Cash is king and the king is rocking and rolling

Volta is no different from any other investment company in that it identifies when the market has mispriced long-term cashflows. In this note, we examine its success in that current cashflows are at near-record levels and 2.7x the dividend payment. Looking forward, we review why defaults may not rise to the level now built into loan prices – a view consistent with that of rating agencies and Volta – as well as the risks to this position. We note the current level of inflation is positive, as long as it is not sustained for too long. We also highlight Volta’s diversification and geographical exposure. Bearing in mind these issues, the discount is anomalous.

• Strong current position: Current cash receipts are 21.4% of NAV, reflecting low defaults (strong corporate cashflows and profitability, ability to pass on inflation to date), CLOs having reduced borrowing costs, CLO floating rate investments, and Volta’s portfolio positioning in recent years into CLO equity.
• Resilience going forward: Rating agency/Volta/our confidence in relatively the low expected level of defaults may reflect i) strong starting position, including high cash cushions in CLO structures, ii) preponderance of PE, iii) inflation still a friend not foe. iv) covenant-lite documentation, and v) Volta diversification.
• Valuation: Volta trades at a double discount: its share price is at a 19% discount to NAV, and we believe its MTM NAV still includes a further sentiment-driven discount to the present value of expected cashflows. Volta targets an 8% of NAV dividend (11.3% 2023E yield on current share price).
• Risks: Credit risk is a key sensitivity. We examined the valuation of assets, highlighting the multiple controls to ensure its validity, in our initiation note, in September 2018. The NAV is exposed to 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 there could be sentiment-driven share price volatility. Long-term returns have been 7.7% p.a. (dividend reinvested basis) since initiation. With above-average returns on recent reinvestments, the portfolio’s past six-month cashflow (annualised) yield is 21.1%. We expect near 2x 2022E dividend cover.