Positive trend continues in December
Volta Finance and Carador Income Fund have reported positive NAV performance for the month of December (Volta +1.4%, Carador +3.1%). This maintains the trend of strong monthly returns since the CLO market recovery began in March 2016.
In December, all post-crisis CLO tranches experienced a positive month with BB and B US debt tranches rising 2.7% and 4.5%. These tranches have delivered a return of 21.7% and 23.6% in 2016 respectively.
Three CLO funds have reported figures to the end of December (BGLF is yet to report) and it has been a strong year for the sector with an average NAV return of 20.1% across the three funds. Fair Oaks Income Fund has generated a return of 24.9% in 2016 followed by Carador (20.1%) and Volta (15.2%).
Carador has also announced a dividend of $0.0275 per share for Q4 2016 bringing total dividends for the year to $0.095 per share. This is ahead of target dividend of $0.09 per share as the re-weighting of the portfolio between mezzanine and equity tranches during the year has enabled a higher distribution.
After a turbulent start to 2016, the CLO market has benefited from significant spread tightening to deliver a year of healthy returns. CLO spreads have tightened for a number of reasons including a higher allocation from investors seeking floating rate exposure. There was a significant level of refinancing activity ahead of the risk-retention deadline in the US. Almost $50 billion of refinancings occurred in 2016 with $37 billion of this taking place in Q4. The resulting lower weighted average cost of the debt tranches can provide a meaningful uplift to the IRR expectation of equity tranches investors.
The CLO funds trade on an average 2.4% discount to NAV and offer a 10% prospective dividend yield. We believe this represents one of the more attractive sub-sectors in the alternative funds universe given relatively low default outlook for the market and the ability to capitalise on relative value opportunities. Volta and Fair Oaks remain our top picks in the sector.|
|Liberum on CLOs;
Fair Oaks Income Fund (Mkt Cap £250m)
26.4% NAV return in 2016
Fair Oaks Investment Fund's (Fair Oaks) NAV per share was $1.005 as at 30 December 2016, a 3.8% monthly return including dividends. The company declared a dividend of 5.75 USD cents per share in December that brings the total dividend for the year at 13.45 USD cents per share.
The shares will go ex-dividend on 12 January 2017.
The JP Morgan CLOIE post-crisis B rated index was up 4.5% in December. Fair Oaks’ positive monthly performance was driven by both equity and mezzanine investments. Market default rates in the US decreased slightly to 2.06%.
Fair Oaks has confirmed its intention to proceed with the proposals under which Shareholders will be offered an option (but will not have an obligation) to extend the duration of their investment, and also with a further equity raise through a C share. The documentation in respect of the proposals is expected to be published in early March, with a deadline for elections under the proposals and applications under the fund raise in late March.
Fair Oaks believes that control positions in new CLOs have the potential to offer one of the most compelling investment opportunities in credit markets at this point in the cycle given supportive loan fundamentals and tight CLO liabilities.
Fair Oaks' 2016 NAV total return was 26.4% validating Fair Oaks' strategy and the significant investment opportunities CLOs present. We expect the positive NAV performance to continue based on the strong credit performance of the equity investments during the year and the opportunistic investment in mezzanine tranches. Fair Oaks currently trades on a 2.7% discount to its December NAV against the peer group average of 3.1%. The current yield is 13.8%.|
Strong monthly returns continue
The monthly results for Blackstone/GSO Loan Financing (Blackstone) and Carador Income Fund (Carador) continue the run of strong monthly results for the sector, with NAV up 1.96% and 2.16% respectively. The strong positive performance comes against a backdrop where equity markets have hit all time record highs following the US election and US Treasuries lost 2.67% in November (the worst performance since 2009). Fixed income weakness has carried over to credit, with investment grade credit losing a similar 2.68% during the month (Barclays U.S. Corporate Index); high yield credit lost 0.07% over November (Credit Suisse High Yield Index), while leveraged loans performed better, gaining 0.32% (Credit Suisse Leveraged Loan Index).
