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Market & Portfolio Commentary - April 2022
2022 continues to be volatile and April was no different from previous months. The combination of stubbornly high inflation and a slowdown in economic growth increased concerns around stagflation. There are multiple factors driving these fears: the ongoing Russian invasion of Ukraine, renewed Chinese lockdowns to deal with Covid and fears around central banks hiking rates too quickly. In Europe, the flash PMI reading came out at +7.5%, the highest level since the formation of the single currency.a Energy was of course a key driver to these high inflation numbers and Russia stopping gas flows to Poland and Bulgaria only increased concerns around the outlook for energy in Europe. As a result, global equities were firmly down for the month with the S&P500 -8.7% for the month, putting in its worst monthly performance since March 2020 when Covid spread around the world.a Megacap tech stocks were one of the worst performers during the month, with the FANG+ index -18.9% in April.a
European Sub Investment Grade Highlights
During April we saw €5.8bn total loan issuance in Europe, as the primary market picked up again following a soft €0.4bn issuance in March, but well below the €12bn issued in April 2021. The 10 year average April monthly loan issuance is €6.3bn. Year-to-date (“YTD”) issuance in 2022 is €24.6bn versus €56.9bn last year. We continue to anticipate a gradual increase in new issuance volumes in the coming weeks although it is unlikely to match the record levels seen in 2021. The HY market was closed during March and April in Europe and YTD issuance is now only €10.8bn, down 79% versus last year.b
The Credit Suisse Western European Leveraged Loan Index return, hedged to Euro, was at -0.13% for the month. Defensives were flat and cyclicals -0.26% in April. CCCs in April were down -2.3%, single Bs -0.13% and BBs +0.16%. As at the end of April, the 3-year discount margin on the index was 477bps. The Credit Suisse Western European High Yield Index, hedged to Euro, was down -2.82% the fourth consecutive negative return month (YTD -8.11%) on the back of investors’ concerns around inflation and central bank policy compounded by the market volatility driven by the Russian-Ukrainian conflict.c
April was another active month on the risk management front within the performing book. Volatility remains persistent, while macroeconomic and geopolitical sentiment continue to drive trading activity. This persistently shifting sentiment served as a headwind to primary markets, with a slowdown in new issuance experienced during the month across Europe and the US. We participated in one new deal during the month, backing the buyout of a global industrials business. We also added a second new name to the book within the secondary market, building on a position already held across the CVC Credit platform. To fund this deployment, we reduced one position while exiting another, both offering income profiles that are tighter than where similar risk is pricing in the primary market. As of April close, performing credit (including cash) was 48.6% of the portfolio, trading at a weighted average price of 97.2 and a YTM of 5.3%, whilst delivering a 4.7% cash yield to the portfolio.
The credit opportunities book remains a diligent focus of the team amidst volatile markets. Though the size of the opportunity set has grown slightly as a result of recent volatility, the quality of the opportunity set remains challenged, and we will maintain our proven investment approach in our deployment decisions. During the month, we added one new name to the book in the secondary market, backing a cruise operator that the CVC Credit platform is intimately familiar with. Additionally, we built on two existing positions at attractive levels, further enhancing the convexity profile of the credit opportunities book. To fund this deployment, we took advantage of liquidity and reduced exposure in a position that trades sporadically. Activity within the structured products sleeve was muted during the month of April, as activity within the primary CLO market remains slow. However, we continue to evaluate attractive opportunities, and anticipate an uptick in activity in the near term. As of April close, credit opportunities was 51.4% of the portfolio, trading at a weighted average price of 89.3 and a YTM of 10.2%, whilst delivering an 8.2% cash yield to the portfolio.
Across the entire portfolio, as of April month end, the weighted average market price was 93.0, trading at a YTM of 9.2% (€ hedged) / 10.6% (£ hedged), and delivering 8.0% (€ hedged) / 9.4% (£ hedged) cash yield (on a levered basis) versus a weighted average price of 96.5, YTM of 8.3% and cash yield of 7.9% as of December 2021. Floating rate instruments comprised 82.6% of the portfolio. Senior Secured 74.6%. The portfolio had a cash position of 1.6% (including leverage) with leverage at 1.3x assets.
Despite a challenging start to the year in global credit markets, the fund is performing well against relevant benchmarks. The performing book remains well positioned for current income, while the credit opportunities book maintains convexity. We will continue to maintain diligence in our risk management amidst macroeconomic and geopolitical uncertainty.
b LCD, an offering of S&P Global Market Intelligence – May 2022
c Credit Suisse