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Market & Portfolio Commentary - March 2022

22.04.2022

Financial markets were volatile again in March 2022 as the war between Ukraine and Russia continued, putting further pressure on already fragile supply chains and accelerating inflation. This has led central banks across the globe to tighten monetary policy despite the risk of a slowdown in the global economy, raising the fears of stagflation. The Fed hiked base rates by 25 bps in March with further rate hikes likely to come over the next few monthsa, while the ECB ended their Pandemic Emergency Purchase Program at the end of March.

European Sub Investment Grade Highlights

New loan issuance came close to a full stop whilst the market analysed the medium- to long-term repercussions of the war in the Ukraine. During March we saw €0.39 billion in total loan new issuances in Europe which compares with €21 billion last year. Year-to-date ("YTD") issuance stood at €18.8 billion or 54% below last year. We expect a gradual increase in new issuance post Easter which is likely to be at a wider yield in comparison with January and early February issuances. The HY market was closed during March in Europe with no bond issued in March and €10.8 billion YTD (-72% vs. last year)b

The Credit Suisse Western European Leveraged Loan Index return, hedged to Euro, was at +0.09% for the month. Defensives +0.38% and cyclicals +0.20% in March. CCCs in March were down -2.33% while BBs returned +0.25% and Bs returned +0.16%. As at the end of March, the three-year discount margin on the index was 463 bps.

The Credit Suisse Western European High Yield Index, hedged to Euro, was down -0.97% marking the third consecutive negative return month (YTD -5.45%) on the back of investors' concerns around inflation and central bank policy compounded by the market volatility resulting from the Russian-Ukrainian conflict.c

Portfolio Commentary

As volatility in global risk markets remains elevated, sentiment in leveraged credit markets remains similarly volatile, and as such, activity within the performing book remained elevated in March. Our trading activity sought to again capitalise on the volatility and further optimise positioning. Throughout the month, we reduced exposure to names trading at tight prices, offering limited discount or unattractive income at current levels. We also exited three names in the USD performing sleeve as hedging costs have risen, and will look to redeploy that capital into EUR-denominated opportunities in the coming weeks. We completed a switch out of a USD-denominated position into the pari passu EUR-denominated debt of the same issuer in an effort to optimise current income. As of March close, performing credit (including cash) was 50.0% of the portfolio, trading at a weighted average price of 98.0 and a YTM of 5.0% whilst delivering a 4.6% cash yield to the portfolio.

We remain diligent in our investment approach to the credit opportunities market, and our activity within the credit opportunities book during the month of March reflects this diligence. The team continues to work through new ideas, and with the macroeconomic and geopolitical uncertainty facing markets globally, we will maintain our diligent investment approach. During the month of March, we received a partial repayment of a position that we have held across the CVC Credit platform for many years. Previous challenges that the issuer faced resulted in depressed trading levels in recent years, and we maintained conviction in our thesis which enabled us to add risk at a significant discount over time. The partial paydown - following a successful asset sale - serves as a testament to our proven investment approach. Additionally, we built a position in a new name in the low 90s during the month of March, further enhancing the convexity of the fund. We also added a new position during the month in the unsecured notes of an issuer that we have secured exposure to at a significant discount. Activity within the structured products sleeve remained elevated throughout the month. We participated in two primary issuances, acquiring new positions in the BB and B-rated paper of a primary CLO deal. We also added a new name to the structured products sleeve at an attractive discount through successful participation in an auction. This brings our structured finance exposure to ~6% of the overall fund. As of March close, credit opportunities was 50.0% of the portfolio, trading at a weighted average price of 90.3 and a YTM of 9.6%, whilst delivering an 8.1% cash yield to the portfolio.

Across the entire portfolio, as of March month end, the weighted average market price was 93.9, trading at a YTM of 8.4% (€ hedged) / 9.8% (£ hedged), and delivering 7.7 (€ hedged) / 9.1% (£ hedged) 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 82.0% of the portfolio. Senior Secured 72.8%. The portfolio had a cash position of 3.6% (including leverage) with leverage at 1.3x assets.

As geopolitical and macroeconomic uncertainty remain significant risks to global markets, we will remain diligent in our investment approach across both performing and credit opportunities books. The fund is performing well against relevant benchmarks, and we will continue to work as a global team in managing the fund.

Commentary Sources:

a Bloomberg
b LCD, an offering of S&P Global Market Intelligence April 2022
c Credit Suisse

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