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Investment Vehicle Manager Market & Portfolio Commentary – October 2019

03.12.2019

Risk appetite returned to the markets in October with equities approaching all-time highs. There were a number of drivers for the improved sentiment. First of all, the US and China seem to be heading towards 'phase one' of a trade deal after a positive meeting between Trump and Xi. Secondly, the Brexit deadline was delayed again and there was some progress on the Withdrawal Agreement. Also, Q3 earnings season started more positively than the market had anticipated. Finally, we also saw Central Banks active again in October with the Federal Reserve reducing its base rate by another 25bps.

European Sub Investment Grade Highlights

  • October leverage issuance was €27.14bn, well ahead of the market-driven weak new issuance of €10.34bn of Last Year ("LY"). For context, the size of new issue in October 2017 was €28.29bn. Monthly volumes were €15.92bn in loans (€5.72bn LY) and €11.2bn in High Yield ("HY") (€4.62bn LY).a
  • 2019 loan volumes have been 55% acquisition and 44% refinancing, with the balance for general corporate purposes. Euro denominated issuance comprised 93% of the volumes for the month, GBP 6% and 1% others. Deal volume has been 20% France, 17% UK, 12% Spain and 11% United States.a
  • 2019 bond volumes have been 67% refinancing and 17% M&A, with the balance for general corporate purposes. Sources of funding were 51% secured, 48% unsecured, with the balance being subordinated bonds. Composition was 92% Euro, 7% GBP, with the balance being others. YTD issuance has been 54% BB, 34% B and 7% split, with the balance being others. Deal volume has been 19% UK, 15% France, 12% Germany, 10% Netherlands and 9% Italy.a
  • TL B new issue spreads in October were E+389bps, in a similar range to what has been seen throughout 2019. Average net leverage was stable at 4.99x, which is 0.39x lower than LY and compares with 5.0-5.8x which we have seen during the year through to September 2019.a
  • In the HY space, single B debt issued in the last 3 months priced at 4.03% yield, which compares with 6.74% for Q4 2018 (271bps tighter) and 4.82% for Q3 2019. For the BB space the YTM on a rolling 3-month basis was 3.04%, 91bps tighter than the new issue for Q4 2018. The spread between BB and B new issue has come in from 279bps in Q4 2018, to 194bps in Q3 2019 and now just 99bps at October 2019.a

Unlike equities, the European sub investment grade credit had a mixed month in October. The Credit Suisse Western European Leveraged Loan Index hedged to Euro was down with a return of -0.35% in October, bringing YTD returns to 3.82%. There was a big divergence between BB rated loans which returned 0.06% for the month and single B rated loans which returned -0.49% for the month.

The Credit Suisse Western European High Yield Index hedged to Euro returned 0.02% for the month, bringing YTD returns to 9.11%. Similar to loans, we saw BBs outperform with 0.21% return for the month, while single Bs were down -0.36%.

Across the performing credit portfolio, leading into year end and in light of some leading indicators, primary activity remains focused on defensible sectors in higher rated large liquid senior secured parts of the capital structure. In addition, secondary activity in the performing segment continued to rotate HY names on relative value positioning given the strong performance post Central Banks’ support.

The credit opportunities portfolio continues to be actively managed with focus on recycling situations where the catalyst has played out, and managing the structured finance positions again as we lead into year end. As discussed in previous monthly reports, there have been a number of restructuring processes which have been actively worked on, and which are expected to drive performance in the future. With one situation exiting its process on 1st October, as we head into year end, we have line of sight on another name concluding, being another favourable outcome to lenders.

As of October close, performing credit (including cash) was at 60.6% of the portfolio with a weighted average price of 99.5, trading at a YTM of 4.6%, delivering 4.3% cash yield to the portfolio. Credit opportunities was at 39.4%, closing the month at a weighted average price of 86.1, trading at a YTM of 9.6%, and delivering 6.9% cash yield to the portfolio.

Floating rate instruments comprised 86.2% of the portfolio. Senior Secured 79.3%. The current yield is 5.9% (gross) with a weighted average market price of the portfolio of 93.5 versus 90.4 as at 31 December 2018. The cash position was at 7.9% compared to 15.3% as of the start of the year.

a S&P LCD – November 2019

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