Alcentra European Floating Rate Income Fund Limited
July saw better performance as new issuance volumes slowed down into month-end and secondary prices saw a recovery on the back of strong CLO formation driven demand.
The Alcentra European Floating Rate Income Fund (the "Fund") was up 0.48% (gross, estimated) for the month, broadly in line with the Credit Suisse Western European Leveraged Loan Index ("CS WELLI") (hedged to GBP) at +0.60%.
European loan issuance in July of c.€8.3bn was down -33% on the prior year, with the new issue market showing some signs of slowing down ahead of the traditional summer break, after 3 strong months of issuance. It is worth noting that July 2017 benefitted from a number of deals being brought forward from September which did not repeat this year due to the more investor friendly market conditions. While headline issuance was down, the trend of growth in net new issuance continued. YTD volumes stand at €70.7bn, flat on last year, but with M&A driven volumes up 88% and refinancings down 53%. The trend of larger jumbo deals continues with the month seeing larger deals from issuers including Sivantos and Techem. While the market is now likely to slow down during the traditionally quiet August summer break, the pipeline for September remains robust and includes sizeable deals from Thomson Reuters and Akzo Nobel.
CLO formation remained very strong in July, despite evidence of a widening in liability costs. The month saw a post-crisis record in terms of the number of issues (11 for €4.5bn), leaving YTD European CLO issuance volume up 67% YTD. While demand remains strong, the high level of net new issuance has continued to allow investors to be selective on new investments, and new issue spreads continue to widen (from 386bps in June to 407bps in July, on a 90 day rolling average basis), with 35% of deals in the last 3 months seeing upward flexes. The secondary market did get firmer as the month progressed however with buyers stepping into the market ahead of the summer break and amid slowing primary activity, particularly as newly issued CLOs looked to ramp-up. This firmer secondary market into month-end drove the positive return for the period, with prices increasing month on month.
We continue to remain constructive in our outlook for the market. The pipeline remains robust and while there may be some renewed pressure on existing tighter margin loans after the August break, in the medium term the growth in well priced new loan issuance is a positive for the market.
The default rate for the 12 months ending July remained at the same very low level of 0.12% seen in June, reflecting the continuing constructive corporate fundamental backdrop.
Portfolio Manager's Commentary
The top performing name was a debt servicing business that was up +2.76% after solid results and supportive headlines regarding their contracts. The second best performing name was a payment services provider that saw its bonds rise +2.22% as it benefitted from improved bond market technicals in the month.
The weakest performer within the portfolio was an industrial business that saw a -4.33% decline due to negative sentiment in the name post weaker numbers, which led to selling pressure. The second weakest holding was a specialist financial services business that saw a -4.18% decline as a result of planned new debt issuance by the company, further exacerbating the pressure seen from new supply in the sector YTD.
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Simon Perry +44 20 7367 5272
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.
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 £1.00 issue price of the initial offering of shares in the Fund for the first full year of investment, paid quarterly.
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.
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 Credit Suisse Western European Leveraged Loan Index, hedged to GBP, 31 July 2018
 S&P Global Market Intelligence, LCD Global Interactive Loan Volume Report, 31 July 2018
 S&P Global Market Intelligence, LCD European Weekly Global View, 27 July 2018
 S&P Global Market Intelligence, CLO Global Databank
 S&P Global Market Intelligence, LCD Global View, 27 July 2018
 S&P Global Market Intelligence, LCD European Playbook, 27 July 2018
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