September 2022 Monthly

In our note, Hardman presentation: Carpe Diem, we summarised the manager’s recent Hardman Talks presentation, Seizing opportunities in volatile times. The key messages were i) refi/reset helped build annualised cashflows to a high-teen percentage of NAV, more than double the dividend payout, which should allow the NAV to grow over the medium term, ii) most underlying loans are floating rate, and so income will rise with interest rates, and iii) the net US exposure is positive in the current environment. Recent months have shown that the MTM can be volatile ‒ both negative (May/June) and positive (July), but Volta is about identifying long-term cashflows, which remain strong and stable.

• July monthly report: The CLO market saw a partial recovery of prior-month losses (+5% for CLO equity tranches, +2.3% for CLO debt), with the NAV up 4.5%. Cashflows remain very robust (increased in each of last five months), with six-month interest and coupons equivalent to 21.4% annualised cashflow to NAV.
• Market conditions: Across CLO markets, USD CLO equity received cashflows below expectations due to the loss of the Libor floor (as interest rates rose), in contrast with EUR deals that received higher cashflows than expected. Combined with a rally in EUR CLO equity price (after two challenging months), this led to a double-digit performance for this asset class.
• Valuation: Volta trades at a 17% 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 11.4% 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: 7.7% 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.