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Market & Portfolio Commentary - December 2022

16.02.2023

2022 was a very difficult year for most asset classes, with the S&P 500 seeing its worst annual performance since 2008.a After some relief in October and November, December saw renewed pressure on long duration assets given the hawkish tone that central bankers in the US and in Europe used during the month. The Bank of Japan joined the hawkish action in December – this was the last major central bank that stuck to loose monetary policy throughout the majority of 2022. We did however see signs that inflation may have peaked in most geographies, which should lead to a slower pace of interest hikes in 2023.

European Sub Investment Grade Highlights

The Credit Suisse Western European Leveraged Loan Index return, hedged to Euro, was at +0.34% for the month and -3.28% for 2022. Defensives were +0.21% and cyclicals +0.47% in December, which translated into FY returns of -2.1% and -4.5%, respectively. In December, CCCs were down -0.81%, single Bs up +0.38% and BBs +0.56%. On a full year ("FY") basis, BBs returned +0.4%, single Bs -3.2% and CCCs -20.9%. As at the end of December, the 3-year discount margin on the index was 661bps (vs. 413bps in 2021). The Credit Suisse Western European High Yield Index, hedged to Euro, was down -0.33%, translating into FY performance of -11.64%.b

Primary issuance remains at very low levels with €1bn loan and €1.6bn High Yield issuance. On the loan side, we saw Safic Alcan placing a €470m term loan and Parques Reunidos with a €250m non-fungible loan on top of some smaller add-on transactions. On the high yield side Iliad completed the issuance of a €750m 4.5yr unsecured bond (upsized from €500m initially targeted). We have also seen a few successful Amend & Extend transactions in December such as Sebia and Altice International as issuers are increasingly focusing on liability management. Demand was generally strong across the board with most issuers upsizing deals. Overall 2022 loan and HY issuance was considerably below prior year at €55bn and €22bn (vs. €130bn and €124bn in 2021, respectively).c

Portfolio Commentary

December is seasonally a slow month in terms of portfolio activity as secondary liquidity in the market is usually low with wider bid/offer spreads. We were mainly active on the performing credit side. As mentioned above, there were some liability management exercises that management teams undertook during the month. We had a position in a European healthcare name which wanted to extend its maturities from Dec. 2024 to Dec. 2027. They paid existing lenders a 2% one-off fee and increased the coupon from E+275 to E+475 to achieve this. We would anticipate more of these transactions in 2023 and initiated a position in short dated loan for a global education business, with a view of increased economics once the company approaches lenders to extend debt maturities. Within the credit opportunities sleeve, we exited two small positions where we had lost conviction and where there could be more downside in the near term.

Across the entire portfolio, as of December month end, the weighted average market price was 83.6, trading at a yield of 18.5% (€ hedged) / 20.2% (GBP hedged), and delivering a 11.5% (€ hedged) / 13.2% (GBP hedged) running cash yield. This compares to a weighted average price of 96.5 and yield to maturity of 8.3% and 7.9% as of December 2021. The increase in yield is due to a) increase in base rates both in EUR and GBP, b) the lower weighted average cash price on the portfolio due to market weakness and c) the attractive new issue spreads we see both in the primary loan and CLO markets. Floating rate instruments comprised 85.5% of the portfolio while 73.7% was invested in senior secured assets. The portfolio had a cash position of -0.3% (including leverage) at the end of the month. Base rates continue to move up with 3M Euribor ending the year at c.2.1% and SONIA O/N at c.3.4%.

Commentary Sources:
a Bloomberg
b Credit Suisse
c LCD – January 2023

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