May 2023 Monthly

In our review, An easy guide to the benefits of CLOs, we noted that the industry-specific terminology can give the impression of a complexity that belies reality. Accordingly, in that note, we gave investors a simple guide to what CLOs are, the benefits they provide, and how Volta is taking the market opportunities. The core of CLOs is uncomplicated cashflows. They are just a pooling of loans into a vehicle, which funds itself by issuing a range of debt and equity. The pool has diversification and credit-enhancement benefits, which result in investors in debt getting a better-than-average risk/return, and investors in equity getting double-digit returns. Cenkos is hosting an investor lunch on 16 May (contact [email protected] for further details).

• Strong current position: Volta’s current annualised cash receipts are ca.20% of NAV, reflecting low defaults (strong corporate cashflows and profitability), low locked-in CLO borrowing costs, CLOs being floating-rate investments and Volta’s portfolio positioning over recent years into CLO equity.
• Resilience going forward: In our note, R&A shining light on 20%+ IRR base-case scenarios, we reviewed how Volta generated cashflows, and why defaults would rise – but not to the level built into loan prices. We highlighted Volta’s diversification and geographical exposure. We also noted that the Report and Account disclosure could help understand these issues.
• Valuation: Volta trades at a double discount: its share price is at a 16% discount to NAV, and we believe its mark-to-market (MTM) NAV still includes a further sentiment-driven discount to the present value of expected cashflows. Volta targets an 8% of NAV dividend (11.6% 2023E 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 robust: 7.7% 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.