AEFS.L Regulatory News (AEFS)

Alcentra European Floating Rate Income Fund Limited

Market Commentary

The Fund was up +0.38% (gross, estimated) in May, ahead of Credit Suisse Western European Leveraged Loan Index ("CS WELLI") (hedged to GBP) at +0.06%[1] for the same period. The Credit Suisse Western European Leveraged Loan Index excluding USD returned +0.27%[2] for the month.

The marginally negative return for the European Loan market in May was a function of two different trends; weakness in the USD loan market and a larger primary pipeline in Europe. USD loans within the index were 0.8%[3] lower on the back a more risk-off sentiment in the USD market generally (impacted US loans and HY). This is illustrated by the more positive performance for the CS WELLI excluding USD for the month which saw a positive return, as it excludes these USD loans. The other main driver was the pick in up European new loan issuance which meant investor focus was on new deals, leading to less demand in secondary to drive prices higher. Despite this, demand for European Loans overall continues to be healthy, supported by CLO issuance and supportive unleveraged fund flows. It is worth noting that the risk-off sentiment that impacted US Loans also impacted the High Yield market, with US High Yield returning -1.27%[4] and EU High Yield -1.38%[5] in the month, further illustrating the relative outperformance of European Loans in the period.

A steady stream of leveraged loan issuance in May meant that new issuance volumes of €9.0bn showed a strong recovery from the low level of €1.6bn seen in April[6]. This however remains 19% below last year's €11.2bn of issuance[7]. For the month, M&A and Recap volumes accounted for 81% of issuance while there was a marginal increase in refinancing activity, which accounted for 17% of volumes[8]. For now this refinancing/repricing activity remains centred on the strongest credits with robust market support. The average new issue spread in May was 402bps at a price of 99.61[9], showing continued attractive investment opportunities in the primary market. Year-to-date issuance now stands at €30.4bn, a 42% decline on the prior year, mainly driven by the quieter start to the year[10]. Looking forward the pipeline remains solid, with the S&P forward pipeline currently standing at €8.5bn[11].

CLO issuance continues to provide solid support for the loan market, with May issuance of €2.6bn. YTD issuance now stands at €12.0bn, +15% on last year's record levels[12]. While arbitrage conditions continue to be difficult, there have been signs of tightening overall liability costs in recent weeks which should help improve the conditions for new CLO issuance. While we do expect that new CLO issuance will slow down into H2 due to a thinner pipeline, issuance should still remain robust and, when coupled with supportive unleveraged fund flows, means demand for European Leverage Loans remains strong.

The S&P default rate for the 12 months ending May again remained at the record low level of 0.00% seen since January[13]. 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 stood at 1.71% for May[14].

In summary, we believe that the market remains balanced overall with the pick-up in leverage loan issuance being supported by continued strong CLO formation and unleveraged fund demand.

Portfolio Manager's Commentary

The top two performing credits in the Fund were both Technology Services businesses that were up +12.86% and +10.59% respectively. Both names saw selling pressure in prior months on the back of weaker results, but benefitted in May from a higher mark, albeit on the back of very limited trading activity.

The worst performing credit was an Agricultural Products business that was down -13.79% in May after it suffered from secondary selling pressure on the back of reporting weaker than expected results. The second weakest credit was a German Cable business that also reported weaker results and saw its debt trade -8.53% lower.

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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