November 2022 Monthly

With its MTM accounting policy (not adopted by all peers), Volta cannot be immune from turmoil in debt markets. Its NAV fell sharply in September, reversing gains in July and August, even though defaults currently remain low. In our note of 16 September 2022, Cash is king and the king is rocking and rolling, we highlighted that Volta is no different from any other investment company, in that it identifies when the market has mispriced long-term cashflows. We examined its successes in that current cashflows are at near-record levels and 2.7x the dividend payment. Looking forward, we reviewed why defaults might 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 that position.

• Sep’22 Factsheet: “This month, the structured debt market has been significantly impacted by the “liquidity” crunch resulting in the Volta net asset value (“NAV”) declining by -7.2%, totally reversing the +7.2% NAV uplift seen in July/August.” CLO equity positions fell 5.6% and debt 8.7%. Annualised receipts were 22.4% of NAV.
• Resilience: The starting position is strong: “There has been no significant increase in the proportion of CCC loans in CLOs and the CLO loan default rate remains very low (0.4% in Europe and 0.9% in the US for the last 12 months)”. We outlined, in our note of 16 September, why we believe the deterioration will be manageable.
• Valuation: Volta trades at an 18% discount to NAV (which is subject to significant external input and oversight). The relative discount to Fair Oaks seems anomalous, as, over the long term, Volta has delivered a better NAV performance. Volta aims for 8% NAV distribution (dividend yield 12.4% 2023E).
• 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: 7.2% 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.