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Market & Portfolio Commentary - December 2021

28.01.2022

After the Omicron-led sell-off in November, we saw a bounce in risk assets in December. The hospitalisation and mortality rates appear to remain low even though it's highly infectious. Central banks also turned more hawkish in December, with an acceleration of tapering announced by the Fed and a first rate hike by the Bank of England. That didn't stop the rally in equities, with most US equity indices closing the year at or near all time highs. The travel sector was one of the stand-out performers in December as most of the November Omicron losses were erased, as evidenced by the 10.2% rise in Crude and 13.6% rise in WTI.a

European Sub Investment Grade Highlights

December was a seasonally quiet month with only €0.71bn total loan issuance, compared to €1.43bn same month last year. The lower issuance levels during the month should be seen in the context of the full year activity. During 2021 loan issuance reached a record €129.5bn, beating the previous high water mark of €120.40bn in 2017. The average new issue spread in December was E+422.97 with 4.50% yield to maturity which compares to tighter levels seen early in the year +376bps and 3.92% in February 2021, respectively. On the HY side, we saw €1.40bn of bond issuance during the month, bringing year-to-date (“YTD”) issuance to €124.40bn, another record when looking at the time series since 2010.b

The Credit Suisse Western European Leveraged Loan Index return, hedged to Euro, was at +0.42% for the month, which brings the full year returns to +4.63%. Defensives were (+0.43%) largely in line with cyclicals (+0.41%) in December. CCCs in December underperformed all other rating categories at -0.21%. In contrast, they were the strongest rating category when looking at the full year returns: BBs +2.42%; Bs +4.3%; CCCs +10.82%, Not Rated +7.66% and Distressed (CC or lower) +5.15%. As at the end of December, the 3-year discount margin on the index was 413bps.

The Credit Suisse Western European High Yield Index, hedged to Euro, was up +1.06%. YTD returns stand at +4.04%.c

Portfolio Commentary

Despite the market slowdown brought forth by the holidays, December was another active month within the performing book across deployment and risk management. We sought to capitalize on the volatility in risk markets introduced by the Omicron variant, while also positioning the portfolio into year-end. During the month, we exited six individual positions trading at or above our view of fair value. As the primary market continues to offer attractively-priced risk at a discount, we partially re-deployed this capital into two new names in December and will look to continue deploying into primary opportunities in January. Additionally, in the secondary market, we topped up on an existing position at a discount, while also adding a new position in the GBP tranche of a European issuer that we have exposure to. As the new year begins, the book remains well-positioned for current income. As of December close, performing credit (including cash) was 50.8% of the portfolio, trading at a weighted average price of 99.6 and a YTM of 4.5%, whilst delivering a 4.5% cash yield to the portfolio.

The credit opportunities book was similarly active while crystallizing a very strong year in terms of performance. During the month, we received full repayment in a core position backing a contract logistics provider following a successful sale of the business. This position was held in the fund for many years, throughout which we led a successful restructuring and maintained conviction during periods of weakness; this repayment further validates our proven investment approach. Separately, we took profit on a position that we entered into less than a year prior at significantly lower levels, as the issuer has proactively reduced its debt load thanks to robust cash generation. We redeployed this capital by introducing one new name to the credit opportunities book, while topping up on an existing position at an attractive level. Within the structured products book, we continued re-deploying capital that was raised following our successful auction in October. During the month of December, we added two new positions in BB-rated CLO paper, both offering attractive risk profiles relative to comparable opportunities. As of December close, credit opportunities was 49.2% of the portfolio, trading at a weighted average price of 93.3 and a YTM of 9.0%, whilst delivering a 7.8% cash yield to the portfolio.

Across the entire portfolio, as of December month end, the weighted average market price was 96.5, trading at a YTM of 8.3%, and delivering 7.9% 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 78.1% of the portfolio. Senior Secured 78.1%. The portfolio had a cash position of -0.3% (including leverage) with leverage at 1.3x assets.

As the new year kicks off, we remain wary of the macroeconomic backdrop as COVID cases break new records and central banks work to gain control of consumer prices. Ahead of potential future volatility in credit markets, the performing book remains well-positioned for current income, and the credit opportunities book continues to offer convexity. The fund recorded significant outperformance against relevant benchmarks during 2021, and we will maintain our proven investment approach in targeting continued outperformance in 2022.

Commentary Sources:

a Bloomberg
b LCD, an offering of S&P Global Market Intelligence – December 2021
c Credit Suisse

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