Volta Finance Ltd (LON:VTA) is the topic of conversation when Hardman & Co’s Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.
Q1: Mark, your recent report sits behind a disclaimer. Can you just remind us why that’s there?
A1: It’s a very 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 seen as a simple asset class, the report should be looked at only by professional and qualified investors. But a very standard disclaimer and nothing to worry about.
Q2: What can you tell us about your recent piece, ‘2024 Experience Bodes Well for 2025’?
A2: Volta Finance has delivered a 21.2% 2024 total NAV return. Importantly, that outperforms B-rated CLO tranches, which delivered 19.2%; US high yield, 8.2%; Euro high yield, which was 8.6%; and global loans, which were 7.3%. So, what its performance did in 2024 is reflect both positive markets, because all those benchmarks were positive, and the incremental value added by the manager through its asset selection and portfolio management, hence the outperformance.
Now, looking into 2025, we expect another strong year from CLOs, with more market growth, partially driven by loans issued to fund greater private equity activity, and stable, if indeed not falling, defaults, both of those offsetting some spread tightening and fewer pull-to-par benefits and loan restructuring. So, a good market.
The year has started well, with the January fact reporting a 1.7% return in the month, and it’s now been positive every month since April of 2023, and again beating the indices I mentioned earlier.
What we’ve seen with AXA IM’s outperformance is that it’s been delivered through economic cycles, hence the title ‘2024 Experience Bodes Well for 2025’.
Q3: Now, you alluded to some detail about the different asset class performances within Volta’s portfolio. Could you comment on the biggest exposures?
A3: Looking at the key asset classes, Volta’s CLO equity tranches’ return was nearly 30%, but there was some volatility. I mean, for example, two months each with a 4% plus return and of negative returns.
In contrast, the CLO debt elements delivered nearly a 26% return, but it was a much more stable return, including positive returns every month.
Now, AXA IM’s management of the portfolio is very active. If we look at CLO equity as a percentage of the portfolio, it fell from one and a half times that of debt, CLO debt in September of 2023, to 1.1 times at the end of July 2024, before rising back to one and a half times again by the year-end of 2024.
Now, this flexible mandate allows the company to exploit whichever elements of the CLO market offer the optimal risk and risk-reward returns.
Q4: 2024 and 2023, for that matter, were great years. What’s driving the 2025 outlook?
A4: Volta Finance starts with very strong cash flow generation. The annualised second half-24 cash flow generation was 22% of the December NAV. Importantly, the risk to cash flows has also been reducing, with, for example, some US CLO managers reducing their holdings of CCC-rated assets after a strong rally, and that manages the level of CLO haircut in the portfolios.
The major credit rating agencies expect loan default rates to decrease and corporate profitability and cash flows to remain strong.
The CLO markets overall are expected to be positive, with the overall issuance in 2025 even possibly exceeding the record 2024 levels and with a much more sustainable mix.
Now, our note details some of the challenges, such as spread tightening, fewer non-recurring gains, and there remain a number of, dare I call them, known unknowns, like the level of interest rates, global conflicts, and the impact of many of Trump’s policies.
Overall, though, we are forecasting another very strong year.
Q5: What can you tell me about the risks?
A5: All investments carry risks. CLOs obviously bring credit-related risks, but the CLO structures do have multiple risk enhancement features.
AXA IM’s and the other managers’ skill in picking good managers was seen, for example, early in the pandemic when 20% of US CLO structures saw cash diversion, but Volta had none.
Now, the end result of this risk enhancement is shown by the absence of any CLO investment-grade defaults between 2012 and 2021, and losses under Fed stress test scenarios were just one 35th of the level of corporate loans.
In addition, there is obviously a sentiment risk to what is not seen as a simple asset class.
