15 Apr 2020 13:53
Alcentra European Floating Rate Income Fund Limited
Market Commentary
The Fund was down -17.18% (gross) in March, behind both the Credit Suisse Western European Leveraged Loan Index ("CS WELLI") (hedged to GBP) which was down -13.86%1, and the Credit Suisse Western European Leveraged Loan Index excluding USD which was down -14.64%2 for the month.
During the month concerns around the impact of the Covid-19 virus outbreak evolved from an initial focus on the risk of a supply shock driven by Asian shutdowns, to concerns around the impact of the pandemic on businesses globally. This drove markets lower, with equity returns c.-15%-20% in the month. Given this background, European loan prices were down -14%, with US loans and high yield markets seeing similar price declines. While the sectors most exposed to the impact of the quarantine and closure measures (leisure, travel, retail, gaming) underperformed, other sectors were not exempt as dealers marked all positions lower and liquidity was thin in early March. Sentiment showed tentative signs of improvement towards the end of the month, as extraordinary fiscal stimulus and monetary support measures were unveiled. While equity markets benefited from this improved sentiment, recovering somewhat from -25%-30% at the trough, European loans did not fall as much so also did not benefit as much from the rebound.
Given conditions during the month, the market for new loan issuance was closed with scant new deals pricing. Similarly CLO formation was also muted, with three deals pricing early in the month, but afterwards the market was closed to issuance. While the prospect for material new CLO issuance is low, we do expect the market to explore pricing static or short maturity CLOs which would be a positive for loan demand.
While the S&P default rate for the 12 months ending March remained broadly stable at 0.43%3, the impact of the virus on certain corporates is likely to lead to an increase from this low level. Initially we believe this will be brought on by more directly impacted businesses, where travel and mobility restrictions, as well as working capital unwinds, mean they are at risk of seeing near term liquidity pressures. S&P are now forecasting an 8% default rate for the European market in 2020, with a low double digit forecast for the US market given higher exposure to the energy segment4. However, the final figure on defaults and indeed 2020 performance, will be directly correlated to the ongoing duration and severity of the outbreak.
Our focus remains on the impact of containment measures on the credits in our portfolio. We are working closely with management teams and financial sponsors to assess the impact of mobility restrictions on demand and cash flows. While government fiscal support appears to be helping, the more directly exposed sectors (travel, leisure, retail etc) are our focus. These sectors remain a relatively small part of the market and our Fund at c.10%, while the market's largest exposures remain more stable and defensive sectors including healthcare, telecoms and cable.
While the first half of the month saw the themes of dealer de-risking and weaker liquidity, more recently we have seen signs of stability and even inflows as some investors look to take advantage of the market's dislocation. So, while the prospect for continued volatility remains and default rates are likely to increase from current low levels, we do think current market conditions may provide an attractive entry point, particularly for assets in more defensive sectors.
1Credit Suisse Western European Leveraged Loan Index, All Denom, hedged to GBP, 31 March 2020
2Credit Suisse Western European Leveraged Loan Index, Non USD, hedged to GBP, 31 March 2020
3S&P Default Ratio, 31 March 2020
4S&P Global Market Intelligence, LCD Global Interactive Loan Volume Report, 3 April 2020
Portfolio Manager's Commentary
Generally, the best performing credits in the Fund were in more defensive sectors such as healthcare, telecoms and cable which traded off less than the broader market in the extreme volatile scenario. The weaker names in the Fund were those with more direct impact from the quarantine and movement restrictions, generally in the retail, leisure and travel sectors. The weakest credit was a French commercial services and equipment provider which traded down on the expectation of weaker results due to government mandated shut downs. The second weakest credit was a UK based childcare provider which also traded down on concerns around the impact of quarantine and shut down measures on demand.
ENDS
For further information please contact:
Alcentra Limited
Simon Perry +44 20 7367 5272
Factsheet
An accompanying factsheet which includes the information above as well as wider commentary on the investments made by the Fund can be found on the Fund's website www.aefrif.com.
Background Information
Alcentra European Floating Rate Income Fund Limited, a Guernsey Authorised Closed-Ended Collective Investment Scheme, regulated by the Guernsey Financial Services Commission and listed on the Main Market of the London Stock Exchange invests predominantly in senior secured loans and senior secured bonds issued by European corporates and targets returns (net of fees and expenses) of 7% to 10% per annum. The Fund targets a dividend yield of 5.5 pence per £1.00 issue price of the initial offering of shares in the Fund for the first full year of investment, paid quarterly.
Important Notices
Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.
This report is aimed at existing investors in the fund and has not been approved by any competent regulatory authority.
The information contained in this document is given as at the date of its publication (unless otherwise marked) and is based on past performance. Past performance is not a guide to future performance and the value of investments and investment value can go down as well as up. The future performance of the Fund will depend on numerous factors which are subject to uncertainty. Including changes in market conditions and interest rates and exchange rates and in response to other economic, political or financial developments, investment return and principal value of your investment will fluctuate, so that when your investment is sold, the amount you receive could be less than what you originally invested. Past or current yields are not indicative of future yields.
This document does not contain any representations, does not constitute or form part of any solicitation of any offer to sell or invitation to purchase any securities of the Fund, nor shall it or any part of it or the fact of its distribution form the basis of or be relied upon in connection with any contract therefor, and does not constitute a recommendation regarding the securities of the Fund. Nothing in this document should be construed as a profit or dividend forecast.
This document includes statements that are, or may be deemed to be, "forward-looking statements". These forward-looking statements include, without limitation, statements typically containing words such as "believes", "considers", "intends", "expects", "anticipates", "targets", "estimates", "will", "may", or "should" and words of similar import. The forward-looking statements are based on the beliefs, assumptions and expectations of future performance and market development of Alcentra Limited ("Alcentra"), taking into account information currently available and made as at the date of this document. These can change as a result of many possible events or factors, not all of which are known or within Alcentra's control. If a change occurs, the Fund's business, financial condition, liquidity and results of operations may vary materially from those expressed in the forward-looking statements. By their nature, forward-looking statements involve known and unknown risks and uncertainties. Forward-looking statements are not guarantees of future performance. Alcentra qualifies any and all of the forward-looking statements by these cautionary factors. Please keep this cautionary note in mind while reading this document.
An investment in the Fund is suitable only for investors who are capable of evaluating the merits and risks of such an investment and who have sufficient resources to be able to bear losses (which may equal the whole amount invested) that may result from such an investment. An investment in the Fund should constitute part of a diversified investment portfolio. Accordingly, typical investors in the Fund are expected to be sophisticated and/or professional investors who understand the risks involved in investing in the Fund.
Alcentra gives no undertaking to provide recipients of this document with access to any additional information, or to update this document or any additional information, or to correct any inaccuracies in it which may become apparent including in relation to any forward-looking statements. The distribution of this document shall not be deemed to be any form of commitment on the part of Alcentra to proceed with any transaction.
This document is issued by Alcentra Limited, which is authorised and regulated in the United Kingdom by the Financial Conduct Authority and whose registered address is at 160 Queen Victoria Street, London, United Kingdom, EC4V 4LA.
BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may also be used as a generic term to reference the Corporation as a whole or its various subsidiaries generally.
© 2019 The Bank of New York Mellon Corporation. All rights reserved. Trademarks and logos belong to their respective owners.