6 Mar 2020 10:32
Alcentra European Floating Rate Income Fund Limited
Market Commentary
The Fund was up +0.83% (gross) in January, ahead of both the Credit Suisse Western European Leveraged Loan Index ("CS WELLI") (hedged to GBP) which returned 0.61%2, and the Credit Suisse Western European Leveraged Loan Index excluding USD which returned 0.71%3 for the month.
The European Loan market saw a solid start to the year with prices moving +0.125-0.25pts higher on the back of strong investor demand. While this demand has resulted in a tightening in new issue loan spreads and some repricings, it has also meant that investor support for secondary assets has remained robust and driven prices higher4.
Issuance conditions remained strong in the month, with €17.2bn5 of European Loans pricing in January. While this is a large headline number, this figure does include refinancings, which saw an uptick in activity for the month. Adjusting for these refinancings results in net issuance of c.€4bn6, which while lower in absolute terms, remains robust overall and includes larger deals from Froneri and Cobham. For the month, average new issue spreads fell to 345bps at a price of 99.75 (c.354bps 3 year Discount Margin)7, on the back of strong demand. We expect the market to remain busy in the coming months, with the S&P forward pipeline remaining strong at €8bn8.
The CLO new issue market saw a solid start to the year with 3 deals pricing for €1.3bn9. While the tighter spreads on European Leveraged Loans means the arbitrage remains difficult, we have also seen CLO liabilities' costs coming down, particularly for mezzanine tranches. This should continue to support CLO issuance going forward, and, along with demand from unlevered funds, means we expect the strong market conditions to continue.
The S&P default rate for the 12 months ending January remained flat at 0.44%10. While this is up from the 0.00% recorded at the same time last year, it remains well below the long term average. The S&P distress ratio (share of performing issuers trading below 80) stood at 2.58%, tightening further from 2.93%10 seen at the end of last year as the strong market conditions in the month led to a rise in loan prices, including lower priced assets.
Global news headlines were dominated by the Coronavirus outbreak during the month. Equity markets were weaker with the news, whereas European Loans were relatively stable given less direct exposure to the Chinese economy. We have been active in looking beyond the simple Chinese economic risk to which borrowers have manufacturing and production footprints in China, as well the potential impact on travel and leisure demand if there are disruptions. For now we believe the impact on European Loan issuers remains manageable given limited direct exposure to Chinese demand or production, however we will continue to monitor the situation as it evolves.
In summary, we have had a decent start to the year with robust issuance along with strong investor demand. This has resulted in some spread tightening and has also helped drive the secondary market tighter. While the CLO arbitrage remains difficult, the tightening in liability spread should help support demand from CLOs as the year progresses, and unlevered fund demand remains strong.
1Portfolio information is based upon Alcentra's calculations, 31 January 2020. Portfolio holdings and statistics are subject to change without notice
2,4Credit Suisse Western European Leveraged Loan Index, All Denom, hedged to GBP, 31 January 2020
3Credit Suisse Western European Leveraged Loan Index, Non USD, hedged to GBP, 31 January 2020
5,6S&P Global Market Intelligence, LCD Global Interactive Loan Volume Report, 31 January2020 2019
8S&P Global Market Intelligence, December Pipeline, January 2020
9S&P Global Market Intelligence, CLO Historical Stats, 3 February 2020
10S&P Default Ratio, 31 January 2020
11S&P Distress Ratio, 31 January 2020
Portfolio Manager's Commentary
The largest positive mover in the Fund was a dental services business that was up +4.20%, the second best performing credit was a physical server business that was up +3.80%. Both credits were recovering from year end weakness.
The worst performing credit was a large operator of petrol and service stations down -2.09% as sentiment softened around news of a potential acquisition for the firm's global expansion plans. The second worst performer was a hygienic paper products producer down - 1.64% on the back of negative concerns around the name.
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.
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