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Market & Portfolio Commentary - January 2022
2022 started off with a volatile January. A number of the main Central Banks struck a hawkish tone during the month which put pressure on financial markets. However, we saw some recovery in the second half of the month. One of the main underperformers was the NASDAQ at -8.98% (-16.3% at the lows) as the pressure on rate-sensitive tech stocks mounted. The Euro Stoxx 600 was only down -3.81% (-6.82%) at the lows. One of the best performing asset classes in January was Brent Crude, up +17.3% for the month, and above $90/barrel for the first time since 2014.a
European Sub Investment Grade Highlights
January saw €13.28bn total loan new issuances in Europe, up 15% vs. the €11.57bn issued in the same month last year. Based on announced transactions and the strong M&A momentum, 2022 is anticipated to be another busy year in terms of issuance volumes. The average new issue spread in January was E+431bps with 4.29% yield to maturity which compares with E+386bps and 4.08% same time last year. The HY market was quieter due to investors' concerns around inflation and central bank policy across the globe, we saw €6.98bn of bond issuance during the month, which is 45% below the issuance levels January 2021.b
The Credit Suisse Western European Leveraged Loan Index return, hedged to Euro, was at +0.29% for the month. Defensives (+0.26%) just under cyclicals (+0.33%) in January. CCCs in January were up +0.28%, BBs +0.21%; Bs +0.31%. As at the end of January, the 3-year discount margin on the index was 412bps. The Credit Suisse Western European High Yield Index, hedged to Euro, was down -1.65% on the back of investors’ concerns around inflation and central bank policy.c
January marked an eventful start of the year within the performing book. Trading volumes remained elevated during a volatile month across risk markets globally driven by central bank posturing, and amplified by increasing geopolitical risk. During the month, we exited ten individual positions within the performing book across names trading at tight levels. Additionally, we reduced exposure in seven positions, also trading at tight levels. Many of the positions that we reduced or exited were in fixed-rate high yield bonds, a subset of credit markets that ultimately realized significant underperformance relative to floating-rate instruments during the month. On the deployment side, the primary market still offers attractive income relative to secondary, and as such, we continue to parse through new issue opportunities diligently. In January, we added three new names to the performing book. One new name was assessed in conjunction with the broader CVC Credit team, serving as a testament to the benefit of scale and the strength of our platform. As of January close, performing credit (including cash) was 51.0% of the portfolio, trading at a weighted average price of 99.3 and a YTM of 4.6%, whilst delivering a 4.5% cash yield to the portfolio.
The credit opportunities book continues to be a great focus of the team amidst volatile markets. As recent volatility has driven outsized movement in trading levels, we constantly monitor the opportunity set in an effort to identify attractive potential investments for the book. We will utilize our proven investment approach in making deployment decisions in light of this volatility. During the month, we added two new names to the credit opportunities book. We entered into one of these new names as part of the deal review completed across the CVC Credit platform, which resulted in deployment across both performing and credit opportunities sleeves. To fund this deployment, we exited three positions during the month, all of which were sourced at cheaper levels and offered constrained convexity at current prices. The structured products sleeve was also active during the month, with reviews of several investment opportunities resulting in the addition of one new name to the book. We acquired a portion of attractively-priced BB-rated CLO paper in the primary market backing a manager that we have a close relationship with. We continue to like this part of the market as risk/reward looks interesting while limiting the duration risk. As of January close, credit opportunities was 49.0% of the portfolio, trading at a weighted average price of 92.8 and a YTM of 8.9%, whilst delivering a 7.8% cash yield to the portfolio.
Across the entire portfolio, as of January month end, the weighted average market price was 96.1, trading at a YTM of 8.2%, and delivering 7.8% 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 81.3% of the portfolio. Senior Secured 76.2%. The portfolio had a cash position of -0.3% (including leverage) with leverage at 1.3x assets.
With the new year underway, we are comfortably positioned against an unstable macroeconomic and geopolitical backdrop. The performing book remains well-positioned for current income, and the credit opportunities book continues to offer convexity. In light of market volatility, we will maintain strict diligence in our analysis of new investment opportunities, while managing existing risk with great focus.
a Deutsche Bank
b LCD, an offering of S&P Global Market Intelligence – February 2022
c Credit Suisse