Volta Finance Ltd (LON:VTA) is the topic of conversation when Hardman and Co’s Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.
Q1: Your recent report sits behind a disclaimer. What can you tell us about that?
A1: It is just the standard disclaimer that many investment companies have. In essence, for regulatory reasons, there are some countries (like the US) where the report should not be read. In the UK, because CLOs are not a simple asset class, the report should only be looked at by professional/qualified investors.
Q2: You called your recent piece Simple Simon Says. What can you tell us about it?
A2: In this note, we explore three aspects of Volta Finance’s portfolio, highlighting their simplification – simplified.
Firstly, unless there is a compelling, opportunistic case, new investments will be in CLO structures only, and not in other structured finance instruments. The asset mix is being simplified.
Second, there should be an increased weighting to AXA IM managed CLO vehicles, reflecting good performance and lower fees. The manager mix is being simplified.
Third, we detail why CLOs are, at heart, simple cashflow structures, which should be viewed as such, free from the terminology that may confuse a clear story.
Q3: So, taking your first point first, why the focus on CLOs rather than other structured debt instruments?
A3: Over time, there has been an increasing allocation to CLOs within the previous mandate of “a diversified investment strategy across structured finance assets”. By September 2021, they were 83% of the portfolio. The policy recent change means that, as non-CLO positions mature, they will be reinvested in CLO elements – so increasing the trend further.
Historically, the company’s message was that a flexible mandate gave it the option to exploit any part of the structured finance market. While this optionality had a value, and it came at a cost in terms of investment focus. It is also likely that some investors were further deterred by having a broad range of other instruments and terminology to master. Simplifying the investment mandate reduces this potential investor drag.
Q4: And the greater weighting to AXA IM managed CLO vehicles?
A4: AXA IM is the manager of Volta, and currently selects CLO investments managed by a variety of financial institutions.
AXA IM is one such manager of the underlying CLOs and, as at 31 July 2021, its vehicles represented 4.8% of NAV. Where the investment is in an AXA-managed CLOs, these are stripped out of the company’s fee calculation so should such positions rise to 20% of the portfolio, the management fee savings give VTA shareholders an extra 20bp gross performance.
AXA IM CLO managed vehicle performance has been good, and we outline some details of that in the note. We also see higher risk control leveraging the synergies between the team in charge of managing Volta Finance and AXA IM CLO vehicles and more clarity of message. With AXA IM being the manager, we believe many investors will be expecting AXA IM to be the main manager of underlying assets too.
Q5: And your point about CLOs being simple cashflows?
A5: A CLO structure is, at its heart, very simple. A portfolio of loans is acquired by a company (a special purpose vehicle – SPV), which funds the purchase by issuing a mix of different tranches of bonds (CLO debt tranches) and “income notes” (CLO equity tranche). The interest received from the loan portfolio is used to pay, firstly, the coupons on the CLO debt tranches, and then all the excess cashflow is for the profit of the “equity” tranche. There is a lot of terminology but the basic structure is a simple cashflow.
