Structured products income fund, Volta Finance Limited (LON:VTA) has published its Annual Report and Audited Financial Statements 2022 for the period ended 31 July 2022, attached to this article. Dagmar Kershaw Chairman of Volta Finance Ltd commentary is below:
Dear Shareholders, in my first Chairman’s Statement to you,
I would have liked to convey a more positive message but unfortunately the world – and particularly Europe – finds itself in a challenging situation once again and Volta is not immune from those forces.
For the year ended 31 July 2022, Volta’s NAV has fallen to €6.22, a 15.8% reduction of the half year number (€7.39) and a reduction of 14.6% compared to a year ago (€7.28). The share price has fared somewhat better, with a reduction of 13.0% from €6.02 a year ago to €5.24 at the end of July 2022. Whilst a fall in value is never welcome, Volta’s performance is consistent with moves seen in broader financial markets. Over the same period, the FTSE 250 fell 12.1%, the DAX fell by 13.3% and high yield bond spreads widened out by 45% from 332bp to 485bp.
Looking back at financial markets over the last 12 months, it can be characterised as a year of two halves: the excess liquidity and buoyant markets of H1 receded rapidly to war in Ukraine, volatility, inflation and energy instability in H2. The term ‘unprecedented’ is in danger of becoming over-used, and it has certainly been an apt description of the COVID-19 pandemic and measures taken to tackle it. Markets were braced for a certain range of outcomes in the post- COVID-19 era, but they did not anticipate the invasion of Ukraine and the subsequent impact of Europe’s reliance on Russian energy. Most finance professionals today are fortunate to have never witnessed (at least not in their adult lives) double-digit inflation, recession and rapidly rising interest rates, however that lack of perhaps experience, certainly unfamiliarity with dealing with a recession adds another dimension of uncertainty to the heady mix.
Against this challenging backdrop, there are some rays of sunlight and I believe Volta is one of them. The performance of Volta’s underlying portfolio is strong and cashflows are at all-time highs with a portfolio total cash return of 18.0% in the past year. You might wonder how that can be, but Volta’s fundamentals are sound:
• The credit quality of corporate borrowers has been and – at least for the time being – continues to be stable with defaults at low levels. Europe leveraged loan defaults have been just 0.7% in the past year, with the US even lower at 0.3%;
• CLOs hold floating rate assets which means that rate rises are passed through to the CLO investors as higher returns; • The portfolios are highly diversified by geography and industry, which helps maintain portfolio quality when industries suffer downturns (e.g. travel, as we saw in the COVID pandemic);
• CLOs are structured to withstand a certain number of defaults, typically 2% p.a. but actual default rates have been significantly lower in recent years, meaning that the funds have been able to generate better than anticipated returns whilst building their reserves (“par value”) to create cushion for future downturns; and
• CLO cashflows are generated from contractual debt interest, not dividends meaning that those payments are significantly more stable than equity dividends which can be reduced or not paid by companies in more challenging times.
CLOs are a sophisticated asset class with a number of moving parts, but history of over 20 years of CLO investing shows that in challenging markets, the structures function in the manner that they are planned to do. Sentiment may affect market pricing of the underlying assets and Volta’s share price but the payment priorities and structural protections embedded in these funds hold firm and good fundamental credit investments will continue to perform.
All of this depends on the investment skills of the manager, and the ability to identify and actively manage CLO investments and opportunities. In the team at AXA IM, Volta has one of the longest-established, most experienced and high quality teams in the CLO market globally. Their first class track record of managing CLOs through bull and bear markets means that they will not only manage Volta’s portfolio actively, but also be able to identify some of the best opportunities to create value in the more volatile markets ahead.
Volta has a stated dividend policy of 8% of NAV, paid quarterly, and your Board has continued to implement this policy through the past year. Given the ongoing discount of the share price to NAV, the dividend yield for the year ended 31 July 2022 equates to an attractive 9.9% based on the share price of €5.24 at 31 July 2022. Your Board recognises that high cash dividends are a valuable commodity in times of uncertainty.
Paul Meader has stepped down as Chairman and from the Board on 31 July 2022 following a tenure of almost 9 years and I would like to thank him for his service, his excellent stewardship and leadership of the Board. I would like to welcome Yedau Odoungele, who joined the Board in June 2022. Yedau has over 25 years’ experience in fixed income and structured credit, including as a CLO structurer and she will bring a very valuable contribution and complementary skill set to the Board. Alongside the Board changes, the Risk Committee has been formally dissolved at the 31 July 2022 year end and the responsibilities of this Committee have been subsumed into the Board. In closing, I am aware that we are in uncertain times and the road ahead is expected to be rockier than the one behind us. I am comforted that we have a first class investment manager in AXA IM, who will help us to not only navigate the bumps in the road, but actively seek out opportunities and smooth the path for future growth. Please do not hesitate to contact me through the Company Secretary, and I thank you for your continued support.
Dagmar Kershaw Chairman, 28 October 2022