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Market & Portfolio Commentary - November 2022

03.01.2023

November was overall a strong month for financial markets with broad based gains across equities, credit, sovereign bonds and commodities. There were a number of drivers behind this positive momentum. In particular the downside surprises to inflation data in Europe and the US were well received by the market. There are also signs that China is starting to move away from its zero Covid-policy, which is anticipated to boost global growth and ease some of the pressure on supply chains.

European Sub Investment Grade Highlights

The Credit Suisse Western European Leveraged Loan Index return, hedged to Euro, was at +1.92% for the month (-3.61% year to date ("YTD")). Defensives were +1.80% and cyclicals +2.05% in November. CCCs were up +1.45%, single Bs +2.33% and BBs +1.64%. As at the end of November, the 3-year discount margin on the index was 643bps. The Credit Suisse Western European High Yield Index, hedged to Euro, was up +3.33% (YTD -11.35%).a

Primary issuance continues to be slow with €3.0bn term loan ("TL") and €0.7Bn HY Issuance. This includes Nuuday which placed a €500m TL after private syndication, Emeria which priced and upsized a €550m non-fungible loan to fund FirstPort acquisition and Faurecia which completed the issuance of €700m sustainability-linked bonds. Demand was generally strong with both Emeria and Faurecia upsizing deals.b

Portfolio Commentary

November was a very active month on the portfolio management side. We exited/reduced a number of positions, while we added a number of new positions across the performing credit, credit opportunities and CLO books. In the performing credit book, we took profit on a healthcare issuer we had bought only a few months ago. The company paid investors 8 points fee and increased its coupon from 3.5% to 7.5%, and bonds traded up on the back of this. Further in the performing credit book, we added a position in a holiday operator at 96.5, where we anticipate a significant repayment in the next few months on the back of an asset sale.

Within the credit opportunities sleeve, we added to a position in the mid-50s as there was a forced bank seller who wanted to exit its position before year end. The company also reported during the month with strong growth at the top line and EBITDA level, and more importantly very strong order intake. We also added to another position in a UK holiday operator. The company has a March 2024 maturity and is in very advanced negotiations with its revolving credit facility ("RCF") providers to extend the RCF maturity which would be a first step to achieve an all-in refinancing of the remainder of the capital structure. At the purchase price of 88, this results in a c. 20% yield to maturity ("YTM") or an even higher internal rate of return ("IRR") if the outstanding loans get refinanced ahead of maturity. We also initiated a position in a chemicals company with a short dated maturity in the low 90s. Finally, we continue to scale into a building material company whose loans look attractively priced in the low 80s. Even though the near term outlook for the business remains challenging, the pricing already reflects this difficult outlook. This remains an underweight position and we have the ability to increase over time if the price of the loans were to drop further. We financed these positions by reducing some other credit opportunities where earnings have disappointed and the upside is probably longer out than we initially anticipated. Specifically highlighting a provider of medical transportation, where underperformance and weakening liquidity is coinciding with a maturity wall in 2024 causing us to take the decision to exit the name over the short term as we manage risk. Furthermore, we continued to add CLO mezzanine paper, with a focus on BB rated tranches, as this market still hasn't fully recovered from the sell-off we saw in late September/early October on the back of the UK's mini-budget. We added around €9m during the month with discount margins around E+10%.

Across the entire portfolio, as of November month end, the weighted average market price was 83.9, trading at a YTM of 17.2% (€ hedged) / 19.7% (GBP hedged), and delivering a 10.9% (€ hedged) / 13.4% (GBP hedged) running cash yield. This compares to a weighted average price of 96.5 and YTM 8.3% and 7.9% as of December 2021. The increase in yield is due to a) increase in base rates both in EUR and GBP, b) the lower weighted average cash price on the portfolio due to market weakness and c) the attractive new issue spreads we see both in the primary loan and CLO markets. Floating rate instruments comprised 85.0% of the portfolio while 72.6% was invested in senior secured assets. With further rate hikes widely anticipated by the market, there is potential for further upside to these yield numbers. The portfolio had a cash position of 0.8% (including leverage) at the end of the month.

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