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Market & Portfolio Commentary - May 2022

22.06.2022

The combination of high inflation and slowing growth continues to impact financial markets. The flash May CPI for the Euro Area came out at 8.1%, which was the highest reading since the formation of the single currency.a In the US, CPI came out at 8.3%, slightly below the 8.5% recorded in the previous month, as investors start to speculate that the US could be past peak inflation. Moreover, various Fed officials hinted towards a 50bps hike at the next meeting, effectively taking a 75bps hike off the table. This provided some relief to financial markets and 10yr treasuries recorded the first month of positive returns this year at +0.03%.b After an initial sell off, most large equity indices also managed to grind out a positive return for the month as sentiment turned more positive in the second half of the month. Retail in particular was weak during the month as a number of US retailers came out with meaningful profit warnings.

European Sub Investment Grade Highlights

May was another quiet month with only €0.4bn total loan issuance in Europe down from almost €10bn issuance in May 2021. Year to Date ("YTD") issuance stands at €25.4bn, down materially from the record year 2021 when we had €64bn at the end of May or the historical 10-year average of €37.1bn for the first five months of the year. The difficult macro environment, and the overhang of a few large hung bridge loans, is keeping activity low in the European loan market.

The HY market was virtually closed during March and April this year and showed a slight improvement during May reaching €2bn in new issuances (vs. €10bn May 2021) in Europe. The issuance was mainly in the BB ratings bracket as investors are focusing on higher quality.c

The Credit Suisse Western European Leveraged Loan Index return, hedged to Euro, was at -2.9% for the month. Defensives were -2.8% and cyclicals -3.0% in May. CCCs in May were down -6.2%, single Bs -2.94% and BBs -2.54%. As at the end of May, the three-year discount margin on the index was 574bps.

The Credit Suisse Western European High Yield Index, hedged to Euro, was down -1.08%, the fifth consecutive negative return month (YTD -9.11%) on the back of investors' concerns around recession, inflation and central bank policy.d

Portfolio Commentary

As volatility in global risk markets remained elevated during the month of May, activity within the performing book was characterised by prudent risk management. We were extremely active on the trading front as secondary market volatility remained robust. Capital markets activity remains thin, and the slowdown in primary new issuance seen globally persisted during the month. In May, we participated in one new primary transaction backing an investment in the Spanish football ecosystem. Additionally, we added two new names to the book in the secondary market, both offering compelling return profiles with attractive current income at discounted prices. To fund this deployment, we reduced several larger positions while exiting six smaller positions. Four of these sales were in fixed rate high yield bonds, which have drastically underperformed floating rate loans year to date. As of May close, performing credit (including cash) was 49.2% of the portfolio, trading at a weighted average price of 93.9 and a YTM of 6.4%, whilst delivering a 5.0% cash yield to the portfolio.

The credit opportunities book remains a diligent focus of the team as we constantly monitor the opportunity set while managing existing risk. Despite secondary market volatility, the opportunity set within stressed credit remains challenged, and as such, we did not add any new names to the book during the month of May. However, we remain focused on screening new opportunities in an effort to move quickly when attractive prospects arise. During the month, we exited one position, taking profit and capitalising on liquidity in a name that trades sporadically. Within the structured products sleeve, we added one new name to the book during the month. Primary CLO activity remains slow, and challenging market dynamics have led to a widening of liability spreads. We participated in the new issuance of BB-rated CLO paper offering attractive spread and discount following extensive internal diligence. As of May close, credit opportunities was 50.8% of the portfolio, trading at a weighted average price of 85.3 and a YTM of 12.0% whilst delivering an 8.6% cash yield to the portfolio.

Across the entire portfolio, as of May month end, the weighted average market price was 89.3, trading at a YTM of 10.9% (€ hedged) 12.2% (£ hedged), and delivering 8.3% (€ hedged)/ 9.5% (£ 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 81.2% of the portfolio. Senior Secured 71.4%. The portfolio had a cash position of 4.2% (including leverage) with leverage at 1.4x assets.

As we approach the summer months, geopolitical and macroeconomic uncertainty remain significant risks to global markets. The performing book remains well positioned for current income, and the credit opportunities book continues to offer attractive convexity. We will maintain strict diligence in our analysis of new investment opportunities, while managing existing risk with great focus.

Commentary Sources

a Bloomberg
b Deutsche Bank
c LCD, an offering of Morningstar Inc. - June 2022
d Credit Suisse

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