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Market & Portfolio Commentary - January 2023

20.02.2023

Financial markets got off to a very strong start in 2023 with positive returns across equities, sovereign bonds and credit.⬞ The positive sentiment was driven by declining natural gas and oil prices, a re opening of the Chinese economy and lower inflation in most developed ma rkets. Given these developments, the macro outlook has improved, in particular for the Asian and European economies. For example, consumer co nfidence in the Euro Area rose to an 11 month high in January. a The only negative for the month was that some macro data are pointing to a faster than expected slowdown in the US economy, as ISM readings showed that December was the first month since May 2020 that both the services and manufacturing components were in contractionary territory.ᵇ


European Sub Investment Grade Highlights
The Credit Suisse Western European Leveraged Loan Index return, hedged to Euro, was at 2 73 Defensives were 2 55 and cyclicals 2 91 in January CCCs returned 4 21 single Bs 3 01 and BBs 1 93 As at the end of January, the 3 year discount margin on the index was 581 bps The Credit Suisse Western European High Yield Index, hedged to Euro, returned 3 14 in January 2023.ᶜ Primary levels started the year below 2022 average with 2 7 Bn loan and 1 Bn HY issuance The average Term Loan (“ B spread was 455 bps with a yield to maturity of 8 These included Restaurant Brands Iberia which priced and upsized a 310 m non fungible TL add on to fund M&A, Inetum which placed a 344 m fungible loan (upsized from 100 150 m) to refinance TLA held by banks and Verisure which completed the issuance of 450 m 5 yr SSN (upsized from 350 m initially targeted) We have also seen a handful of successful amend extend in January e g Altice France, Nord Anglia Education, SafetyKleen and PortAventura as issuers continue focusing on liability management Demand was generally strong across the board with most issuers upsizing deals.ᵈ


Portfolio Commentary
January was a fairly active month on the trading side, both across the performing credit sleeve and the credit opportunities sleeve On the performing credit side, we added to a position in a pharmaceutical company at 97 25 and a spread of E+ 525 We also initiated a position in a French care home operator, and we swapped out of the loans of a telecom company and into the short dated fixed rate bonds that were trading c 2 5 points lower With the High Yield market reopening, we believe these bonds could be targeted for a refinancing by the company. In the credit opportunities sleeve, we added to a position in a UK holiday operator in the low 90 s as news came out that banks were willing to extend their Revolving Credit Facility, which is a first step of a larger refinancing exercise We exited a position in a US medical transport company as the combination of wage inflation and top line pressure from new regulations means a recovery will take a lot longer than originally expected We also added a few more positions to our CLO BB positions in the mid 80 s and we initiated a position in a gym operator. Across the entire portfolio, as of January month end, the weighted average market price was 86 4 trading at a yield of 18 1 hedged) 19 8 %%(GBP hedged), and delivering a 11 7 hedged) 13 4 %%(GBP hedged) running cash yield With the market rally we saw in January, the weighted average market price was up from 83 6 at the beginning of January However, this is still well below the average price of 96 5 on 1 January 2022 on the portfolio Floating rate instruments comprised 84 4 of the portfolio while 73 3 was invested in senior secured assets The portfolio had a cash position of 0 2 %%(including leverage) at the end of the month Base rates continue to move up with 3 M Euribor ending January at c 2 5 %%(vs 0 5 a year earlier) and O/N SONIA at 3 4 %%(vs 0 4 a year earlier) Both the ECB and the Bank of England hiked base rates by a further 0 5 in the first days of February.


Commentary Sources:
a. Bloomberg
b. Deutsche Bank
c. Credit Suisse
d. LCD February 2023

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