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Volta Finance

Investment opportunities at this point of the cycle

14 Jan 2019 / Corporate research

With market concerns that the credit cycle might turn, in this note, we explore the opportunities Volta has in these conditions. While MTM losses are likely to increase, and some of the market prices of Volta’s holdings will not reflect their long-term value, there are upsides. We note: (i) spreads are likely to widen; (ii) more mis-pricing opportunities are likely to emerge; (iii) Volta has a broad diversification and a good credit track record; and (iv) its profile is very different from 2007-2008.

  • Strategy: Volta aims to preserve its capital across the credit cycle and to provide a stable stream of income (via quarterly dividends) by investing in a diversified portfolio of structured finance assets. The company has a flexible mandate, meaning that it can respond rapidly to market opportunities.
  • 2018 Report and Accounts: We have also taken the opportunity to review the 2018 R&A released in October. Of particular note is an incremental risk reduction in credit (lower impact of increasing default rate), valuation (even greater market pricing) and liquidity risks (33-month extension to Repos facility).
  • Valuation: Volta trades at a 13% discount to NAV. Peer structured finance funds, and a range of other debt funds, on average, trade at smaller discounts. In the medium term, Volta has delivered faster NAV growth than its immediate peers and an in-line volatility, making this absolute and relative discount an anomaly.
  • 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 in September. 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 there could be sentiment-driven, share-price volatility. However, long-term returns have been good: ca.13% p.a. returns (dividend reinvested basis) over five years. The current portfolio expected NAV return is broadly similar. The yield is 9.3% and will be covered, in our view, by predictable income streams.
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