Volta Finance plc (LON:VTA) is the topic of conversation when Hardman and Co’s Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.
Q1: You recently published on Volta Finance, but sat it behind a disclaimer. What is that about?
A1: They are not a simple business, and the disclaimer simply says, “THIS DOCUMENT IS NOT AVAILABLE TO ‘U.S. PERSONS’, NOR TO PARTIES WHO ARE NOT CONSIDERED ‘RELEVANT PERSONS’ IN THE UNITED KINGDOM, NOR SHOULD IT BE TAKEN, TRANSMITTED OR DISTRIBUTED, DIRECTLY OR INDIRECTLY, TO EITHER OF THESE CATEGORIES.” The full disclaimer is on the second page but, for the man on the Clapham omnibus, it just means it is an investment only for sophisticated, professional investors.
Q2: Your note was a summary Q&A with management, what were your key takeaways?
A2: In this note, we provide investors with a detailed Q&A with the Company’s Directors and Manager on the key issues as we see them today. These are structured into risk management (exposed sectors where loans are typically >30% below par, make up just 10% of the portfolio, solvency is strong and there appears to still be a liquid market at a modest discount for many assets). We consider the Company’s re-investment opportunities and focus on the revised dividend prospects. Volta marks to market most of its assets and thus captures both “real” losses and investor sentiment (ca. two thirds of March’s losses), which may reverse over the next year or two.
Q3: What are the worst industries/loans to which the Company is exposed through its CLO positions?
A3: They have used market prices to assess which sectors have been most affected by the COVID-19 crisis. This has appeal to us in that it is using hard factual data rather than the latest news story. We note that less than 10% of the portfolio is in these high-risk areas (where the price is largely under 70% of par).
Q4: You spent quite some time on Cov-lite documentation, what is your summary of that?
A4: The fact that many companies without revenue would have breached “full” covenants and gone into default is indisputable so Cov-Lite documentation has already had an impact reducing defaults. Looking forward, we concur with management that the “cycle” will be extended significantly because of such documentation. Companies in a painful situation will trade for quarters and probably years before defaulting (or not) giving more time for government action and an economic recovery to save them. Losses on default will be higher but far fewer companies will default. We also believe that investor sentiment, and so the share price, will be driven by the number of defaults and if these do not materialise in the short term to the extent they would have in the past, we do not expect the same sentiment-driven downward pressure on the share price as has been seen then.
Q5: You asked about how quickly the portfolio could be sold, what did they tell you?
A5: The company will not be a forced seller is the key message. They have again been communicating for many years how it manages its liquidity and this should not come as a surprise. As of today, “a few tens of millions” of Euros worth could be liquidated in a week against gross assets of just under €200m and at the 5%-10% discount. VTA’s share price discount to its net asset value is currently at ca 5x the lower end of this range.
Q6: You were interested in how much of the fall in the NAV was real and how much could be considered sentiment, as the latter could be expected to reverse over time. To measure this, you asked what their marked to model valuation would be, compared with the marked to market approach they actually used. What did they tell you?
A6: Management’s indication that the portfolio would fall by ca.10% if the sentiment element against the ca.30% reported fall is removed is consistent with the monthly performance of BGLF, which uses a mark-to-model approach. It appears to us a split of about one third fundamental and two thirds sentiment in an extreme market is not unreasonable. We also believe that as markets normalise, the sentiment factor should return to zero. In good times, market prices may well be above modelled prices, but that is for the future not now.
Q7: And finally, a quick word on their dividend?
A7: Volta Finance suspended its dividend in early April as there was limited visibility at the time on what would actually be received. Having now seen the actual cashflows for that month (which were as expected allowing for rate changes), it is paying a reduced dividend. The company targets an 8% of NAV dividend, which equates to around 11% yield on current s/p.
