AXA IM has published the Volta Finance Ltd (LON:VTA) monthly report for February 2023.
PERFORMANCE and PORTFOLIO ACTIVITY
The Company has reported another positive performance in February at +1.7% after a strong January performance of +5.5% and thus a good start for 2023.
February performance reflected the carry of the portfolio during a relatively quiet month. In terms of defaults, over the month the rolling 12-month default rate increased by 0.2% (from 0.8 to 1%) in the US, while decreasing by 0.2% for European loans (from 0.4% to 0.2%). Current levels are significantly below the level projected by the rating agencies, with defaults expected to reach 2.5 to 4.5% for 2023. We are still being more constructive than that, and expect default rates to stay at the bottom of this range.
The Q4 2022 earnings season did again confirm our view that inflation can provide some benefits: selling prices are easier to adjust when overall prices move (compared to when they are flat), which helps transfering higher costs to clients and maintaining profitability. As a result, during February, earnings were better than expected.
February is a structurally weak month in terms of interest and cash flows collected from the Company’s assets: They received the equivalent of €1m of interests and coupons. However, over the usual rolling 6-month time frame, they received €22.2m of interests and coupons, ie. a 19.4% annualized cash flow to NAV.
Given that defaults are still materializing at a low pace, even if we are proven wrong and default rates reach the higher end of the above-mentioned range, we consider a materially negative impact on CLO Equity quarterly payments in 2023 as a remote risk.
In February, the volume of loan refinancings (amend-and-extend) increased again, enabling CLOs that are still reinvesting to increase the WAS (Weighted Average Spread) of their underlying loan books. All other things being equal, higher WAS means higher cashflows distributed to the Equity. As a result, we expect the Company’s cash flows to increase in the coming quarters.
Volta Finance’s underlying sub asset classes monthly performances** were as follows: +0.8% for Bank Balance Sheet transactions, +3.7% for CLO Equity tranches, +2.2% for CLO Debt tranches; and -0.1% for Cash Corporate Credit and ABS (which represent circa 2.2% of the fund’s NAV).
No significant purchases were made in February. We think that some pricing weakness on loans will show in the coming months if we are confirmed to live longer with higher rates. The Company accumulated a bit of cash over the last 2 months and we hope this will allow us to make some good investments, at a discount, in the coming weeks/months.
As at the end of February 2023, VTA’s NAV was €229.1m or €6.26 per share.
*It should be noted that approximately 5.87% of their GAV comprises investments for which the relevant NAVs as at the month-end date are normally available only after the Company’s NAV has already been published. VTA’s policy is to publish its NAV on as timely a basis as possible to provide shareholders with their appropriately up-to-date NAV information. Consequently, such investments are valued using the most recently available NAV for each fund or quoted price for such subordinated notes. The most recently available fund NAV or quoted price was 5.32% as at 31 January 2023, 0.55% as at 30 September 2022.
** “performances” of asset classes are calculated as the Dietz-performance of the assets in each bucket, taking into account the Mark-to-Market of the assets at period ends, payments received from the assets over the period, and ignoring changes in cross-currency rates. Nevertheless, some residual currency effects could impact the aggregate value of the portfolio when aggregating each bucket.
Volta Finance Ltd (LON:VTA) is a closed-ended limited liability company registered in Guernsey. The Company’s investment objectives are to seek to preserve capital across the credit cycle and to provide a stable stream of income to its Shareholders through dividends that it expects to distribute on a quarterly basis.
