July 2021 Monthly

In our 5 May 2021 note, Re-Set, Re-Fi, Re-Light my Fire, we explored how favourable market conditions mean that CLO vehicles can re-finance debt cheaply, enhancing the value of Volta’s equity positions (which have been increased substantially in recent years). We showed the impact on Volta’s CLO debt portfolio, and what this meant for new investment returns. The key message is that the favourable conditions are expected to lift returns by 1%-1.5% p.a. for several years. Volta is also benefiting from the unexpectedly low levels of defaults. Despite this favourable outlook, Volta still trades at a 16% discount to NAV, albeit down from March 2020 highs.

• Volta monthly report: Its May 2021 report showed that Volta’s NAV increased by 0.4% (YTD 8.9%). By asset type, it was +1.6% for CLO equity tranches, +1.2% for CLO debt, -2.6% for Cash Corporate Credit deals and ABS (this bucket has a one-month delay in publishing its NAV), +1.4% for Bank Balance Sheet transactions.
• Monthly commentary: Trailing 12-month default rates continued to decline in May to 1.7% (i.e. below most forecasts for 2% for both the US and Europe). On a six-month rolling basis, Volta received interest and coupons equivalent to a 15.9% yield on NAV. Volta expects cashflows to increase in the coming months.
• Valuation: Volta trades at a 15% discount to NAV (which is subject to significant external input and oversight). The relative discounts to Fair Oaks and Marblepoint seem anomalous, as, over the long term, Volta has delivered a better NAV performance. Volta aims for 8% NAV distribution (8.7% 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 good: 8.5% p.a. (dividend re-invested basis) since inception. Volta’s performance relative to its peers has been strong, and returns for investments made after the financial crisis were double those in prior years.