AEFS.L Regulatory News (AEFS)

Alcentra European Floating Rate Income Fund Limited

Market Commentary

The Fund was down +0.00% (gross) in October, ahead of both the Credit Suisse Western European Leveraged Loan Index ("CS WELLI") (hedged to GBP) which returned -0.23%[1], and the Credit Suisse Western European Leveraged Loan Index excluding USD which returned -0.21%[2] for the month.

The European Loan market saw some softness in October, despite continued strong demand from CLO formation. As with other weaker months, there was less volatility within the European Loan market compared to that seen in the US Loan market, which returned -0.49%[3] in the period. The negative return for the month was driven by some weakness in USD assets in the index as well as from issuers that have both USD and EUR debt, driven by a softer USD loan market technical. In addition there was a trend of certain lower rated assets as well as names that have reported weaker results underperforming. That being said, demand generally remains solid, with higher rated higher quality credits remaining well supported.

October saw a strong month of new issuance with €15.9bn of new deals pricing in the month, +178% on the prior year[4]. Issuance was driven by a number of larger transactions (Merlin, Kantar) as well as from an increase in refinancing and recap activity. For the month M&A activity was +86% up on the prior year and accounted for 40% of activity, while refinancings/recaps accounted for 54%[5]. This leaves year to date new issuance volume at €75bn, -15% on the same period last year[6]. For the month, average new issue spreads stood at 382bps at a price of 99.42[7], however there is a bifurcation in pricing levels between solid credits which received strong support (e.g. Merlin), and weaker credits that struggled in the market (e.g. Kantar). We now expect the market to start to slow into year-end due to a thinner pipeline of buyout driven issuance for the rest of the year. The S&P forward pipeline currently stands at €5.8bn[8].

The CLO new issue market saw a strong month with €4.0bn of new deals pricing, +65% year on year[9]. This leaves year to date CLO formation at €26.2bn, +12.5% on the prior year and almost matching 2018's full year record of €27.3bn[10]. While the CLO market has benefitted from a tightening in the higher rated liabilities in recent months, recently there has been some widening in the lower rated part of CLO structures, leading to some pressure on the arbitrage overall. That being said, the market for CLO issuance remains open and the large pipeline of new deals should continue to support demand for European Leveraged Loans.

The S&P default rate for the 12 months ending October again remained at the record low level of 0.00% seen since January[11]. We continue to expect a return to a more normalised 1.5% - 2.0% rate in the medium term. This is backed up by the S&P distress ratio (share of performing issuers trading below 80) which rose marginally to 4.26%[12].

Despite some increase in volatility in the month due to a weaker USD market technical and some underperformance in weaker credits, the market should remain solid overall. Loan issuance is expected to slow down, while CLO demand should remain. We will continue to focus on strong credit selection in order avoid weaker loans and look to outperform the market through avoiding riskier holdings.

Portfolio Manager's Commentary

The top performing credit for the Fund in October was an Agricultural Products Company that was up 6.57% on the back of improved outlook and results, and better buying sentiment. The second best performing credit was a Specialist Financial Services Business that was up 5.88% on the back of positive news around the renewal of its large SAREB contract.

The worst performing credit was a European dentist business that was down -9.94% after reporting weaker results. The second weakest credit was a European Retailer that was -5.78% lower on the back of continued selling pressure after the lenders agreed to take control of the business.

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.

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