AEFS.L Regulatory News (AEFS)

Alcentra European Floating Rate Income Fund Limited

Market Commentary

The Fund was up +0.71% (gross) in December, slightly behind both the Credit Suisse Western European Leveraged Loan Index ("CS WELLI") (hedged to GBP) which returned 0.85%[1], and the Credit Suisse Western European Leveraged Loan Index excluding USD which returned 0.74%[2] for the month.

The European Loan market saw a strong return for the month with average prices increasing by c.0.5pt[3]. This was driven by better macro and geopolitical headlines leading to improved sentiment generally and better appetite for loans, particularly for lower priced and more cyclical credits. The market also benefitted from the low level of loan issuance coupled with strong demand, predominantly from ramping and recently priced CLOs.

The market for loan issuance quietened in December as we approached the traditional holiday break. Volumes for the month stood at €0.8bn[4], -51% year on year, with only a small number of add-on deals from existing issuers pricing. This leaves full year volumes at €80.9bn[5]. While this is -16% on the prior year, mainly due to lower M&A driven issuance (-35%), it still remains robust overall. The main driver of issuance for the year was M&A which accounted for 54% of the volume, with refinancings accounting for 34% and recapitalisations at 12%[6]. For the month, average new issue spreads stood at 383bps[7] at a price of 99.63 (c.395bps 3 year Discount Margin)[8], although with relatively low volumes overall this is not a reflection of overall market spreads. We expect a busy start to 2020, with capital market desks indicating a decent volume of deals to come in Q1. This is supported by the S&P forward pipeline which has now increased to €9.6bn, an increase of almost €4bn in the month and c.€3.8bn higher than the same period last year[9].

The CLO new issue market also saw a slower month in December with only two deals pricing for a total of €0.8bn[10]. While this is low in absolute terms, it is ahead of the prior year, which saw no issuance in the month. This leaves full year issuance volumes at €29.8bn[11], a new annual record and +9% ahead of last year. While the CLO arbitrage remains difficult, the market has remained resilient throughout the year with steady quarterly issuance, a testament to the market's robustness. We expect this trend to continue in 2020, providing solid support for European Leveraged Loans.

The S&P default rate for the 12 months ending December remained flat at 0.44%. While this is up from the 0.00% recorded earlier in the year it remains well below the long term average[12]. The S&P distress ratio (share of performing issuers trading below 80) ended the year at 2.93%, a solid tightening from the wide of 4.26% seen in October, as the strong market conditions in the month lead to a rise in loan prices, particularly lower priced assets[13].

After a strong end to the year, driven by lower issuance and strong demand, we expect a more balanced start to 2020. Demand should remain strong, supported by a solid pipeline of CLOs looking to price, as well as demand from unlevered funds. At the same time we do expect a pick-up in issuance, with a relatively full pipeline of deals expected. As such we expect the market to remain broadly balanced and are forecasting a coupon return for the year. While there remains a risk of volatility from broader financial markets we would expect the European Loan market to continue to remain more resilient than that of comparable asset classes.

Portfolio Manager's Commentary

As with the prior month the top performing credits in December were generally assets that recovered after seeing weakness in previous periods. The largest positive mover was a chemicals company that was up +4.61% on the back of better investor sentiment around the name and on no new credit news. The second best performing credit was a telecommunications service provider that was up +4.40% after positive headlines emerged indicating support from a large shareholder.

The worst performing credit was a funeral service provider that was down -8.62% after weaker results led to selling pressure. While this issuer's results were weaker, we believe management have a plan in place to improve performance and that the selling pressure is overdone. The second weakest credit was an agricultural products company that was -6.69% lower after a ratings downgrade led to selling pressure in 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.

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.

BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may also be used as a generic term to reference the Corporation as a whole or its various subsidiaries generally.

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1Portfolio information is based upon Alcentra's calculations, 31 December 2019. Portfolio holdings and statistics are subject to change without notice

2Credit Suisse Western European Leveraged Loan Index, All Denom, hedged to GBP, 31 December 2019

3Credit Suisse Western European Leveraged Loan Index, Non USD, hedged to GBP, 31 December 2019

4,9Credit Suisse Western European Leveraged Loan Index, All Denom, hedged to EUR, 31 December 2019

5,6,7S&P Global Market Intelligence, LCD Global Interactive Loan Volume Report, 31 December 2019

8S&P Global Market Intelligence, LCD European Weekly, 19 December 2019

10S&P Global Market Intelligence, December Pipeline, 31 December 2019

11,12S&P Global Market Intelligence, CLO Historical Stats, 2 January 2020

13S&P Default Ratio, 31 December 2019

14S&P Distress Ratio, 31 December 2019