TIDMAEFS
RNS Number : 1049N
Alcentra European Fltng Rate Inc Fd
15 May 2020
Alcentra European Floating Rate Income Fund Limited
Market Commentary
The Fund was up 4.44% (gross) in April, behind both the Credit
Suisse Western European Leveraged Loan Index ("CS WELLI") (hedged
to GBP) which was up 6.59%(1) , and the Credit Suisse Western
European Leveraged Loan Index excluding USD which was up 7.48%(2)
for the month.
After a very weak March in which the market traded materially
lower on concerns around the impact of the Covid-19 virus on global
economies, April saw a strong recovery. Loan prices rebounded
c.7%(3) as sentiment improved on the back of supportive government
and central bank actions, as well as due to an improvement in fund
flows and a lack of new loan issuance. While the initial rebound in
late March saw higher quality and defensive names outperform, the
recovery in April saw the strongest performance in B and CCC assets
as well as in the sectors that were the weakest in March
(Metals/Minerals, Housing, Retail, Chemicals). After seeing some
initial underperformance relative other credit asset classes in
March, European Loans outperformed in April, returning more than US
Loans (4.2%)(4) , EU HY (5.82%)(5) and US HY (3.68%)(6) ,
benefitting from the improved sentiment and technicals as well as a
from a lower energy exposure.
Given the recent market volatility we did not see any new loan
deals price in April. However, we have seen high yield bond
issuance, both from higher quality credits (e.g. Netflix), but also
names looking to improve their liquidity buffers (e.g. Merlin),
although overall issuance volumes remain low. Looking forward we do
think there is scope for companies to look to access the primary
loan market, with higher quality and rated companies looking to
term-out maturities (e.g. Synlab and Nielsen currently in market)
and potentially companies looking to improve liquidity, however the
scope for material M&A driven issuance remains muted.
The market for CLO formation has also re-opened, with three new
deals pricing in the last week of the month amounting to
c.EUR0.8bn(7) total volume. Despite this, for now, arbitrage
conditions remain difficult and a standard four-year reinvestment
period deal does not work. Recent issuance has been focussed on
issuing smaller, shorter and less levered deals in order to term
out warehouses. This is a positive indication of the maturity of
the European CLO market and is a trend that is expected to
continue. In addition, demand has been aided by more positive fund
flows into unlevered funds and SMAs.
While the S&P default rate for the 12 months ending April
remained stable at 0.42%(8) , it is expected to increase in the
coming months. S&P are forecasting an 8%(9) default rate for
the European Loan market, although the final figure will depend on
the length and severity of the pandemic and the resulting economic
weakness. Initially we believe defaults will be concentrated on
more directly impacted businesses, where travel and mobility
restrictions, as well as working capital unwinds, mean they are at
risk of seeing near term liquidity pressure. The S&P distress
ratio, a measure of names in the market trading below 80 has shown
a material improvement from >50% at the trough in mid-March,
c.36% at the end of March to c.18% at the end of April(10) .
Our focus continues to be on understanding the impact of
lock-down and quarantine measures on a sector by sector and company
by company basis. We have focused on reducing our exposure to
companies where we see the most downside and look to position the
fund in names we think have better scope for recovery as economies
begin to normalise. The technicals in the European Loan market
remains solid with limited new loan issuance and solid demand from
both unlevered funds/SMAs, as well as buying of lower rated lower
priced credits by credit opportunities funds. While the prospect
for volatility remains, particularly idiosyncratic volatility as
companies begin to report results, we do think returns on offer
remain attractive, particularly in the single B space where spreads
of 600bps-800bps are on offer.
(1) Credit Suisse Western European Leveraged Loan Index, All
Denom, hedged to GBP, 30 April 2020
(2) Credit Suisse Western European Leveraged Loan Index, Non
USD, hedged to GBP, 30 April 2020
(3) Credit Suisse Western European Leveraged Loan Index, Non
USD, hedged to EUR, 30 April 2020
(4) Credit Suisse Leveraged Loan Index, All Denom, hedged to
EUR, 30 April 2020
(5) Ice of BAML European High Yield: HP00, 30 April 2020
(6) Ice of BAML US High Yield: H0A0, 30 April 2020
(7) S&P Global Market Intelligence, CLO Historical Stats, 2
May 2020
(8) S&P Default Ratio, 30 April 2020
(9) S&P Global Market Intelligence, European Weekly, 2 May
2020
(10) S&P Distress Ratio, 30 April 2020
Portfolio Manager's Commentary
Generally the best performing credits in the fund were names
that underperformed in March and benefitted from the improved
sentiment and outlook in April. The top performing credit was a
French software distribution business that was up +35.6% on better
results and outlook. The second best performing credit was a UK
based child care provider that initially traded lower on concerns
around the lock-down impact in demand, but rebounded +34.8% due to
increased investor confidence given the importance of the firm's
activity.
