April 2023 Monthly

In our note, R&A shining light on 20%+ IRR base-case scenarios, we reviewed how Volta generated cashflows at near-record levels, and looked forward, considering why defaults would rise – but not to the level built into loan prices. We highlighted Volta’s diversification and geographical exposure. We also reviewed how investors can use the Report and Account (R&A) disclosure to better understand the true business drivers. The February 2023 factsheet reinforced these messages, with annualised cashflow at 19.4% of NAV (despite every February being a cyclically low cashflow month). 2022 actual defaults were one fifth the level predicted at the time of the Ukraine invasion. Volta has no exposure to Silicon Valley Bank or bank AT1 instruments.

• February 2023 factsheet: The NAV rose by 1.7%, after an increase of 5.5% in January. The underlying loan fundamentals are strong. Loan default rates are low (0.2% European loans and 1.0% US, on a last-12-month basis) and earnings are coming in better than expected. February saw increased loan refi activity.
• Resilience going forward: The rating agency’s/Volta’s/our confidence in a low expected level of defaults reflects i) a strong starting position, including high cash cushions in CLO structures, ii) a preponderance of PE, iii) inflation still being friend, not foe, iv) covenant-lite documentation, and v) Volta’s diversification.
• Valuation: Volta trades at a double discount: its share price is at a 19% discount to NAV, and we believe its mark-to-market (MTM) NAV still includes a further sentiment-driven discount to the present value of expected cashflows. Volta targets an 8% of NAV dividend (11.6% 2023E yield on current share price).
• 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 only partially hedged.
• Investment summary: Volta is an investment for sophisticated investors, as both the NAV and the discount to NAV reflect sentiment. This may be expected to normalise over time, and we note that BGLF’s model-based approach saw its NAV drop by only a third that of Volta in March 2020. Fundamental long-term returns have been robust: 7.7% p.a. (dividend reinvested basis) since inception. Volta’s performance relative to that of its peers has been strong, and returns for investments made after the financial crisis were double those in prior years.