November issuance outpaced that seen in October and was the most active month for US CLO issuance since June 2015, with demand boosting issuance before the introduction of US risk retention rules in December. US volumes totalled $10.9 bn through 21 issues, the European market was also active with five new issues totalling €2.0 bn. Spreads continue to tighten, with the most recent European CLO reduced its AAA spread from 145bps to 85bps.
The CLO sector is one of the most attractive on a relative basis in our alternatives universe. There is potential for further yield compression in the short-to-medium term and the underlying cash return from CLOs has been strong given that defaults remain low. The CLO funds trade on a peer group average discount of -5.1%, which has narrowed c.1% over the past month. Carador trades in line with the average, at a discount of -5.4%, while Blackstone is tighter at -1.4%. The sector has an average prospective dividend yield of 10.4%.|
Double-digit NAV returns likely for 2016
Three of the CLO funds have announced October performance figures this morning with a continuation of the recent trend of strong monthly returns. CLO debt tranches were broadly positive during the month with BB and B tranches in the JP Morgan CLO Index rising 0.9% and 1.6% respectively. According to the index, CLO equity prices lost -1.3% in the month although this mainly reflects quarterly distributions during October. The majority of the London-listed funds experienced positive returns from their CLO equity investments.
All three funds (Volta, Fair Oaks and Carador) with mark-to-market valuation policies experienced strong returns in the month. Fair Oaks Income Fund was the best performing fund in October (+2.6%) and over the past 12 months (+14.8%).
CLO issuance reached its highest level since June 2015 during October as demand from investors helped to boost issuance before the introduction of US risk retention rules. Equity investors should benefit as spreads on senior tranches tightened to 143bps (161bps in June) on US CLOs and as low s 98bps on European CLOs.
The CLO funds trade on an average 6.0% discount to NAV and offer a 10.6% prospective dividend yield. We believe this represents one of the more attractive sub-sectors in the alternative funds universe given relatively low default outlook for the market and the low exposure to oil and gas / energy. Volta and Fair Oaks remain our top picks in the sector.
|The biggest risk recently was the likelihood of a £Sterling bounce from an oversold 1.10....rallied to 1.16 last week, knocking 5% off the Sterling price. Quite likely further to go...|
|Had a close read of the Annual Report just out.
I found the commentary on Principal Risk Factors very useful and the Chairman’s statement.
I was surprised that I could find no info on defaults in the portfolio(especially as we do not get this info in the Monthly Report) or of Shareholders with 3%+.
They also gave no figures on the projected impact on the portfolio of a change in interest rates-something I was looking for- but did note the following from the Risk section quote Given that the Company’s investments have floating interest rate characteristics, risk arising from interest rate volatility is modest unquote-would have preferred it if it had been quantified.|
Positive performance in September
Volta's NAV per share as at 30 September 2016 was €8.2 including the dividend of €0.15 paid in the month. The September NAV is higher by 1.4% compared to the August NAV mainly due to positive performance in most credit and equity markets.
In September, Volta sold four positions (two USD CLO debt and two European CLO debt) with expected yields close to 4.5%; no purchases were made. The company generated cash of €1.0m in interest and coupons during the month bringing the total cash holdings to €8.0m. The mark-to-market variations in September were +1.2% for Synthetic Corporate Credit deals, +1.8% for CLO Equity tranches, +1.7% for CLO Debt tranches, +1.8% for Cash Corporate Credit deals, and, +0.7% for ABS.
Carador Income Fund
Carador's NAV per share as at 30 September 2016 was $0.7466 a 1.6% increase to August NAV per share. In the quarter, the company received estimated net cash flows of $20m or 0.0371 per share increased by 14% compared to Q2 2016.
