April 2020 Monthly

Volta unusually issued an intra-month trading update on 24 March 2020. The key points were as follows: i) liquidity has been managed so that Volta’s cash is close to €3m in excess of the amount ($20m) needed to close the repo and so it will not be a forced seller of assets; ii) the MTM is highly volatile but at that date was down ca.35% on end-February; iii) ultimate losses will reflect the broadly diversified portfolio, which has macroeconomic sensitivities, not stock-specific ones; iv) Volta’s $ assets are largely unhedged and $ exposure is ca.50% after currency risk management. The discount implies significant deterioration in the macroeconomic outlook.

• Outlook: Current CLO prices imply a ca.12% default rate and Volta’s NAV discount implies higher losses. Investors may/may not consider this fair in light of their own views of government remedies. Near term, Volta expects all its assets to pay their April cashflows, allowing them to pay the April dividend and reinvest.
• COVID consideration: Market wide, cov-lite documentation has become increasingly prevalent. This increases lenders’ losses in the event of default, but it reduces the probability of default and gives weak borrowers more time. Given the weight of government remedies, extending time is crucial to reducing losses.
• Valuation: Volta trades at a 17% discount to 24 March NAV (which was down ca.35% on end-February). The 24 March trading update noted the NAV is highly volatile, reflecting fundamental, technical and sentiment effects. The underlying exposure is to ca.700 corporates and so macroeconomic-sensitive.
• Risks: Credit risk is a key sensitivity (Volta has a widely diversified portfolio). We examined the valuation of assets, highlighting the multiple controls to ensure its validity, in our initiation note. NAV is affected by sentiment towards its own and underlying markets. Volta’s long $ position is now largely unhedged.
• Investment summary: Volta is an investment for sophisticated investors, as there could be sentiment-driven share price volatility. However, long-term returns have been good, at 8.6% p.a. (dividend-reinvested basis) since inception to end-Feb’20. The current portfolio is generating near-record levels of income, which supports the prospective dividend yield. Sentiment is likely to prove volatile over the short term, but long-term cashflow is likely to be the key to performance.