M&g Credit Inc. Regulatory News (MGCI)

M&G CREDIT INCOME INVESTMENT TRUST PLC

(the “Company”)

LEI: 549300E9W63X1E5A3N24

Quarterly Review

The Company announces that its quarterly review as at 30 June 2022 is now available, a summary of which is provided below. The full quarterly review is available on the Company’s website at: 

https://www.mandg.com/dam/investments/common/gb/en/documents/funds-literature/credit-income-investment-trust/mandg_credit-income-investment-trust_factsheet_gb_eng.pdf

Market Review

During the quarter market sentiment varied between growth and inflation concerns. Tighter central bank policy accompanied by more uncertain forward guidance, and mixed economic data contributed to poor performance for risk assets. Fears of an imminent recession in the US and Europe, brought on by months of rising inflationary pressure which has dented consumer and business confidence, gathered pace over the period. Business surveys for the month of June pointed to a sharp deceleration in the health of the global economy, as manufacturing and service sector activity slowed among the world’s leading economies. The worsening inflationary picture has necessitated a more aggressive pace of interest rate hikes from many of the world’s central banks. The combination of growth concerns and an uncertain path for monetary policy saw both investment grade and high yield credit spreads continued to sell off notably as the quarter progressed. As the period drew to a close, sovereign bond yields partially retraced as investors began to question the ability of central banks to tighten aggressively into a slowing growth environment.

Manager Commentary

Financial markets ended the first half of the year with nearly all asset classes (public bonds, sovereign bonds, equities) having suffered fairly dismal returns. Against this backdrop, the Company’s year-to-date NAV total return as at end of June was -3.37%. This compares favourably to the performance on fixed income indices such as the ICE BofA Sterling and Collateralised Index which has fallen by 14.17% and the ICE BofA European Currency Non-Financial High Yield 2% Constrained Index which has fallen by 15.25%. The portfolio’s low duration and investment grade credit quality contributed to this relative outperformance. During the period we continued to sell down AAA cash-like ABS holdings and CLOs in order to add risk and yield into the portfolio. The widening in credit spreads gave us the opportunity to redeploy proceeds into bonds with solid credit fundamentals, available at valuations that are attractive by historical standards. We have targeted purchases of BBB public corporate bonds with the most attractive relative value to be found in REITs (Real Estate Investment Trusts) as well as banking and insurance subordinated debt and hybrid bonds.  During the quarter we also transacted c.£1.6m of mezzanine debt across two new private securitisations. The first was backed by a diversified portfolio of UK small and medium enterprise (“SME”) business loans, with the second backed by a pool of high quality invoice receivables. During the quarter, demand in the market saw the share price of the Company reach a premium to NAV, which allowed us to reissue 2.7m shares from the Company’s treasury account.

Outlook

Economic conditions have deteriorated, with inflationary and recessionary concerns weighing on credit fundamentals for some issuers and many downgrading guidance for the remainder of the year. That said, we currently have a healthy portfolio which displays little sign of distress thus far. By-and-large corporate balance sheets, credit metrics and maturity profiles (bolstered  by significant re-financing last year) remain in good shape, which means many issuers are well positioned to survive an economic downturn. Bond valuations at this point have reached historically cheap levels and in our opinion look attractive for long term investors, with investment grade credit spreads already partially pricing in a recession. Whilst current spreads (and yields) are attractive, and we have been cautiously and selectively adding risk into the portfolio, we are also wary of the significant headwinds being faced by markets. As the ECB  prepares to step away from purchasing corporate bonds (thus removing the largest buyer in the market since 2014), credit spreads are likely to stay wider. It is set be a similar story for sterling assets in the UK as the Bank of England winds down its own Corporate Bond Purchase Scheme (CBPS). Geopolitical developments remain intertwined with the path of inflation and its associated impact on the wider growth outlook. Concerns are heightened over a European gas cut-off or rationing following maintenance on the Nord Stream gas pipeline in July, which has the potential to severely impact Eurozone GDP, and in particular that of Germany. China’s “zero-Covid” policy is also having a negative bearing on the global economy, affecting supply chains, manufacturing and production, whilst possibly more concerningly, underlying data points to a more structural economic malaise in the world’s second largest economy. If there is a silver lining to the gloomy economic outlook, it’s that developed economies remain in an historically very strong state. Household debt payments as a percentage of disposable income and excess cash savings are relatively low, while the labour market remains extremely strong.

The private asset sector appears to be going through a period of adjustment in light of the volatility and higher spread levels seen in public markets, which may result in a slower pipeline of private opportunities over the summer months (although we have already completed one transaction in early July). Right now, public markets are where we believe asset values look most attractive and where we are seeing risk adjusted returns in excess of the Company’s long term objective. If the current dynamic persists, we will continue to add public bonds to the portfolio where we see valuations as misaligned relative to credit fundamentals, adding risk where we are sufficiently compensated for doing so. We have recently utilised the Company’s access to the £25m credit facility in order to take advantage of the pronounced volatility and enhanced returns available in the public bond market. Whilst any decline in bond valuations will have a negative impact on the Company’s NAV, we view the current volatility in credit markets as an opportunity to reposition the portfolio to deliver increased yield over the longer term.

Link Company Matters Limited

Company Secretary

28 July 2022

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