Re-Set, Re-Fi, Re-Light my Fire

In this note, we explore how favourable market conditions mean that CLO vehicles can re-finance debt cheaply, thus enhancing the value of Volta’s equity positions, which have been increased substantially in recent years. We show the impact on Volta’s CLO debt portfolio and the wider loan market, and what this means 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 benefiting from the unexpectedly low levels of defaults. Despite this favourable outlook, Volta still trades at a 15% discount to NAV, albeit down from March 2020 highs.

• Re-set/Re-fi opportunity: Volta has already seen five positions re-finance, at savings of 15bps-23bps. A further one is expected to complete in May (benefit ca.30bps), and several more in June/July. 20 positions could benefit and see the expected equity returns rise by 2% to 3%.
• Lower-than-expected defaults: Rating agency expectations of defaults in spring 2020 were ca.4x as high as the trailing default rate seen in March 2021. CLO vehicles have incremental rules and restrictions, meaning their defaults have typically been around half the wider market average.
• Valuation: Volta trades at a double discount: its share price is at a 15% discount to NAV, and we believe its mark-to-market NAV includes a further sentiment-driven discount (5%-10%) to the present value of expected cashflows. Volta targets an 8% of NAV dividend (10.2% 2022E yield on current share price).
• 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. The NAV is exposed to 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. 8.6% p.a. returns (dividend-re-invested basis) since initiation. With above-average returns on recent re-investments, the portfolio’s six-month historical cashflow yield is 16.3%, and the latest projected IRR is 13.3%. We expect 1.5x adjusted and nearly 2x statutory dividend cover in 2022.