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Market & Portfolio Commentary - February 2022

17.03.2022

February was another volatile month for financial markets. The first half of the month was dominated by concerns around inflation and central banks reaction function. The Fed, BoE and even ECB guided towards a tightening monetary policy as inflation was higher and more persistent than initially expected. The second half of the month was dominated by the humanitarian tragedy in the Ukraine. This triggered severe sanctions against Russia which has an impact across multiple asset classes, with commodity markets in particular impacted. Brent Crude moved to above $100/bbl for the first time since 2014,a but we also saw large increases in gas prices, wheat, corn and aluminium as supply of these will be impacted by Russian sanctions. This is anticipated to lead to higher inflation and lower growth.

European Sub Investment Grade Highlights

February saw €4.52bn total loan new issuances in Europe, 47% below last year on the back of high market volatility induced by central banks policy as well as the Russia- Ukraine conflict. Year-to-date (“YTD”) issuance stood at €17.3bn or 14% below last year. The average new issue spread in February has widened to E+426bps with 4.61% yield to maturity which compares with E+376bps and 3.92% same time last year, mainly as a result of the overall market volatility. HY issuance also slowed down to €10.8bn YTD a reduction of 59% vs. last year as the rates volatility is added to the geopolitical situation in Europe.b

The Credit Suisse Western European Leveraged Loan Index return, hedged to Euro, was at -0.9% for the month. Defensives -0.99% and cyclicals -0.84% in February. Interestingly, CCCs still outperformed in February with a return of +0.10% while BBs returned -0.80% and single Bs -1.04%. As at the end of February, the 3-year discount margin on the index was 459bps.

The Credit Suisse Western European High Yield Index, hedged to Euro, was down -2.92% on the back of investors’ concerns around inflation and central bank policy compounded by the market volatility on the back of the Russian-Ukrainian conflict.c

Portfolio Commentary

Activity within the performing book remained elevated in February as we managed volatility in credit markets. Throughout the month, we managed risk by both adding and reducing exposure in an effort to optimize the book while capitalizing on the volatility. We added seven new names to the performing book, including a handful of names that we had previously been invested in. Our primary market participation was selective, deploying into four new names that offered attractive income relative to individual risk profiles. Within the secondary market, we added three new names to the book at attractive levels, while topping up on two existing positions on weaker days. In order to fund this deployment, we reduced risk across five positions while exiting four others, all trading at tight levels. This active trading allowed us to optimize the fund for current income and further expand our floating rate exposure, all while building discount. As of February close, performing credit (including cash) was 50.0% of the portfolio, trading at a weighted average price of 98.1 and a YTM of 4.9%, whilst delivering a 4.6% cash yield to the portfolio.

The credit opportunities book was similarly active throughout the month of February. Volatile markets have driven outsized risk movements, and as such, we continue to monitor the opportunity set for potential investments within the credit opportunities book. Throughout the month, we added to two existing positions at opportunistic levels, enhancing the convexity profile of each investment and the broader book. To fund those purchases, we exited one position at a premium to par, while the name had held in despite broader sector pressure. Additionally, we added one new name to the book during the month with an attractive, shorter-dated return profile. The structured products sleeve had one of its most active months in recent memory, both in terms of deal review and ultimate deployment. During the month, we participated in four individual new issue deals, adding to our BB, B, and Equity sleeves within the structured products book. This deployment followed extensive diligence around each deal, several conversations with respective managers, and gaining comfort around each individual risk profile. Additionally, we added to an existing CLO Equity position at a significant discount through successful participation in an auction. As of February close, credit opportunities was 50.0% of the portfolio, trading at a weighted average price of 90.8 and a YTM of 9.4%, whilst delivering a 7.9% cash yield to the portfolio.

Across the entire portfolio, as of February month end, the weighted average market price was 94.5, trading at a YTM of 9.1%, and delivering 8.3% 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 83.3% of the portfolio. Senior Secured 78.4%. The portfolio had a cash position of -1.3% (including leverage) with leverage at 1.3x assets.

With the conflict in the Ukraine becoming more dire by the day, we remain vigilant in our risk management as volatility continues. The team has been focused on identifying investment-level exposure to Russia and the Ukraine, and we continue to work as a team in managing risk. Similar to January, we continue to have a preference for floating rate instruments given the current interest rate environment globally, and this preference has aided in our YTD outperformance. We will maintain our proven investment approach with the dire geopolitical backdrop and imminent central bank policy tightening

Commentary Sources:
a Bloomberg
b LCD, an offering of S&P Global Market Intelligence – March 2022
c Credit Suisse

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