Q&A with Hardman analyst

In this note, we provide investors with a detailed Q&A with Volta’s Directors and Manager on the key issues as we see them today. These are structured into risk management (exposed sectors where loans are typically >30% below par make up just 10% of the portfolio, solvency is strong and there appears to still be a liquid market at a modest discount for many assets). We consider Volta’s re-investment opportunities and focus on the revised dividend prospects. Volta marks to market most of its assets and thus captures both “real” losses and investor sentiment (ca. two thirds of March’s losses), which may reverse over the next year or two.

• Importance of Cov-Lite documentation: Investors should not underestimate the importance of the market trend for Cov-Lite documentation. It will allow potentially vulnerable companies to survive materially longer (and potentially through to an economic recovery), a material positive for Volta’s performance.
• Performance: Volta’s March fall in NAV (34%) is better than peers with the same accounting approach. Volta’s CLO US equity positions had no April cash diversions (market average 17%). Underlying loans in sectors with prices mainly >30% below par are 10% of the book. The manager continues to outperform the market.
• Valuation: Volta trades at a 27% discount to NAV. Peer-structured finance funds, and a range of other debt funds, on average, trade at smaller like-for-like discounts/premiums. Volta has delivered faster-than-peer NAV growth for in-line/lower volatility. It targets an 8% of NAV dividend (11% yield on current s/p).
• Risks: Credit risk is a key sensitivity. We examined the valuation of assets, highlighting the multiple controls to ensure its validity, in our initiation note in September 2018. We noted the 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. Long-term returns have been good: ca.10% p.a. returns (dividend reinvested basis) over five years. The current portfolio-expected cashflow IRR is above this level. The dividend yield (8% of NAV is targeted, 11% on current share price) will be driven by cashflows.