned +0.66% and BBs returned +0.36% during the month. As at the end of February, the 3-year discount margin on the index was 417bps. The Credit Suisse Western European High Yield Index, hedged to Euro, was up 0.60% for the month bringing YTD returns to +1.12%.

Following the second month of the year, our performing book continues to be well-positioned for current income and capital upside. The book saw elevated turnover in the month of February, and we continue trading actively in an effort to further optimise the portfolio. We made select sales across low-coupon names trading at tight levels, and re-deployed that capital into performing names trading at a discount to par. During the month, a core second-lien position was pre-paid at par, and we exited a GBP-denominated position within an issuer we expect will issue additional GBP debt in the near term. We used these sources of cash to fund an initiating position in a European building materials distributor within the primary market, as well as to initiate a position in a US-based utilities provider trading at a discount in secondary. As of February close, performing credit (including cash) was 46.1% of the portfolio, trading at a weighted average price of 100.0 and a YTM of 4.2%, whilst delivering a 4.2% cash yield to the portfolio.

The credit opportunities book continues to garner diligent focus across both European and US markets. We maintain real-time focus on the portfolio and the opportunity set, and in the month of February, we continued to position the portfolio to capture discount and current income in attractive opportunities. Throughout the month, we crystallised gains in a UK-based roadside recovery service provider, a primary position that we funded as part of a refinancing after being invested in the company's debt for years with a high level of conviction. We also de-risked a European specialty chemicals manufacturer trading at an attractive level. These sales, in addition to cash raised within the performing book, helped us fund four initiating positions within the credit opportunities book – two in the US and two in Europe, in primary and secondary markets alike. We also added to a position in a global cargo service provider trading at a discount. We believe we have identified attractive risk-adjusted returns across these new names and the rest of the credit opportunities book. Across the structured products book, we added to a collateralized loan obligation ("CLO") equity position in the secondary market in a manager we are intimately familiar with. We also de-risked select CLO BBs trading above par in order to rotate into new issue BBs at a discount.

As of February close, credit opportunities was 53.9% of the portfolio, trading at a weighted average price of 91.0 and a YTM of 8.4%, whilst delivering a 7.3% cash yield to the portfolio.

Across the entire portfolio, as of February month end, the weighted average market price was 95.0, trading at a YTM of 6.4%, and delivering 7.6% cash yield (on a levered basis) versus a weighted average price of 94.1, YTM of 7.1% and cash yield of 6.5% as of December 2020. Floating rate instruments comprised 83.8% of the portfolio. Senior Secured 81.9%.

The portfolio had a cash position of 2.6% (including leverage) with leverage at 1.3x assets. The fund continues to outperform the broader market heading into the third month of the year. Trading, idea-generation, and portfolio optimization remain a key focus as we constantly seek to generate incremental returns while staying disciplined in our risk management. We believe the fund is well positioned as equity market volatility picks up amidst earnings and macroeconomic developments.

 

a LCD, an offering of S&P Global Market Intelligence - March 2021

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