19 Mar 2020 08:58
Alcentra European Floating Rate Income Fund Limited
Market Commentary
The Fund was down -0.47% (gross) in February, ahead of both the Credit Suisse Western European Leveraged Loan Index ("CS WELLI") (hedged to GBP) which was down -0.95%2, and the Credit Suisse Western European Leveraged Loan Index excluding USD which was down -0.65%3 for the month.
While performance in the month started on a strong footing with solid new loan issuance and demand, the market ended the month c.-1pt lower4. This was driven by broader financial market concerns around the potential impact of the COVID-19 coronavirus. As we have seen in other periods of volatility, European Loans outperformed other assets classes (US Loans -1.8pts5, EU HY -2.1pts6 and US HY -2.1 pts7) with the market benefitting from its lower global trade exposure and longer term investor base.
Headline issuance from the month was strong at €10.6bn8, however it was really a month of two halves. While the first two weeks saw strong issuance driven by M&A (60% of volumes) and refinancings/repricings (40%)9, we did see volumes slow towards the end of the month, due to both a lighter pipeline as well as concerns around the global impact of the coronavirus. For the month, average new issue spreads rose to 364bps at a price of 99.66 (c.378bps 3 year DM)10, mainly driven by the market conditions later in the month and aided by a reduction in repricings after a number of requests got pulled. Looking forward we expect a decline in opportunistic issuance to lead to lower new issue volumes overall, however underwritten deals are likely to continue to come, potentially offering attractive investment opportunities. The S&P forward pipeline currently stands at €6bn11, mainly comprising underwritten deals.
CLO formation was also strong in the month with 8 deals pricing for €3.3bn12, with the market benefitting from improving arbitrage conditions due to tighter liability spreads earlier in the month. Looking forward there is potential for new CLO issuance to slow down as the broader market trade-off is also likely to lead to higher CLO liability cost, although there is still a sizeable pipeline of warehouse looking to come to market.
The S&P default rate for the 12 months ending February remained stable at 0.44%13 and still well below the long term average. The S&P distress ratio (share of performing issuers trading below 80) stood at 2.52%, tightening further from 2.58%14 seen at the end of January.
Looking forward, global markets remain focussed on the potential impact from the coronavirus outbreak. We continue to engage with management teams on the potential impact of the virus to understand both the supply side and demand side risks for issuers, but for now it remains too early to definitively evaluate the direct impact on results. However we will continue to manage sector and credit specific risk and exposures within the Fund in light of the evolving situation. While there is scope for support from both monetary and fiscal policy actions, we do expect volatility to remain. Despite this we expect the European Loan Market to remain relatively better insulated than other asset classes given its more defensive nature, lower global trade exposure and longer term investor base.
1Portfolio information is based upon Alcentra's calculations, 29 February 2020. Portfolio holdings and statistics are subject to change without notice
2,4,10Credit Suisse Western European Leveraged Loan Index, All Denom, hedged to GBP, 28 February 2020
3Credit Suisse Western European Leveraged Loan Index, Non USD, hedged to GBP, 28 February 2020
5Credit Suisse Leveraged Loan Index, 28 February 2020
6BofA ICE European High Yield Index (HP00), 28 February 2020
7BofA ICE US High Yield Index (H0A0), 28 February 2020
8,9S&P Global Market Intelligence, LCD Global Interactive Loan Volume Report, 28 February 2020
11S&P Global Market Intelligence, December Pipeline, February 2020
12S&P Global Market Intelligence, CLO Historical Stats, 3 February 2020
13S&P Default Ratio, 28 February 2020
14S&P Distress Ratio, 28 February 2020
Portfolio Manager's Commentary
The top performing credits for the Fund in February were names that had been weaker in prior periods but saw improved outlook and traded higher in the period. The top credit, a pharmaceutical company, traded +4.6% higher after the company was refinanced and the debt was repaid at par. The second best credit, a funeral service provider, was +3.6% higher on better results and investor sentiment around the name.
The weaker names were generally those with some risk from the COVID-19 coronavirus outbreak as well as credits with name specific news. The weakest credit was a financial services provider, which was -6.1% lower on the news of new potential M&A and marginally weaker results. The second weakest credit was a manufacturing supplier which was -4.0% lower on the back of COVID-19 Headlines.
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.
© 2019 The Bank of New York Mellon Corporation. All rights reserved. Trademarks and logos belong to their respective owners.