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Market & Portfolio Commentary - August 2022
August was another month of two halves. In the first half of the month, the rally that started in July continued. However, in the second half of the month, the mood in markets changed. Electricity prices across Europe started to skyrocket on the back of higher natural gas prices, low levels of water in the Rhine and issues with nuclear energy in France. Towards the end of the month, Fed Chairman Powell unambiguously rejected the Fed pivot that the market was anticipating in his Jackson Hole speech, resulting in renewed pressure on long duration assets.
European Sub Investment Grade Highlights
In line with usual seasonality, August was a quiet month leading to new loan issuance of €1.6bn and no HY issuance.a The Credit Suisse Western European Leveraged Loan Index return, hedged to Euro, was at +0.9% for the month. Defensives were +0.78% and cyclicals +0.96%% in July. CCCs in August were up +1.4%, single Bs +1% and BBs +0.7%. As at the end of August, the 3-year discount margin on the index was 595bps. The Credit Suisse Western European High Yield Index, hedged to Euro, was down -1.1% (Year to date (“YTD”) -12.1%) underpinned by the Fed Chairman Powell’s Jackson Hole speech.b
The European loan market continued its recovery from the June lows. The market technical – which we discussed a number of times in the past – improved materially as new money came into the asset class through new CLO formation, which dealers desks were low on inventory and primary issuance came to a seasonal halt. With a number of motivated buyers in the market and not a lot of supply, the market rallied considerably in the first few weeks of August. As we approached a more active primary window in September, and equities and high yield started to sell off, we also saw some profit taking on loans, especially the loans with higher cash prices.
During the month, we added some risk both in the performing credit book and in the credit opportunities book. In the performing credit book, we participated in two new primary opportunities which were attractively priced. The first one came with a coupon of E+6.25% and an OID of 92, while the second one came at E+5.25% with a 91 OID. With 3m Euribor continuing to move up, these primary opportunities offer high single digit yield to maturity profiles for the performing credit book. This gives us confidence that over time, we may be able to increase the yield on the performing credit book further through attractively priced primary issuance. Towards month end, we did trim some risk in the performing credit book to have some cash to deploy in the primary calendar in September. For example, we took profit on a leisure name at 94.5 that we bought mid July at 90.5.
We also added to some positions in the credit opportunities sleeve where we took the opportunity to build out some positions at attractive levels. Given the slow new issue calendar in the CLO space, we didn’t deploy in that part of the book during the month.
Across the entire portfolio, as of August month end, the weighted average market price was 87.2, trading at a YTM of 13.7% (€ hedged) / 15.5% (GBP hedged) and delivering a 9.0% (EUR hedged)/ 10.9% (GBP hedged) running cash yield, versus a weighted average price of 96.5, YTM of 8.3% and 7.9% as of December 2021. The increase in YTM is partially due to an increase in base rates, and partially due to the lower average cash price across the portfolio. Floating rate instruments comprised 83.4% of the portfolio while 71.9% was invested in senior secured assets. The portfolio had a cash position of 2.7% (including leverage) with leverage at 1.4x assets. Market consensus is for further central bank hikes across all major geographies, which should lead to further upside to the yield on the portfolio.
a LCD – September 2022