Investment Vehicle Manager Market & Portfolio Commentary – May 2019

31.05.2019

After a very strong start for financial markets in 2019, the mood changed dramatically in May. In the beginning of the month, Trump tweeted about new tariffs on Chinese imports as there was a breakdown in trade negotiations. In Europe, Theresa May resigned as Prime Minister in the UK, raising the likelihood of a hard Brexit. Finally, Italian risk assets sold off as well during the month as the EU and Italy seemed to be clashing again over Italy’s debt problems.

The combination of these factors led to renewed fears of a global growth slowdown. During the month, we saw a flight to quality and the 10-year Bund yield finished the month at -0.20%, the lowest yield on record.

European Sub Investment Grade Highlights

May leverage issuance was €16.56bn, ahead of €15.63bn Last Year (“LY”) for the first time in 2019 as the risk on sentiment continues. Monthly volumes were €9.14bn in loans (€11.23bn LY) and €7.42bn (€4.39bn LY) in High Yield (“HY”).
2019 loan volumes have been 61% acquisition and 22% refinancing, with the balance being recaps. Euro denominated issuance comprised 97% of the volumes for the month, and GBP 3%.
2019 bond volumes have been 65% refinancing and 10% M&A, with the balance being general corporate purposes. Sources of funding were 43% secured, 56% unsecured and 1% subordinated bonds. Composition was 93% Euro with the balance being GBP.
TL B new issue spreads in May were E+394bps, in a similar range to what has been seen throughout 2019. May pricing was 29bps wider than the corresponding period LY. Average net leverage was stable at 5.4x, which was 0.1x higher than the corresponding period LY.
In the HY space, single B debt issued in the last 3 months to May was priced at a 4.71% yield, compared to 6.24% for Q2 2018. For the BB space however the YTM on a rolling 3-month basis was 3.34%, 61 bps tighter than the new issue for Q4 2018, a flight to quality.

The Credit Suisse Western European HY Index hedged to Euro was down with a return of -1.56% for the month taking YTD to 5.31%. The Credit Suisse European Leveraged Loan Index hedged to Euro was down -0.04% for the month taking YTD to 2.97%.

As the market started to experience volatility, much of the activity in the month was focused on reducing lower spread coupon names at high pricing in performing credit, keeping light and slightly reducing fixed income HY positions, and allocating to the new issue market which continued to price wider than what was experienced in 2018. Across credit opportunities, the continued allocation into existing positions remained a core driver of activity as well as working through a number of new opportunities generated through the month. In addition, as the structured finance market priced liabilities at attractive relative levels, the allocation here has slowly increased with the opportunities across the mezzanine and equity tranches. Mark-to-market volatility was experienced broadly across the portfolio, however, as discussed in previous notes, mostly within the credit opportunities segment of the portfolio.

As of May close, performing credit (including cash) holds a 58.9% allocation with a weighted average price of 99.8, trading at a YTM of 4.9%, delivering 4.8% cash yield to the portfolio. Credit opportunities maintained a 41.1% allocation to the strategy, closing the month at a weighted average price of 84.7, trading at a YTM of 11.5%, and delivering 7.0% cash yield to the portfolio.

At the end of May, floating rate instruments comprised 83.7% of the portfolio. The current yield is 6.3% (gross) with a weighted average market price of the portfolio of 92.7 versus 93.9 as at 30 April 2019. The cash position fell from 15.3% as of the start of the year to 7.4%.

* Sources: S&P LCD – June 2019

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