Carador traded $101m in nominal value during the month of September and the weighted average risk-adjusted IRR for all investments is approximately 14.1%. The company also sold three tranches of 1.0 BBs and three tranches of 2.0 Income Notes at a weighted average risk-adjusted IRR of approximately 10.38%. As at September 2016, the portfolio comprised 73.93% of NAV in Income Notes and 26% of Mezzanine Notes.
The Q3 2016 dividend of $0.0225 per share will be paid on 2 November 2016.
The CLO issuance grew this quarter and could potentially pick up before the risk retention requirement starts to apply at the end of December. The high yield and loan markets continue to advance and should allow CLO funds to maintain their positive performance. Volta is trading at a 10% discount approximately to its September NAV and Carador at 2.9%. The average for the sector is 2.8%, with Fair Oaks trading at a 2.3% premium.|
Volta Finance Ltd.
2.8% NAV growth as market rally continues
Volta's NAV was €8.09, up 2.8% over the month in line with the post-Brexit rally in credit markets which extended into August. The growth was driven by positive mark to market valuation changes in most asset classes, notably of +3.1% for CLO debt tranches, +2.4% for CLO equity tranches, +4.4% for cash corporate credit deals and +3.3% for ABS.
The company received €1.4m in interest and coupon payments. The company is now considered fully invested, with €3.4m in cash or cash equivalents, although it continues to see opportunities in mezzanine and equity CLO tranches, RMBS tranches, as well as cash corporate credit and synthetic corporate credit.
The company continues to improve its portfolio and rotate out older positions with lower yields. The weighted average life of the portfolio is now 3.5 years, which the company aims to continue to extend.The company is now trading at 12.4% discount to the end of August NAV, this compares to a -3.2% average peer group discount. The current yield is 9%.|
|Liberum;Specialist FinanceCLO FundsPost-Brexit rally continuesEventCarador Income Fund and Blackstone/GSO Loan Financing have both published NAV reports for August, reporting monthly gains of 2.99% and 0.13% respectively. This follows a similarly positive month for Fair Oaks Income Fund which reported a 2.3% NAV return for August last week. ? The post-Brexit rally and positive sentiment in credit markets extended into August as European loans returned 0.88% and high yield rose 1.86% for the month. The JP Morgan CLOIE post-crisis B-rated index was up 7.4% in August. Spreads continue to tighten across the asset class as a result of strong demand, The spread to maturity for the index was 11.7% at 31 August in line with 31 December 2015 levels and European CLO 2.0 secondary spreads also closed the month inside year-end 2015 levels. Loan and CLO new issuance was minimal in Europe over the month of August, although this is likely to ramp up in September. Issuance in the US was strong with 13 new CLOs ($5.9bn) issued. Post period end BGLF announced that it has increased it's target dividend yield to an annualised rate of 0.10 per share as income has increased as the portfolio has have rotated out of senior secured loans into CLOs. Liberum viewThe CLO sector is one of the most attractive on a relative basis in our alternatives universe. There is potential for further yield compression in the short-to-medium term and the underlying cash return from CLOs has been strong given that defaults remain low. Carador is now trading at par, with BGLF at a small discount of -0.8%. The CLO funds peer groups now trades on an average discount to NAV of -2.4%, which has tightened in from -3.7% over the month, reflecting the attractiveness of the sector, which offers a 9.5% prospective dividend yield. |
|Just very difficult to buy any of these as liquidity is low.|
|I was going to enquire when the quarterly dividends were to start but here it is...
€0.15 dividend declared for Sep 16: ex-div 8 Sep 2016; paid 27 Sep 2016.|
Strong July for CLO funds
Carador Income Fund and Blackstone/GSO Loan Financing have both published NAV reports for July with monthly gains of +6.5% and +0.3% respectively. These gains follow large monthly uplifts for Fair Oaks Income Fund (+13.2%) and Volta Finance (+5.5%) over the same period.
