28 Jun 2016 12:30
28 June 2016
Chenavari Capital Solutions Limited (the "Company")
Brexit Impact on Chenavari Capital Solutions Limited
Market Commentary
Last week, the United Kingdom voted in a referendum to leave the European Union. Significant uncertainties exist on the exit process and the consequences of such decision.
Since this decision, markets have been characterized by extreme volatility in forex and equity, and credit markets are significantly down.
Portfolio Outlook
While we do not expect immediate, direct consequences on the underlying credits in the portfolio, two positions stand out as being highly correlated to the performance of the UK economy:
· A secondary investment in a second loss regulatory capital transaction backed by UK residential mortgages: this transaction has de-levered significantly as it is referencing a static pool of loans. Credit losses continue to be minimal with cumulative losses over 3.2 years at 15.2bps against a second loss representing a 2.19% to 9.87% tranche. While higher unemployment and lower house prices would result in an increase in defaults and losses, the transaction has significant cushion over our base case scenario. This investment represents 5.8% of the Company's NAV as of May month-end.
· A primary investment in a first loss regulatory capital transaction issued by a UK clearing bank referencing large UK corporate borrowers. The transaction is a 0% to 9.6% tranche on a portfolio of £1.86 bn. The underlying corporate borrowers are primarily large UK companies which might be significantly affected by a recession in the UK. No credit event had been recorded in the portfolio as of the March report. This investment represents approximately 11.1% of the Company's NAV as of May month-end.
Impact on the Company
Beyond the two transactions discussed above, the Company's return and NAV might be affected by:
· Marks - We expect a number of capital relief transactions month-end marks to be significantly adversely affected by the extreme volatility and current widening in credit spreads. Approximately 59.7% of the Company's assets are valued on the basis of a dealer valuation and we believe this will result in a reduction in the Company's NAV but it is not possible to estimate the extent of this.
· Hedges and cash collateral - The Company's assets are primarily denominated in currencies other than Sterling. The Company owns assets denominated in Euros, US Dollars and Swiss Francs (together 65.3% of NAV as of May month-end), while the shares were issued in Sterling. Hence, the Company has entered into foreign exchange short-dated swaps to hedge the currency risk.
As of 24 June, the Company held £13m of unencumbered cash, which is available to meet any margin call requirements on its hedges.
Enquiries:
Kirstie McLaren
Chenavari Investment Managers
Email: ccslir@chenavari.com
Telephone: +44 20 7259 3600
Robert Peel
Fidante Capital
Telephone: +44 20 7832 0900