In this note, we review the key information and messages investors should take from the recent Report and Accounts. In particular, we note the detailed explanations as to how Volta Finance Limited (LON:VTA) is delivering strong returns. This performance reflects the sound fundamentals of the CLO investment market and the value specifically added by the manager (reaffirming the issues we identified in our note, The benefits of having AXA IM as the manager). In terms of outlook, the expected relative resilience of the portfolio was also noted. By way of example, the CLO managers in which Volta invests, are expected to mitigate the impact of anticipated market-wide lower recoveries through investing in better-quality underlying assets.
- Strong current position: Volta Finance’s current cash receipts are over 20% of NAV, reflecting low defaults (strong corporate cashflows and profitability, ability to pass on inflation to date), low locked-in CLO borrowing costs, CLOs being floating-rate investments and Volta’s portfolio positioning in recent years into CLO equity.
- Resilience: The rating agency’s/Volta’s/our confidence in a relatively low expected level of defaults reflects i) a strong starting position, including high cash cushions in CLO structures, ii) a preponderance of private equity (PE), iii) inflation still being friend, not foe, iv) covenant-lite documentation, and v) diversification.
- Valuation: The Company trades at a double discount: its share price is at a 24% discount to NAV, and we believe its mark-to-market (MTM) NAV still includes a further sentiment-driven discount to the present value of expected cashflows. Volta targets an 8% of NAV dividend (10.4% 2024E yield on current share price).
- Risks: Credit risk is a key sensitivity. We examined the valuation of assets, highlighting the multiple controls to ensure its validity, in our initiation note, in September 2018. The NAV is exposed to sentiment towards its own and underlying markets. Volta’s long $ position is only partially hedged.
- Investment summary: Volta Finance is an investment for sophisticated investors, as both the NAV and the discount to NAV may be volatile over time. We note the closest competitor to Volta has had a more stable NAV valuation due to a different asset valuation approach. Fundamental long-term returns have been robust: 8.0% p.a. (dividend reinvested basis) since inception. Volta’s performance relative to that of its peers has been strong, and returns for investments made after the financial crisis were double those in prior years.
