10 May 2019 16:33
Alcentra European Floating Rate Income Fund Limited
Market Commentary
The Fund was up +0.85% (gross, estimated) for the month while the Credit Suisse Western European Leveraged Loan Index ("CS WELLI") (hedged to GBP) returned +1.08%1 for the same period. The Credit Suisse Western European Leveraged Loan Index excluding USD returned 0.90%2 for the month.
The European Loan market saw lower issuance in April. When combined with continued robust CLO formation and supportive unleveraged fund flows this meant the market saw strong returns for the month. As in January and February, USD loans within the index outperformed, as they continue to recover from their larger decline in Q4 (USD loans in the CS WELLI returned +1.55% in April)3.
European Loan issuance at €2.6bn was -53% down on the prior year, driven by both the timing of the Easter break as well as the thinner overall pipeline. This leaves year-to-date volumes at €22.2bn, versus €40.8bn in the prior year, with M&A driven volumes accounting for 70% of this issuance4. We have seen a marginal increase in recap activity (accounting for 16% of volumes YTD vs 6% in the prior year) as stronger performing issuers looked to take advantage of the more favourable market conditions in recent months5. The volatility seen in Q4 had an impact on the pipeline in Q1 and was likely the key driver of the lower issuance volumes we have seen. The S&P forward pipeline has now increased to €12.4bn6, the highest level since June 2018 and should help support issuance in June and beyond. For the month, the average new issue spread was 417bps at a price of 99.50, although the sample size of 6 deals remains small7.
While the CLO market remains challenging due to the current difficult arbitrage conditions, the last two weeks have seen signs of increasing interest from CLO liability investors which is positive for CLO issuance outlook8. April CLO formation stood at €2.5bn, -14% year on year, with volumes impacted by the timing of Easter and Golden Week in Japan. YTD issuance however remains 3% above the prior year at €9.4bn. This strong YTD CLO issuance, coupled with supportive unleveraged fund flows, meant demand was again very strong in the month9.
The S&P default rate for the 12 months ending April again remained at the record low level of 0.00% seen since January. 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 1.37% for April10.
In summary, the market overall remains robust with strong demand from CLO issuance, and lower loan issuance volumes year to date, leading to a strong recovery from Q4 weakness. Looking forward we do expect loan issuance to increase, however the market should remain supported from CLO and leveraged loan fund demand.
1,3Credit Suisse Western European Leveraged Loan Index, All Denom, hedged to GBP, 30 April 2019
2Credit Suisse Western European Leveraged Loan Index, Non USD, hedged to GBP, 30 April 2019
4,5S&P Global Market Intelligence, LCD Global Interactive Loan Volume Report, 3 May 2019
6,7S&P Global Market Intelligence, LCD European Weekly, 26 April 2019
8S&P Global Market Intelligence, CLO Round Up, 29 April 2019
9Leveraged Finance Volume, S&P Technical Data, 4 May 2019
10S&P Distress Ratio, 1 May 2019
Portfolio Manager's Commentary
The top performing credit was a German Cable business which saw it bonds rise +7.25% and loans increase +4.43% after the company confirmed that they are looking at a potential asset disposal that would reduce leverage. The second best performing credit was a Chemicals business whose recently issued bonds benefitted from the strong bid for high yield assets after pricing at an attractive level and were up +4.12%
The worst performing position was a technology services business which was -20.96% lower after seeing continued downward pressure in its loans from selling pressure, in spite of no new credit news. The second weakest credit was a specialist financial services business that was -2.90% lower after reporting marginally weaker results and seeing technical selling pressure in the bonds.
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.
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