11 Jul 2018 07:58
Alcentra European Floating Rate Income Fund Limited
Market Commentary
June saw weaker performance as a heavy primary supply pipeline led to lower secondary prices in loans, particularly in lower margin names.
The Alcentra Floating Rate Income Fund (the "Fund") was down -0.13% (gross) for the month, ahead of the Credit Suisse Western European Leveraged Loan Index ("CS WELLI") (hedged to GBP) at -0.41%1. We estimate that the main underperformer in the Index during the month was Wind Tre, an Italian telecommunications business which contributed c. -10bps of negative performance. This is a credit the Fund doesn't own.
European loan issuance in June of €10.1bn was broadly flat on the prior year (-3.4%) and marginally lower than the prior month (-10.6%)2. YTD volumes at €62.2bn are c.6.5% higher than the prior year; significantly, M&A volumes are up +97% YTD versus the prior year while re-financings are down -51%, resulting in material net new issuance growth3. This has been driven by a number of larger M&A transactions including TDC, MFG/MRH, Stars Group and BMC. The pipeline remains strong with sizeable deals still expected from Thomson Reuters, Akzo Nobel and Sivantos.
Despite continued robust CLO formation (European CLO issuance volume is up 51% YTD) 4, along with sustained inflows into unleveraged funds, the high level of loan net-issuance has allowed investors to be more selective on new investments. This has driven new issue spreads wider, with the average spread on new B rated loans widening to 384bps in June (on a 90-day rolling average basis), from 363bps in December 20175. The wider pricing in primary has also put pressure on secondary trading levels, particularly for credits that issued at tight spreads. These themes were the main drivers of the negative return for the month.
We continue to remain constructive in our outlook for the market. While short term there may be less support for existing tighter margin loans in secondary, in the medium term the growth in well priced new loan issuance is a positive for the market.
The default rate continues to decline and fell to just 0.1% at the end of the month, reflecting the continuing constructive corporate fundamental backdrop6.
Portfolio Manager's Commentary
The best performing name within the portfolio was an industrial business that was up 1.64% on the back of improved sentiment post its earnings announcement. The second best performing name was the junior debt tranche in a global chemicals business. The weakest performer within the portfolio was an industrial business that saw a -4.75% decline post reporting weaker than guided results. The second weakest holding was a specialist financial services business that saw a -4.49% decline due to new issue supply pressure weighing on the sector.
1 Credit Suisse Western European Leveraged Loan Index, hedged to GBP, 30 June 2018
2 S&P Global Market Intelligence, Euro Loans and Technical Data, 30 June 2018
3 S&P Global Market Intelligence, LCD European Weekly, 29 June 2018
4 S&P Global Market Intelligence, CLO Global Databank
5 S&P Global Market Intelligence, LCD Global View, 3 July 2018
6 S&P Global Market Intelligence, LCD European Playbook, 2 July 2018
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
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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.
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