CLOs experienced a positive month with junior post-crisis CLO positions rising sharply. BB tranches returned 10.6% and B-rated tranches rose 8.4% as spreads tightened during the month. The JP Morgan CLO Index of post-crisis equity tranches returned 3.2% during the month.
The CLO market is benefiting from positive sentiment in credit markets as evidenced by rising loan prices and an improved outlook from market forecasters. The default rate over the past year in the US market is 2.3% (0.89% excluding energy) and forecasters have raised expectations of CLO issuance in 2016 in Europe and the US. Primary markets have benefited from spread compression as demonstrated by Blackstone GSO's Griffith Park CLO with AAA notes priced at Eurobor +1.23% (27bps tighter than the level achiebved on the Elm Park CLO which closed in April).
We regard the CLO sector as one of the most attractive on a relative basis in our alternatives universe. There is potential for further yield compression in the short-to-medium term and the underlying cash return from CLOs has been strong as defaults remain below historic levels. This is the ultimate driver of returns as CLOs benefit from a term leverage structure. The CLO funds trade on an average 3.7% discount to NAV and offer a 9.7% prospective dividend yield.|
5.5% NAV growth on market rally
Volta's NAV per share at the end of July was €7.87 per share, 5.5% higher than the June NAV per share due to improved credit and equity markets in the month after the Brexit vote. The NAV growth mainly derived from favorable mark to market valuation changes of the CLO debt tranches by 8% and the CLO equity tranches by 4.5%. The USD CLO tranches, especially from 2.0 deals, led the market rally in July.
Volta generated €4.9m in interest and coupons and purchased four assets for a total of €10.6m, yielding an average of approximately 10.5%, based on standard market assumptions. The company sold four positions of €8m with a projected yield of about 4.5%. Volta's cash position at the end of July totaled €7.6m.
Volta continues to improve its portfolio and rotate out older positions with lower yields. The company is trading at 11.8% discount to its July NAV with a current yield of 8.9%.|
Alternative Funds - Weekly Data and Trends
CLOs were the best-performing sub sector with a 3.6% uplift thanks largely to Fair Oaks Income Fund's 13% NAV increase in July. We expect Volta and Carador will also announce material NAV gains for July in the coming week. Blackstone/GSO Loan Financing (BGLF) is unlikely to benefit as much as the portfolio is valued using an intrinsic valuation model based on future cash flows and does not use secondary market information such as third party broker quotes. As a result, BGLF's NAV outperformed during the market correction in the first half of the year and is now likely to underperform on a relative basis as the market recovers.|
|As an income play, it make all sense to pay quarterly and i never really understood why they have not done that earlierInvestors can also elect to have payment in gbp|
|YS - thnx. Seems as though they rather misread the fact that when rates do finally move up they do so from a very low base!|
|It gets better - we're going to quarterly divs:
'Volta is today pleased to announce a change to the expected frequency of the dividend distributions from semi-annual to quarterly. The Company intends to make dividend distributions in March, June, September and December.'|
|Skyship re your 137, pls see below. Since i posted this, Fair nav went up like 10pc! so may be an article to scare ppl like me..
Rising benchmark raises borrowing costs for companies
Higher three-month dollar Libor also affects vast universe of collateralised loan obligations
by: Joe Rennison in London and Eric Platt in New York
Companies face their first increase in borrowing costs since the financial crisis as incoming rules for prime money market funds spur higher short- term interest rates.
Payments on floating rate loans issued by dozens of companies are set to increase asUS dollar Libor for a period of three months has risen above 0.75 per cent.
This level, alongside interest rate floors set at 1 per cent, is used on more than nine-in-ten of the loans that comprise the $880bn S&P/LSTA Leveraged Loan Index.
Analysts and investors expect Libor to continue climbing as new rules governingprime money market funds are fully implemented in October. That has reduced participation in commercial paper, pushing up short-term borrowing rates including Libor.
“As Libor crosses these floors, the amount of interest the companies have to pay is going to creep up,” said Meredith Coffey at the industry association LSTA.
