Hardman presentation: carpe diem

In this note, we review the manager’s recent Hardman Talks Seizing opportunities in volatile times presentation and Q&A. 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.

• How the manager adds value: AXA IM has ca.$21bn of CLO assets under management, giving it the scale required to invest in people and control systems. Its presence gives invaluable market knowledge, positioning and pricing power. As the listed vehicle, Volta is a highly visible and important part of this portfolio.
• May monthly report: In May, the CLO market experienced a brutal price adjustment, reversing four months of solid outperformance relative to classic credit and equity markets. Still, cashflows remain extremely robust, with six-month interest and coupons representing a 19.3% annualised cashflow to NAV.
• Valuation: Volta trades at a double discount: its share price is at a 14% discount to NAV, and we believe its MTM NAV still includes a further sentiment-driven discount (5%-10%) to the present value of expected cashflows. Volta targets an 8% of NAV dividend (10.9% 2023E dividend 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 good: ca.9% p.a. (dividend reinvested basis) since initiation. With above-average returns on recent reinvestments, the portfolio’s past six-month cashflow (annualised) yield is 19.3%. We expect near 2x 2022E dividend cover.