The weakest credits continued to be those most at risk of
needing nearer term liquidity. The largest decline, an outdoor
clothing retailer, was down -25.7% on concerns around outlook and
recovery for their business. The second weakest credit, a European
mobile holidays business, was -20.7% lower due to concerns around
the impact of the virus on demand and the need to raise extra
liquidity.
S
For further information please contact:
Alcentra Limited
Simon Perry +44 20 7367 5272
Factsheet
An accompanying factsheet which includes the information above
as well as wider commentary on the investments made by the Fund can
be found on the Fund's website www.aefrif.com .
Background Information
Alcentra European Floating Rate Income Fund Limited, a Guernsey
Authorised Closed-Ended Collective Investment Scheme, regulated by
the Guernsey Financial Services Commission and listed on the Main
Market of the London Stock Exchange invests predominantly in senior
secured loans and senior secured bonds issued by European
corporates and targets returns (net of fees and expenses) of 7% to
10% per annum. The Fund targets a dividend yield of 5.5 pence per
GBP1.00 issue price of the initial offering of shares in the Fund
for the first full year of investment, paid quarterly.
Important Notices
Neither the contents of the Company's website nor the contents
of any website accessible from hyperlinks on the Company's website
(or any other website) is incorporated into, or forms part of, this
announcement.
This report is aimed at existing investors in the fund and has
not been approved by any competent regulatory authority.
The information contained in this document is given as at the
date of its publication (unless otherwise marked) and is based on
past performance. Past performance is not a guide to future
performance and the value of investments and investment value can
go down as well as up. The future performance of the Fund will
depend on numerous factors which are subject to uncertainty.
Including changes in market conditions and interest rates and
exchange rates and in response to other economic, political or
financial developments, investment return and principal value of
your investment will fluctuate, so that when your investment is
sold, the amount you receive could be less than what you originally
invested. Past or current yields are not indicative of future
yields.
This document does not contain any representations, does not
constitute or form part of any solicitation of any offer to sell or
invitation to purchase any securities of the Fund, nor shall it or
any part of it or the fact of its distribution form the basis of or
be relied upon in connection with any contract therefor, and does
not constitute a recommendation regarding the securities of the
Fund. Nothing in this document should be construed as a profit or
dividend forecast.
This document includes statements that are, or may be deemed to
be, "forward-looking statements". These forward-looking statements
include, without limitation, statements typically containing words
such as "believes", "considers", "intends", "expects",
"anticipates", "targets", "estimates", "will", "may", or "should"
and words of similar import. The forward-looking statements are
based on the beliefs, assumptions and expectations of future
performance and market development of Alcentra Limited
("Alcentra"), taking into account information currently available
and made as at the date of this document. These can change as a
result of many possible events or factors, not all of which are
known or within Alcentra's control. If a change occurs, the Fund's
business, financial condition, liquidity and results of operations
may vary materially from those expressed in the forward-looking
statements. By their nature, forward-looking statements involve
known and unknown risks and uncertainties. Forward-looking
statements are not guarantees of future performance. Alcentra
qualifies any and all of the forward-looking statements by these
cautionary factors. Please keep this cautionary note in mind while
reading this document.
An investment in the Fund is suitable only for investors who are
capable of evaluating the merits and risks of such an investment
and who have sufficient resources to be able to bear losses (which
may equal the whole amount invested) that may result from such an
investment. An investment in the Fund should constitute part of a
diversified investment portfolio. Accordingly, typical investors in
the Fund are expected to be sophisticated and/or professional
investors who understand the risks involved in investing in the
Fund.
Alcentra gives no undertaking to provide recipients of this
document with access to any additional information, or to update
this document or any additional information, or to correct any
inaccuracies in it which may become apparent including in relation
to any forward-looking statements. The distribution of this
document shall not be deemed to be any form of commitment on the
part of Alcentra to proceed with any transaction.
This document is issued by Alcentra Limited, which is authorised
and regulated in the United Kingdom by the Financial Conduct
Authority and whose registered address is at 160 Queen Victoria
Street, London, United Kingdom, EC4V 4LA.
BNY Mellon is the corporate brand of The Bank of New York Mellon
Corporation and may also be used as a generic term to reference the
Corporation as a whole or its various subsidiaries generally.
(c) 2019 The Bank of New York Mellon Corporation. All rights
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owners.
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END
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