The increase in Libor past 0.75 per cent will affect loans issued by Valeant Pharmaceuticals, office supply retailer Staples and fragrance and cosmetics groupCoty, which will reset higher when quarterly interest payments are due in the coming months. The loans include a floating rate component — in this case Libor — and a spread to compensate investors for the underlying credit risk.
“[Rates] will start floating after a very long time and it will be interesting to see how it shakes out,” said Neha Khoda, a credit strategist with Bank of America Merrill Lynch. “For some companies it won’t matter, it will be a drop in the ocean. But for some with limited cash flows, it will be significant.”
The rise will also affect the vast universe of collateralised loan obligations — bonds backed by leveraged loans. For CLO investors in the lowest tranches, known as the “equity” slice of such deals, the impact can be significant.
Equity investors typically receive all income left over after other, more senior, holders in the CLO have been paid. In exchange for the potential upside, these holders must tolerate the greatest risk of loss should the underlying loans default.
As Libor has slowly crept higher, the income that CLO portfolios have collected on corporate loans with floors has stagnated. As the Libor rate paid to senior tranche holders has increased, that has left less to pass on to equity holders.
“The increase in Libor is a net negative for equity holders because it erodes the yield pick-up,” said Oliver Wriedt at CIFC. “The rate has to get above 1 per cent before that negative effect is neutralised.”|
|There were two defaults in the US CLO Index during the month although none of Fair Oaks' CLO equity positions had exposure to these names. Cumulative default rates in the portfolio are just 0.09% and have materially outperformed projected defaults since inception
The manager’s timing has proven to be opportune in relation to the secondary mezzanine investments which were mostly completed during March and April. These positions have re-rated significantly and still offer considerable upside. The JPM CLO B-rated Index is up 28% from its 2016 lows although it is still only flat YTD. Fair Oak's 12.9% NAV return in 2016 to date compares to a 0.1% return for the CLO B-rated Index.
July's substantial return and the ongoing credit performance of the portfolio should help to cement Fair Oak's premium relative rating to the sector. The shares currently trade on a 4.4% discount to NAV and offer an 11.4% dividend yield.|
|YS - thnx for that, but is it possible to post the Summary para or a few salient individual paras - unable to access as the FT is a sub site these days...|
|FAIR commentary by Liberum;
Fair Oaks Income Fund
Stellar 13% NAV return in July
Fair Oaks Income Fund has announced a stellar NAV uplift of 13.2% to $0.929 for the month of July. The NAV uplift was due to a combination of an improvement in pricing and strong cash flow receipts during the month.
The junior CLO markets had one of the strongest months on record with the JP Morgan CLO B-rated Index up 8.4%. The company's equity positions also repriced significantly and generated substantial cash distributions in the month. All CLO equity positions except one distributed cash-flows in July which were ahead of expectations ($18.1m actual vs. $17.0m expected).|
Rising benchmark raises borrowing costs for companies
Higher three-month dollar Libor also affects vast universe of collateralised loan obligations
Interesting article highlighting that CLO have benefited from libor floor on loans and with interest rate increase in the US, the benefit of this libor floor is reducing.
My understanding below, however may be completely wrong: CLO are libor based vehicle, asset (loans) are paying libor and a spread, and the clo notes are all libor based except the most junior piece, the equity, taking all excess cash
It seems that the loans have libor floor (at 1%), therefore when the libor rate were lower than 1pc, the assets were paying 1pc but the liabilities (clo notes) were using a lower libor, hence creating more excess cash for the most junior tranche, the equity. With the gearing in place, this may be material. With USD libor increasing it seems that this extra cash will potentially not available anymore.
Not sure what is/will be the impact on clo funds like Vta, Cifu, Fair, fair to say that it is most likely negative. Really based on their exposure to clo equity piece, and if this increasing interest rate environment was priced in the valuation of those assets.|
|As ever - many thnx for yr post on the NBDG thread.|