Volta Finance Ltd (LON:VTA) recently published their Annual Report and Audited Financial Statements 2021 for the twelve months to 31 July 2021.
Please find below commentary provided by AXA Investment Managers (“AXA IM”) Paris as Investment Manager of Volta. This commentary is not intended to, nor should be construed as, providing investment advice. Potential investors in the Company should seek independent financial advice and should not rely on this communication in evaluating the merits of investing in the Company. The commentary is provided as a source of information for Shareholders of the Company but is not attributable to the Company. The full report is attached below.
KEY MESSAGES FROM THE INVESTMENT MANAGER
Commentary on Performance
At the time of writing, we are 18 months after the worst of the COVID-19 crisis. Volta is showing the benefits of the strategy which has been pursued over the last three years. Deciding to increase the share of CLO equities, at the detriment of non-CLO positions, was the right thing to do when considering the following:
- The amount of cash flow Volta received from its assets has never been so high
- The overall performance over the last few years (even including the cost of the COVID-19 crisis) has been good: +10.5% (6.2% annualized) since end of November 2019 for the NAV
- Volta was able to maintain its dividend policy (paying a quarterly dividend in the region of 8% to the NAV)
As at the end of July 2021, CLO positions represent close to 85% of Volta’s assets and we continue to invest in both CLO equity and CLO debt in order to continue to transform Volta to make Volta more attractive and comprehensive for investors. Our conviction is that part of the discount at which Volta’s shares are trading, relative to the published monthly NAV, is due to the difficulty for some investors to embrace the variety of assets in which Volta was investing for more than a decade. Being an almost pure CLO fund, while maintaining the flexibility and the opportunity to choose between CLO debt and CLO equity, should help attract more investors as it is simpler to understand.
In response to the COVID-19 crisis, central banks and governments brought billions to the table to support both the economy and financial markets. Even though the situation is different from the situation following the Global Financial Crisis (GFC) in 2008, we may see similar consequences i.e. billions of savings available to finance companies’ debt and equity, so we may experience several years without any significant corporate debt issues. This was already the case in the US following the GFC and in Europe following the Euro-sovereign crisis with several years without any particular stress.
Another key point for CLO investment is the debate regarding the potential resurgence of inflation. Our conviction is that, due to the way we produce and consume to fight climate change, we may in the coming years see a higher inflation regime than what we saw over the last two decades. Changing for “better” energies (issuing less CO2) as well as the need for a kind of de-globalisation (less transportation) may imply higher prices. At the same point in time some of the risks associated with climate change (floods, fires) will continue to materialize meaning that the uncertainty regarding growth is increasing. We may see for years a higher inflation as central banks will be forced to maintain lower rates to finance the need for change and the cost associated with climate catastrophes. This situation is mostly favourable to debt as inflation is facilitating debt erosion while maintaining low rates and dovish monetary policies facilitate debt refinancing. Obviously, some businesses may be impacted. This has for years driven our efforts to promote ESG and sustainable investment practices as much as we can through incorporating, and pushing third party CLO managers to incorporate, non-financial sustainability risks in their credit selection, while trying to avoid financing businesses that are at risk because of E, S or G factors.
Overall, we are optimistic about the strategy for the coming years, at least from the point of view that globally we may enjoy several years with limited default rates for loans both in the US and in Europe.
Commentary on Cash Flow Generation
Despite some volatility with the COVID-19 crisis, Volta’s ongoing cash flows are on a global positive trend reaching a new high at the end of July 2021, measured over the past six months:
Though the last figure (€27m as at the end of July) is inflated by two exceptional payments in relation with two resets we conducted in June and July, the trend is clearly up for several years and it is reasonable to expect Volta’s interest and coupons to stabilize in the area of €24m per six-month period, considering the current portfolio composition.
This pace (€24m per six-month period) represents circa 18% per annum based on the current NAV. A significant portion of these cash flows are from Volta’s CLO equity bucket and it is clear that part of this percentage is there to compensate, on a long-term basis, par erosion that may materialize through years on CLO equity positions. Under reasonable assumptions the projected IRR of Volta’s assets, as at the end of July, was close to 13%. Almost one third of the current ongoing cash flow exists to compensate probable future par erosion. As long as such par erosion does not materialize, these cash flows in excess of projected IRR are, month after month, contributing to a NAV increase.
Please find a link to the full Annual Report here https://www.voltafinance.com/media/31848/volta-finance-limited-2021-annual-report-and-accounts.pdf
AXA Investment Managers Paris has been the Investment Manager of Volta Finance Limited (LON: VTA) (“Volta”) since inception. Volta Finance’s investment objectives are to preserve capital across the credit cycle and to provide a stable stream of income to its Shareholders through dividends. For this purpose, Volta pursues a multi-asset investment strategy on deals, vehicles and arrangements that provide leveraged exposure to target Underlying Assets (including corporate credit, residential and commercial mortgages, auto and student loans, credit card and lease receivables).