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Investment Vehicle Manager Market & Portfolio Commentary - June 2021

23.07.2021

As we come to an end of the first half of 2021, financial markets have been fairly robust overall, despite some COVID and inflation induced volatility. US equity markets seem to be finding new all time highs on a regular basis, and commodities continue to go higher. Oil was one of the best performing asset classes in the month due to progress on vaccination programs and delays in Iran's re-entry into crude markets.a However, not all commodities performed well in June and we saw weakness in gold, silver and copper.b Despite the general optimism, there is some rising concern around the delta variant and how that could trip up the reopening trade.

European Sub Investment Grade Highlights

The Credit Suisse Western European Leveraged Loan Index, hedged to Euro, was at 0.31% for the month, which brings year-to-date ("YTD") returns to +2.91%. Cyclicals (+0.41%) again outperformed defensives (+0.19%). CCCs returned +0.73% while BBs returned +0.17% during the month. As at the end of June, the 3-year discount margin on the index was 409bps. The Credit Suisse Western European High Yield Index, hedged to Euro, was up 0.65% for the month bringing YTD returns to +3.26%.c

Total loan issuance during the month of June was €12.1bn, compared to €7.5bn in June 2020. The average new issue spread was E+377.1, 3.97% yield to maturity; which compares with E+416.67 and 4.93% last year, respectively. The YTD loan issuance now stands at €76.0bn, just about double the €38.1bn issuance we saw in the first six months of 2020. On the High Yield side, we saw €10.4bn of bond issuance during the month, bringing YTD issuance to €70.6bn.d

During the month of June, our focus and activity within the performing book was thematically dominated by a robust primary market. As credit spreads remain firm in secondary markets, M&A and refinancing activity remain elevated heading into summer months. We selectively participated in a number of these transactions that exhibited attractive risk profiles, pricing, and relative value. This consummated in the addition of five new names to the book in the European market, further enhancing our diversification at compelling price points. We also participated in two primary transactions backing existing portfolio companies that came to market – in one instance to refinance following an IPO, and in the other instance to raise incremental financing. Finally, we added a sixth new name to the book in the secondary market after a US-based issuer that we previously owned tapped the European market for new debt. Our robust primary market participation was funded partly by paydowns that have either occurred or will occur in the near term, as well as through the right-sizing of a performing name trading above par. As of June close, performing credit (including cash) was 44.1% of the portfolio, trading at a weighted average price of 99.8 and a YTM of 4.4%, whilst delivering a 4.4% cash yield to the portfolio.

The credit opportunities book continues to drive fund capital appreciation as the first half of the year comes to a close. We continue to see compression in stressed credit markets, and a number of our conviction credit opportunities positions experienced significant price appreciation driven by buying activity that began in prior months. In the month of June, we added one new name to the credit opportunities book in a European manufacturer of heat exchangers and cooling equipment. We also topped up on two existing positions at a discount – both were introduced to the book as new names earlier this year. In order to fund those purchases, we took advantage of liquidity and reduced a small portion of an existing credit opportunities position trading at recent highs. In the structured finance book, we funded a new position of BB CLO paper in the primary market. This deal reset backed a manager we are intimately familiar with, and we saw accretive value in the BBs despite a small amount of tightening. As of June close, credit opportunities was 55.9% of the portfolio, trading at a weighted average price of 93.9 and a YTM of 8.5%, whilst delivering a 7.3% cash yield to the portfolio.

Across the entire portfolio, as of June month end, the weighted average market price was 96.5, trading at a YTM of 8.4%, 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 76.7% of the portfolio. Senior Secured 81.3%. The portfolio had a cash position of -1.9% (including leverage) with leverage at 1.3x assets.

As the first half of the year comes to a close, the fund continues to significantly outperform relevant benchmarks. With a number of markets trading at high valuations, we remain focused on fundamental performance at our portfolio companies. Idea generation and positioning remain a key focus, and the team continues to screen opportunities across European and US markets. The fund is well-positioned for both current income and capital appreciation heading into the summer months.

Commentary Sources:
a Deutsche Bank
b Bloomberg
c Credit Suisse
d LCD, an offering of S&P Global Market Intelligence – July 2021

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