Volta Finance Ltd (LON:VTA) has published its results for the six month period ended 31 January 2023.
The half-yearly financial report can be found below:
CHAIR’S STATEMENT
Dear Shareholders
The past six months have been challenging on a global scale – macroeconomic and geopolitical headwinds, war in Europe, soaring inflation in the world’s leading economies and a cost-of-living squeeze have impacted individuals, companies and governments. Financial markets have continued to be eventful and at times it has seemed that the only certainty is uncertainty.
Against this backdrop, we remain optimistic about the second half of our financial year. The Company’s portfolio is performing well, with strong cash flow generation in excess of 21% per annum and we have continued to maintain our dividend of 8% of NAV, which equates to a 9.2% 2023 yield on the current Share price. It is disappointing that in the first half of our financial year, the Company’s NAV and Share price have fallen marginally from €6.22 to €6.16 and from €5.24 to €5.22 respectively, however we see significant value upside in those current levels. We believe the Company is trading at a double discount: our Share price trades at a discount to NAV, and also the mark to market NAV figure includes a further sentiment-driven discount to the present value of expected cash flows.
Financial markets have been highly volatile in the last six months since our financial year end on 31 July 2022. Equities have fallen and then risen in most markets, although the NASDAQ remains down on the period and whilst oil prices have reduced from the highs of June 2022, they remain at significantly elevated levels compared to long term averages. The most notable changes have been in bond markets, where after more than a decade of ultra-low interest rates, central banks have been compelled to introduce multiple rate hikes in an attempt to choke off inflation. As at 31 January 2023, German 10 year government bond rates are now practically 3 times their level at the end of July 2022 (2.44% vs 0.82%) and the UK is almost double (3.52% vs 1.81%).
The leveraged loan asset class has nonetheless remained resilient through this period and exhibited better price stability than similarly-rated high yield bonds due to its floating rate nature and extremely short duration. Defaults remain extremely low at 1.0% and whilst the level of defaults will undoubtedly rise, projections of 2.5% (S&P’s) for US loans and 2.5% (Fitch’s) for European loans in the coming year are still markedly below those experienced in previous downturns and credit cycles. Many market commentators believe that defaults in 2023 will be more concentrated in the second half and early YTD experience appears to support this. Loan borrowers have enjoyed many years of low rates and flexible financing terms, which means they are going into these more difficult times from a position of relative strength.
Many borrowers are undeniably starting to feel the impact of recession and a downturn in consumer and government spending. Short term supply issues in raw materials have started to ease and are expected to continue to do so as China re-opens post COVID-19, but inflation is impacting costs, particularly for wages and energy and the financial health of borrowers is closely aligned with their ability to pass through costs, along with ultimate demand for their products and services. Consumer-driven businesses such as retail and leisure are out of favour, but even non-cyclical consumer sectors such as food are under pressure.
CLO issuance was subdued in 2022, with issuance down over 30% on the prior year and no refinance or reset activity post April 2022. The second half was particularly quiet as many buyers chose to sit on the side-lines awaiting greater clarity and market stability. Additionally in the UK, the disastrous mini-budget of the short lived Truss government led to widespread selling of highly rated CLO and structured credit paper as pension funds scrambled to match their liabilities from their most liquid assets, creating an overhang of paper in the market and causing spread levels to blow out.
Economic theory tells us that it is much harder to make attractive returns in efficient, perfectly functioning markets. So, whilst the environment may be more challenging than in recent years, it also presents opportunities for our Investment Managers:
- The Company’s portfolio is performing well with very high levels of cash flow generated. Loans are floating rate instruments and when rates rise, so do the cash receipts into a CLO (of course, that rise in interest rates puts pressure on borrowers and is a contributing factor in defaults, so careful analysis becomes even more important);
- defaults are low (0.4% in the Euro portfolio and 0.7% in the US portfolio) and even the most bearish analysts are anticipating default levels significantly below where the market is pricing risk, leading to our belief that this market is pricing inefficiently and offers opportunity;
- the portfolio is highly diversified by geography and industry, which helps maintain portfolio quality when industries suffer sectoral downturns;
- CLO managers have been focusing on building and maintaining cushion against the potential for downgrades and breaches of stress tests. Market volatility has allowed them in many cases to rotate out of lower quality credits and into more favoured names; and
- The Company has a best-in-class management team in AXA IM who are highly experienced in different market conditions. We share AXA IM’s view that current markets have mispriced credit risk and that this offers interesting value propositions. Manager and security selection are key, as is active management and monitoring of the portfolio and our managers continue to selectively make new investments in primary and secondary markets.
We find ourselves in interesting times. With so much uncertainty and negative news flow, it would be easy to run for cover in ‘safe’ asset classes and avoid higher-octane strategies such as CLOs. If the last six months has shown us anything, it is that safety can be deceptive as inflation has eroded the value of cash and low-yielding government bonds have fallen in value as rates rose. In times like these, we should expect volatility across financial markets but the skilful will find opportunities through market inefficiencies and cash generation will provide cushion to financial shocks. I thank you for your continued support and please do not hesitate to contact me through the Company Secretary.
Dagmar Kershaw
Chair
5 April 2023
Volta Finance Ltd (LON:VTA) is a closed-ended limited liability company registered in Guernsey. Volta’s investment objectives are to seek to preserve capital across the credit cycle and to provide a stable stream of income to its Shareholders through dividends that it expects to distribute on a quarterly basis.
