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Market & Portfolio Commentary - October 2021

26.11.2021

October 2021 was another volatile month for financial markets. One of the top performing asset classes during the month was WTI which was +11.4% for the month, thereby extending year-to-date gains to 72.2%.a Other commodities, including key industrial bellwether copper and agricultural prices such as wheat futures were also up considerably for the month.a These moves of course put into question the transitory nature of the inflation we're seeing, and as a result, rates markets were volatile again this month. Equities markets rebounded strongly though from the September losses and the S&P 500 closed the month at a new all-time high.b

European Sub Investment Grade Highlights

Total loan issuance during the month of October was €10.75bn, compared to €5.0bn same month last year and €7.4bn average monthly issuances in October since 2010. The average new issue spread has been widening gradually in recent months now reaching E+408.68 with 4.41% yield to maturity after compressing to +376bps and 3.92% in February 2021, respectively. The YTD loan issuance now stands at a record €117.7bn, considerably more than the €59.6bn issuance we saw in the first ten months of 2020. On the HY side, we saw €11.2bn of bond issuance during the month, bringing YTD issuance to €108bn.c

The Credit Suisse Western European Leveraged Loan Index return, hedged to Euro, returned +0.14% for the month, which brings YTD returns to +4.04%. Defensives (+0.12%) marginally underperformed cyclicals (+0.16%). CCCs outperformed all other rating categories at +0.51% while BBs returned +0.02% and single Bs +0.13%.

The Credit Suisse Western European High Yield Index, hedged to Euro, was down -0.67% for the month bringing YTD returns to +3.39%. The Yield to Worst on this index is now 3.47% with a spread to worst of 367bps.d

Portfolio Commentary

The performing book saw increased turnover and further optimization during the month of October. Primary market activity remains robust, and we participated in a number of deals offering attractive current income relative to issuer risk profiles. Through the primary market, we added three new names to the portfolio during the month, while also participating in one refinancing and one add-on of an existing name. We also participated in the buyout financing of an existing issuer that was acquired by a large global asset manager. Credit markets saw notable intra-month volatility in spite of the consistent rally across equities during the month, and we used the opportunity to reduce certain names trading at or above our view of fair value. We also initiated various switches, including a rotation out of loans into bonds of the same issuer capturing attractive spread differential, as well as a switch out of an issuer’s USD-denominated loan into its pari-passu EUR loan. This trading activity served to optimize the performing book for attractive current income while maintaining a similar level of risk. As of October close, performing credit (including cash) was 47.7% of the portfolio, trading at a weighted average price of 99.6 and a YTM of 4.6%, whilst delivering a 4.5% cash yield to the portfolio.

The credit opportunities book continues to be a focus of the global team as the softening macroeconomic outlook presents pockets of volatility. With this backdrop in mind, we reduced some higher-beta exposure at attractive levels, crystalizing gains in certain names that were sourced at lower levels. We exited one credit opportunities position during the month, as market conditions may prove to make a refinancing difficult for the issuer over the next 12 months. With elevated volatility across the market, we remain focused on identifying attractive opportunities and continue to screen new names diligently. The structured products book saw an uptick in activity during the month of October. We held a successful auction, through which we monetized two CLO equity positions and two CLO BB positions at attractive levels. We re-deployed a portion of the proceeds into new issue BB’s offering attractive spread and discount, and expect to re-deploy into additional attractive CLO equity and mezzanine opportunities in the near term. As of October close, credit opportunities was 52.3% of the portfolio, trading at a weighted average price of 94.3 and a YTM of 8.6%, whilst delivering a 7.5% cash yield to the portfolio.

Across the entire portfolio, as of October month end, the weighted average market price was 96.9, trading at a YTM of 8.0%, and delivering 7.7% 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 77.8% of the portfolio. Senior Secured 80.7%. The portfolio had a cash position of -2.2% (including leverage) with leverage at 1.3x assets.

The fund continues to outperform relevant benchmarks as the penultimate month of 2021 begins. With an uptick in macroeconomic volatility, we believe the performing book remains well-positioned from a risk perspective while providing attractive current income. The credit opportunities book continues to offer convexity, and we will maintain our diligent investment approach while managing existing risk and screening new names. Overall, we believe the reduced risk in the credit opportunities sleeve given some of the increased volatility, which gives us some dry powder to redeploy in new opportunities in the near to medium term.

Commentary Sources:
a Deutsche Bank
b Bloomberg
c LCD, an offering of S&P Global Market Intelligence – November 2021
d Credit Suisse

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