Volta Finance Ltd (LON:VTA) is the topic of conversation when Hardman and Co’s Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.
Q1: Your recent report sits behind a disclaimer. What can you tell us about that?
A1: It is just the standard disclaimer that many investment companies have. In essence, for regulatory reasons, there are some countries (like the US) where the report should not be read. In the UK, because CLOs are not a simple asset class, the report should be looked at only by professional/qualified investors.
Q2: You called your recent piece on Volta Finance Hardman presentation: carpe diem. What can you tell us about it?
A2:In this note, we reviewed the manager’s recent Hardman Talks, Seizing opportunities in volatile times and Q&A.
The key messages were i) refi/reset helped build annualised cashflows to a high-teen percentage of NAV, more than double the dividend payout, which should allow the NAV to grow over the medium term, ii) most underlying loans are floating rate, and so income will rise with interest rates, and iii) the net US exposure is positive in risky times.
The presentation showed how strong the corporate market is and that, while defaults will rise, they start from a low point. There will be mark-to market (MTM) volatility, but long-term cashflows are good.
Q3: So, taking your first point first, what can you tell us about the higher cashflows?
A3:In several of our recent notes, we have highlighted how the market opportunities have allowed CLO vehicles to refinance their own debt instruments while the assets (corporate debts) have not re-financed. This means that the profits of CLO structures increased, and so the cashflows to CLO equity holders have increased.
As the holder of CLO equity instruments, Volta’s cashflows have improved. It has also allowed the restructuring of various instruments, allowing lump sums to be withdrawn. Overall quarterly underlying annualised cashflows are in the 15%-17% range of NAV, which is double the dividend payment, allowing the NAV to grow (subject to MTM noise movements, of course).
Q4: And what about inflation, and higher interest rates?
A4: The manager’s comment was “Inflation is our Friend”, as broadly spread inflation helps erode debt, as borrowers’ EBITDA continues to grow, and Volta’s debt is floating rate. Sharp rate rises can be problematic, but the starting position for corporates is very positive, with profits up 31% in 4Q’21 on 4Q’19, while corporate debt is up 15% over the same period. Corporate defaults are presently extremely low, and corporate cashflows are at the highest levels for 50 years.
Volta may be expected to be able to benefit from higher WAS (weighted average spread) inside CLOs, generating even stronger cashflows from Volta Finance’s CLO equity positions. The presentation, and our note, go into some detail about rating agency stress-testing, noting, of course in our view, that events like the Ukraine crisis are never really forecast well in such models.
Q5: And what did the Q&A session cover?
A5: It was a very broad and interactive Q&A session, covering a range of credit issues including the fact that interest rates start to bite at about 3%, and really become a worry when they rise to 4%+, on current forecasts there will be no diversion of cashflows, and there are over 1,400 underlying borrowers, giving huge diversity in the portfolio. Other issues raised included discount management, the dividend, operational risk, the manager’s competitive advantages and the role of Volta within the manager’s overall portfolio.
