Volta Finance: Re-Set, Re-Fi, Re-Light my Fire

In this note, we explore how favourable market conditions mean that CLO vehicles can re-finance debt cheaply, thus enhancing the value of Volta Finance Ltd (LON:VTA) equity positions, which have been increased substantially in recent years. We show the impact on Volta’s CLO debt portfolio and the wider loan market, and what this means for new investment returns. The key message is that the favourable conditions are expected to lift returns by 1%-1.5% p.a. for several years. Volta is benefiting from the unexpectedly low levels of defaults. Despite this favourable outlook, Volta still trades at a 15% discount to NAV, albeit down from March 2020 highs.

  • Re-set/Re-fi opportunity: Volta has already seen five positions re-finance, at savings of 15bps-23bps. A further one is expected to complete in May (benefit ca.30bps), and several more in June/July. 20 positions could benefit and see the expected equity returns rise by 2% to 3%.
  • Lower-than-expected defaults: Rating agency expectations of defaults in spring 2020 were ca.4x as high as the trailing default rate seen in March 2021. CLO vehicles have incremental rules and restrictions, meaning their defaults have typically been around half the wider market average.
  • Valuation: Volta trades at a double discount: its share price is at a 15% discount to NAV, and we believe its mark-to-market NAV includes a further sentiment-driven discount (5%-10%) to the present value of expected cashflows. Volta targets an 8% of NAV dividend (10.2% 2022E yield on current share price).
  • Risks: Credit risk is a key sensitivity. We examined the valuation of assets, highlighting the multiple controls to ensure its validity, in our initiation note, in September 2018. The NAV is exposed to sentiment towards its own and underlying markets. Volta’s long $ position is only partially hedged.
  • Investment summary: Volta Finance is an investment for sophisticated investors, as there could be sentiment-driven share price volatility. Long-term returns have been good: ca. 8.6% p.a. returns (dividend-re-invested basis) since initiation. With above-average returns on recent re-investments, the portfolio’s six-month historical cashflow yield is 16.3%, and the latest projected IRR is 13.3%. We expect 1.5x adjusted and nearly 2x statutory dividend cover in 2022.

DOWNLOAD THE FULL REPORT

Click to view all articles for the EPIC:
Or click to view the full company profile:
Facebook
Twitter
LinkedIn
Hardman & Co

More articles like this

Volta Finance

A guide to high-yield fixed income alternatives

When investors think of bonds, their minds immediately go toward U.S. Treasuries or other IOUs issued by corporations. Maybe municipal securities enter their minds. But these are just the tip of the iceberg with regard to

Volta Finance

Record CLO sales boost Wall Street buyout financing

Wall Street bankers looking to raise fresh financing for multi-billion dollar buyouts are getting a boost from the record start to the year from a critical part of the leveraged loan universe. Sales of collateralized loan

Volta Finance

Diversified investment opportunities

For the intrepid investor, there is no shortage of diversified investment opportunities. Interest in cryptocurrencies, structured products, direct indexing, and other “trendy” assets has grown in recent years, but a new report by Morningstar suggests that advisors may need

Volta Finance

The potential of CLO equity

Collateralized loan obligation (CLO) equity has emerged as a source of potentially robust, and front-loaded, returns for sophisticated investors. Over the past 30 years, collateralized loan obligations (CLOs) have grown from a niche asset class into a

Volta Finance

CLO: Best debt investment opportunities for this year

Collateralized loan obligations are among the best debt investment opportunities for this year, according to John Wright, global head of credit at Bain Capital. Spreads on the structured investment vehicles, which repackage leveraged loans into bonds

Volta Finance

US banks reentering $1.3 trillion CLO market

The biggest US banks are stepping back into the $1.3 trillion market for collateralized loan obligations after nearly two years of shying away from investing in the securities. Citigroup Inc. has resumed buying CLOs, according to