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Investment Vehicle Manager Market & Portfolio Commentary - July 2021

25.08.2021

The month of July showed continued recovery across global economies as vaccine rollout accelerates and restrictions ease. However, the spread of the Delta variant weighed on risk sentiment and has called into question the path to – and the timing of – a full recovery. China recorded new infections in 15 out of 31 provinces leading to targeted lockdowns and further restrictions. As a result, we saw higher volatility in the equity market with drops of 2- 3% in the major US/EU indices mid-July. However, by the end of July the US reached new all-time highs yet again, led by growth stocks, while Treasury yields continued their recent decline, falling below 1.2% during the month.a Most European equity indices also closed July above the levels seen at the end of June. Oil experienced a volatile month as the OPEC+ failure to reach an output agreement caused a sharp move lower, before eventually reaching a deal that caused an equally sharp pullback.b Meanwhile the reporting season has started and, on balance, it has so far shown a healthy set of results and positive outlook guidance entering the second half of 2021 supporting the gradual recovery.

European Sub Investment Grade Highlights

The Credit Suisse Western European Leveraged Loan Index, hedged to Euro, was at +0.04% for the month, which brings YTD returns to +2.95%. Cyclicals (+0.03%) marginally underperformed defensives (+0.05%). CCCs returned -1.26% while BBs returned -0.03% during the month, offset by +0.13% single B’s and +0.37% for unrated companies. As at the end of July, the 3-year discount margin on the index was 414bps. The Credit Suisse Western European High Yield Index, hedged to Euro, was up 0.33% for the month bringing YTD returns to +3.60%.>sup>c

Total loan issuance during the month of July was €12.5bn, compared to €7.4bn in July 2020. The average new issue spread was E+384.33, 4.02% yield to maturity; which compares with E+424.07 and 4.91% last year, respectively. The YTD loan issuance now stands at €95.0bn, considerably more than the €45.0bn issuance we saw in the first seven months of 2020, and a historical record – since 2010 only 2017 & 2018 get close to the levels seen in 2021, at €70.0bn each year on a YTD basis, €15.0bn below current levels. On the High Yield side, we saw €8.9bn of bond issuance during the month, bringing YTD issuance to €85.5bn, also a record since the dataset provided by LCD (up to 2010).d

In the month of July, activity across the performing book continued to be driven by a healthy primary market. M&A and refinancing activity remain robust, and as a result, the performing book saw significant primary market participation and elevated trading activity throughout the month. We introduced six new names to the portfolio via the primary market, with half of these transactions backing M&A. In order to fund this deployment, we exited five positions during the month, coupled with small reductions across other select performing names. Each of these sales we made were across names trading at tight levels, as primary offered better relative value while maintaining a similar level of risk. The fund also participated in the first "blue bond" issuance during the month, which is a subset of green bonds, with designated use of proceeds to finance projects related to ocean conservation. As of July close, performing credit (including cash) was 45.0% of the portfolio, trading at a weighted average price of 99.6 and a YTM of 4.5%, whilst delivering a 4.4% cash yield to the portfolio.

The credit opportunities book continues to be a key focus of the team, from screening opportunities to adding new names while managing existing positions. Despite compression in stressed credit markets globally, we continue to have success in sourcing new ideas while several existing positions still offer convexity. During the month of July, we added two new names to the credit opportunities book. We initiated a position in the secured debt of a Norwegian shipping company via the secondary market, and also participated in a primary market transaction backing the merger of two US-based freight brokers. Both names offer attractive current income, convexity, and risk-reward profiles. In terms of trading activity, during the month, we made small sales across two credit opportunities positions trading at or above our view of fair value. As of July close, credit opportunities was 55.0% of the portfolio, trading at a weighted average price of 93.9 and a YTM of 8.5%, whilst delivering a 7.4% cash yield to the portfolio.

Across the entire portfolio, as of July month end, the weighted average market price was 96.4, trading at a YTM of 8.6%, and delivering 8.1% 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 78.3% of the portfolio. Senior Secured 79.0%. The portfolio had a cash position of -0.1% (including leverage) with leverage at 1.3x assets.

The fund continues to outperform relevant benchmarks heading into the final month of summer. The performing book is well-positioned for current income and capital appreciation, and we are confident in the convexity of the credit opportunities book. We continue to parse through opportunities in both segments of the portfolio, and will continue to remain diligent with our proven investment approach.

a JP Morgan
b Bloomberg
c Credit Suisse
d LCD, an offering of S&P Global Market Intelligence – August 2021

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