AEFS.L Regulatory News (AEFS)

Alcentra European Floating Rate Income Fund Limited

Market Commentary

February saw a continuation of the trend from the prior month, with improved sentiment globally and solid technicals driving the market tighter. USD loans within the index again outperformed (+1.72% return for the month), after their underperformance in Q4. It is worth highlighting that the average prices of USD loans within the index (98.18) are now in line with those of EUR loans (98.11). The EUR assets within the Credit Suisse Western European Leveraged Loan Index ("CS WELLI") returned +2.17% for February, in line with the performance of the fund[1]. A further reference point to illustrate the recent USD currency effect on returns would be the S&P European Leveraged Loan Index. This index doesn't contain these USD loans and returned 0.67% for the month[2].

Despite continued pressure on CLO arbitrage from wider liability spreads, CLO issuance continued in-line with the record issuance levels seen last year. For the month €3.0bn of new CLOs priced, 1% up on the prior year[3]. This CLO issuance, coupled with a pipeline of c.30 warehouses in the European CLO market, has meant demand for European Loans was strong in the month, and helped drive the market tighter.

European Loan issuance saw a recovery from the record low levels of January, with €7.9bn of primary loans issued in the month. While this was a -41% decline on the prior year, overall volumes were healthy and in-line with the monthly average volumes in 2018[4]. M&A driven volumes saw a recovery and were up 21%, while refinancings were down 86%, as such net issuance for the month was up[5]. The increase in M&A volumes was driven predominantly by two larger deals for Ahlsell and Amer Sports. For the month, the average new issue spread was 400bps at a price of 99.54. The near term pipeline for March is supported by a large deal from Power Solutions, but beyond that remains relatively light, although there are signs of improved private equity activity[6].

It is worth highlighting that despite the strong market demand for new issuance, there is evidence of increased investor focus on new issue loan documentation, with new deals generally seeing improvements in terms at pricing, on the back of concerted investor actions.

The S&P default rate for the 12 months ending February remained at the record low level of 0.00%[7] seen in January. We do not expect default rates to remain at such low levels and would expect a return to a more normalised 1.5% - 2.0% rate. This is backed up by the S&P distress ratio (share of performing issuers trading below 80) which stood at 2.11% for February[8].

Looking ahead, we believe that the expectation for lower CLO issuance as a result of pressure on the arbitrage is balanced by the thinner forward pipeline for new loans. As such, we think the market should remain well supported going forward.

Portfolio Manager's Commentary

The top performing credit was an education business that issued its debt at 94 in more difficult market conditions in early January. It has since seen a strong bid emerge and was up +3.70% in the month. The second best performer was a specialist financial services business that was up +2.48% after better sentiment around the sector and positive results from peers led to an improved bid.

The worst performing credit was a technology services business that saw its loans fall -14.27% after reporting weaker results which led to selling pressure in the name. The second weakest name was a technology services business that was -13.04% lower after also reporting weaker results which saw leverage increase.

For the month as a whole the fund saw 103 positions increase in price, with only 15 seeing a decline. As such, while two idiosyncratic positions saw weakness on specific credit news, they were more than offset by the positive contribution from other holdings, as indicated by the positive overall return for the fund for the month of [+0.81%].

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.

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