Structured products income fund, Volta Finance Limited (LON:VTA) has published its results for the six month period ended 31 January 2022, attached to this article, and will be available on Volta’s website shortly.
I am pleased to be able to report further positive returns for Volta’s shareholders over the six month period to 31 January 2022. Perhaps inevitably, returns were more muted than the heady gains seen during the last full financial year. Nonetheless, the Net Asset Value (“NAV”) total return grew by a creditable 5.6% during the six month period and the share price total return was 7.8%.
In my report to you last October, I commented that financial markets had enjoyed extraordinary policy tailwinds since COVID-19 first emerged but that these were likely to veer around and become headwinds. Fiscal stimulus was likely to wane and monetary policy likely to tighten. So it has proven, and more swiftly than I had suspected, as expectations around inflationary pressures have shifted from being “transitory” to being altogether more concerning. Amplified more recently by the invasion of Ukraine, the consequence has been a very sharp fall in the prices of government bonds and considerable volatility in equities. There have been few safe-havens for investors.
Against this backdrop, Volta produced robust returns and acted as a diversifier to other credit assets. By way of comparison, the S&P500 equity index in the United States generated a total return of 3.1% during the same six month period. More significantly, Volta has not succumbed unduly to the recent volatility in equities. I am hesitant to predict that this will continue because Volta is as vulnerable to the vagaries of market sentiment as any other quoted investment. However, it does seem possible that our strong underlying fundamentals are asserting themselves and, to some extent anyway, overcoming the worries that have beset other assets. Specifically, default rates remain at almost
record lows and this is a key determinant of our medium term returns. Rolling 12 month default rates ended 2021 at just 0.3% in the US and 0.6% in Europe. These default rates will, undoubtedly, rise from here but AXA IM do not forecast default rates rising above long term averages over the coming few years. Therefore, it seems relatively unlikely that defaults will present a notable threat to Volta’s cash flows. Furthermore, there are a number of other factors that provide confidence that our cash flows should remain robust:
- the collateral cushion has been rebuilt in most of our CLOs since the COVID-19 crisis two years ago;
- underlying economic performance remains sound in most sectors, even if growth estimates in economies are reducing from prior heady predictions. Many borrowers are prospering;
- the covenant-lite structure of most underlying loans means that fewer companies are likely to face material issues in the coming few years (although we must remember that the consequence may be lower recoveries when things do go wrong);
- finally, the last two years of easy policy conditions have enabled many borrowers to refinance at attractive terms, pushing out the risks associated with the “refinancing wall” well into the future. This means that any adverse conditions in the short term are much less likely to impact underlying borrowers and their ability to refinance.
The implication of all of this is that our cash flows, already at around record levels, are unlikely to reduce materially in the medium term. Over the 6 month period under review, our cash flow yield was 13.5%. Those cash flows are the key underpin to our shareholder returns.
In addition, Volta’s assets are overwhelmingly floating rate in nature. So we have avoided much of the adverse sentiment in the fixed interest markets as interest rate expectations have accelerated. At the same time, the “CLO arbitrage” (in simple terms the difference between the interest received by a CLO from the underlying loans and the interest cost of the CLO debt) has remained intact. Volta’s significant allocation to CLO equity positions, which accounted for 61.3% of our NAV at 31 January 2022, has, therefore, proven beneficial. As noted in my last report, our investment manager, AXA IM Paris (“AXA”), believes that CLOs continue to offer the most attractive opportunities in the
structured finance universe. Since the period end, the portfolio has further orientated towards CLOs, which now account in total (across debt and equity) for 90.6% of NAV as at 28 February 2022.
The benefit of all of this to shareholders has been both ongoing positive returns and a rebuilt dividend stream since COVID-19 struck. Some years ago, the board set a dividend policy to seek to pay quarterly dividends totalling 8% (on an annualised basis) of NAV and we have continued to implement this policy. During the six month period, we declared two dividends totalling €0.29 per share, up from €0.23 per share during the same period a year ago. Given the ongoing discount of the share price to the NAV, this equates to an attractive dividend yield of 9.4% on the share price of €6.20 at 31 January 2022.
At the moment, there is war on our doorstep, inflationary pressures are building and investors are jittery. It is easy to be negative about the outlook for the world and for investment markets. But AXA forecast an expected IRR from our current portfolio of 12.4%. We are, of course, subject to the buffeting of market sentiment and Volta is a higher risk investment: short term returns can be volatile. But, absent catastrophe, our underlying cash flows should assert themselves, keeping our dividend well covered and our NAV per share rising in the longer term from the period-end level of €7.39. That, in turn, should mean that future shareholder returns remain attractive.
As always, if you have any queries, please contact me via the Company Secretary at
Paul Meader Chairman 6 April 2022
Please find the Half-Yearly Financial Report 2022 here:
Volta Finance Ltd (LON:VTA, LON:VTAS) is a closed-ended limited liability company registered in Guernsey, investing in a diversified portfolio of structured finance assets. The Company aims to provide a stable stream of income to its Shareholders through dividends that it expects to distribute on a quarterly basis.