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Market & Portfolio Commentary - September 2021

22.10.2021

September was a softer month for financial markets. There were a number of things that kept investors awake. On top of Covid infections and the debate about the direction of travel for inflation, a couple of newer concerns were thrown into the mix. The Evergrande default led to questions about downside risks to the Chinese economy and potential contagion to other parts of the world. We also saw a big spike in European natural gas prices which nearly doubled in the month and fuel shortages in the UK. Global food prices climbed back to near the highest in a decade as a result of changing weather patterns, shortage of workers and higher shipping costs.a Furthermore, an increasing number of Central Banks are turning hawkish with US treasuries experiencing the worst monthly performance since February.b Finally, discussions about the US debt ceiling didn’t really make much progress. As a result, most major equity indices were down for the month, ending a run of seven consecutive months of positive performance.b

European Sub Investment Grade Highlights

Total loan issuance during the month of September was €9.0bn, compared to €7.0bn in the same month last year. This represents a slightly slower restart post summer - for instance, September 2019 saw €9.7bn in new loan issuance. The average new issue spread was E+402.44 with 4.23% yield to maturity, which compares with E+428.75 and 4.78% in September last year. The year to date ("YTD") loan issuance now stands at a record €104.6bn, considerably more than the €54.6bn issuance we saw in the first nine months of 2020. On the high yield side, we saw €6.8bn of bond issuance during the month, bringing YTD issuance to €93.6bn. We are well on track to have a record year of issuance in each of the European leveraged loan and high yield markets.c

The Credit Suisse Western European Leveraged Loan Index return, hedged to Euro, was at +0.44% for the month, which brings YTD returns to +3.90%. Defensives (+0.36%) underperformed cyclicals (+0.52%). CCCs outperformed all other rating categories at +1.56% while BBs returned +0.32%, single Bs +0.35% and unrated companies +0.63%. As at the end of September, the 3-year discount margin on the index was 403bps. The Credit Suisse Western European High Yield Index, hedged to Euro, was up 0.11% for the month bringing YTD returns to +4.09%.d

During the month of September, activity across the performing book was again driven by a healthy primary market. With elevated sponsor activity, we have seen a significant uptick in acquisition, recapitalization, and dividend-related issuance. We participated in four new deals during the month that we felt offered attractive current income relative to issuer risk profiles; two of these issuers are new to the portfolio. In order to fund these opportunities, we exited three positions at levels we believed were at or above fair value. Additionally, optimization remains a focus of the performing book on the trading side, both in the form of outright purchases and sales, as well as capital structure switches. The book remains well-positioned for current income as the final quarter of 2021 begins. As of September close, performing credit (including cash) was 47.6% of the portfolio, trading at a weighted average price of 100.0 and a YTM of 4.3%, whilst delivering a 4.3% cash yield to the portfolio.

The credit opportunities book also saw elevated deployment and trading activity during the month. We added two new names to the credit opportunities book while also adding risk across four existing positions throughout the month, across both primary and secondary markets. To fund this deployment, we de-risked a position following a partial par repayment after a successful maturity extension. We also exited two positions during the month, one of which was sold into the respective company’s tender offer. With elevated activity across both new issue and secondary markets, the team remains focused on identifying attractive ideas and optimizing the credit opportunities book for capital appreciation. Within the structured products book, we exited a BB position near par after rolling into the paper at a discount as part of a reset in June. We will look to re-deploy this capital into new issue BB's offering greater discount and spread in the near term. As of September close, credit opportunities was 52.4% of the portfolio, trading at a weighted average price of 94.8 and a YTM of 8.6%, whilst delivering a 7.7% cash yield to the portfolio.

Across the entire portfolio, as of September month end, the weighted average market price was 97.2, trading at a YTM of 8.0%, and delivering 7.8% 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 78.5% of the portfolio. Senior Secured 76.0%. The portfolio had a cash position of 2.2% (including leverage) with leverage at 1.3x assets.

The fund continues to outperform relevant benchmarks heading into the final quarter of 2021. The performing book is well-positioned for current income, and the credit opportunities book maintains convexity and capital appreciation potential. With recent macroeconomic uncertainty driving a pickup in volatility across global risk markets, and concurrent heavy levels of new issuance, we will remain diligent in our investment approach.

Commentary Sources:

a Bloomberg
b Deutsche Bank Research, September and Q3 2021 Performance Review – 1 October 2021
c LCD, an offering of S&P Global Market Intelligence – October 2021
d Credit Suisse

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