August 2022 Monthly

In our note, Hardman presentation: Carpe Diem, we summarised the manager’s 15 June Hardman Talks presentation, Seizing opportunities in volatile times. The key messages were i) refi/reset helped build annualised cashflows to a high-teen percentage of NAV, more than double the dividend payout, which should allow the NAV to grow over the medium term, ii) most underlying loans are floating rate, and so income will rise with interest rates, and iii) the net US exposure is positive in risky times. The presentation showed how strong the corporate market is and that, while defaults will rise, they start from a low point. There will be mark-to-market (MTM) volatility, but long-term cashflows are good.

• June monthly report: The CLO market experienced a further price adjustment
  (-7.2% for CLO equity tranches, -4.4% for CLO debt), with the NAV down 4.6%. Cashflows remain very robust (increased in each of last four months), with six-month interest and coupons equivalent to 20.6% annualised cashflow to NAV.
• Current market pricing: The manager comments that loans and CLOs are now priced at levels that are relatively similar to May/June 2020, when default rates were expected to be in the 10% to 15% range on a one year/18-month horizon, against the current expectation that they will increase by a few percentage points.
• Valuation: Volta trades at a 14% discount to NAV (which is subject to significant external input and oversight). The relative discount to Fair Oaks seems anomalous, as, over the long term, Volta has delivered a better NAV performance. Volta aims for 8% NAV distribution (dividend yield 11.4% 2023E).
• 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 good: 7.9% 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.