October 2021 Monthly

In our 28 July note, Yield (10%, covered and growing) + capital growth, we explored how favourable market conditions mean that CLO vehicles can refinance debt cheaply, enhancing the value of Volta’s equity positions; this is expected to lift total returns by 1%-1.5% p.a. for several years. We noted how it will further increase dividend cover (Hardman & Co FY’21E: 1.8x) and generate capital returns through a growing NAV. The latter, in turn, will see the dividend rise (Hardman & Co FY’23E yield: 10.3%). A high and growing dividend yield, and capital growth, could be attractive to a range of buyers. Despite this favourable outlook, Volta still trades at a 13% discount to NAV.

• Volta monthly report: Volta’s Aug’21 report showed that its NAV fell by 0.5% (YTD: 12.8%). By asset type, it was -1.3% for CLO equity tranches, +0.6% for CLO debt, +0.7% for Cash Corporate Credit deals and ABS (this bucket has a one-month delay in publishing its NAV), and +1.5% for Bank Balance Sheet transactions.
• Monthly commentary: The six-month rolling interest and coupons received represent a 19.6% annualised cashflow yield on August NAV. The September CLO primary market pipeline is so high (with unprecedented YTD volume) that AXA IM expects some spread widening and reinvestment at attractive levels.
• Valuation: As noted, Volta trades at a 13% 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 (8.3% 2021 yield, 10.3% 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: 8.8% p.a. (dividend reinvested 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.