10 Jun 2020 08:52
Alcentra European Floating Rate Income Fund Limited
Market Commentary
The Fund was up 2.83% (gross) in May, behind both the Credit Suisse Western European Leveraged Loan Index ("CS WELLI") (hedged to GBP) which was up 3.44%1, and the Credit Suisse Western European Leveraged Loan Index excluding USD which was up 3.19%2 for the month.
The strong market conditions seen in April continued into May, driven by the firm technicals of solid demand from unlevered funds/SMAs and CLOs as well as limited new loan issuance. Sentiment also continues to improve on the back of easing of lock-down measures and generally better than expected company earnings. Loan prices recovered another c.3pts in the month, leaving the average index price at c.91.50, c.12 points above the lows seen in late March3. This leaves year to date returns for the CS WELLI exc USD at -5.17%4. After outperforming other asset classes in April, European Loan returns were more in line in May.
Improving market conditions in the month led to a pick-up in loan issuance activity with €2.3bn of new loans pricing, albeit still below normal market levels. The deals that priced came at attractive terms with an average spread of 428bps and price of 97.755 and were generally from higher rated/quality issuers looking to extend maturities (e.g. Nielsen and Micro Focus). We also saw companies access the market to improve liquidity (e.g. APCOA). Looking forward we do think there is continued scope for companies to access the primary loan market, for opportunistic reasons (maturities and liquidity) but also banks looking to syndicate some of the pre-virus underwritten deals at attractive terms (e.g. CEP, Boels).
While CLO arbitrage conditions remain challenged, we do continue to see new deals price with four new CLOs pricing for €1.0bn of total volume in May6. As in April, these deals have generally been of smaller size and shorter duration, and driven by the desire to term out warehouse positions. While arbitrage conditions are improving, a standard 4-year reinvestment period deal still does not work in the current market and this will likely limit near term new formation. Demand from unlevered funds and SMAs continues to be robust, driven by more supportive fund flows.
The 12 month S&P default rate for April was restated from 0.42% to 1.39% and remained stable at 1.39% for the month of May7. The increase in April was driven by two events, a technical default from Holland and Barrett due to debt buybacks and a restructuring in Swissport. The Fund does not own investments in either issuer. We expect the default rate to rise from this level, with S&P forecasting an 8% default rate for the European Loan market, although the final figure will depend on the length and severity of the outbreak and resulting economic weakness. The S&P distress ratio, a measure of names in the market trading below 80 continues to improve on better market sentiment and now sits at 10.9%, down from 18.3% at the end of April and a peak of over 50%8.
We continue to focus on managing the portfolio and reducing positions in names with downside risk given the current market environment. Looking forward we expect the current technicals of strong demand and lower issuance as well as the high level of monetary and fiscal support to underpin the market. While the potential for heightened volatility remains, particularly idiosyncratic volatility due to company specific news, the reopening of economies is positive for sentiment and we are seeing attractive opportunities to put money to work in the new-issue primary market.
1Credit Suisse Western European Leveraged Loan Index, All Denom, hedged to GBP, 31 May 2020
2Credit Suisse Western European Leveraged Loan Index, Non USD, hedged to GBP, 31 May 2020
3,4Credit Suisse Western European Leveraged Loan Index, Non USD, hedged to EUR, 31 May 2020
5S&P Global Market Intelligence, LCD Global Interactive Loan Volume Report, 31 May 2020
6S&P Global Market Intelligence, CLO Historical Stats, 2 June 2020
7S&P Default Ratio, 31 May 2020
8S&P Distress Ratio, 31 May 2020
Portfolio Manager's Commentary
The top performing credits in the Fund during May were generally names where outlook has improved on easing of lock-down measures. The top performing credit was a European holiday park business, which was up 35.50% on the back of better liquidity and improved outlook for the summer season. The second best performing credit was a Dutch-based Dental care provider which was up 15.89% on the back of improved investor sentiment around the name.
The credit with the largest decline was a leading French retailer, down -3.35% on the back of weaker outlook for the business. The second weakest credit was a Spanish university business which was down -1.11% on no new credit news and limited trading volumes.
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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