Volta Finance Ltd (LON:VTA) has delivered +21.2% 2024 total NAV return, outperforming i) B-rated CLO tranches (+19.2%), ii) US high yield (+8.2%), iii) Euro high yield (+8.6%), and iv) global loans (+7.3%). Its performance reflects positive markets and the incremental value added by the manager through its asset selection and portfolio management. Looking into 2025, we expect another strong year from CLOs: more market growth (partially driven by loans issued to fund greater PE activity), and stable, if not falling, defaults offsetting some spread tightening and fewer pull to par benefits from loans restructuring. AXA IM’s outperformance has been through economic cycles.
- Positive CLO markets: We believe investors should “follow the cash”. Receipts into CLO structures have been strong, with low default rates from good corporate profitability and cashflow, and many borrowers passing on inflation to customers. CLO structures’ costs reflect refinancing and resetting opportunities.
- Value added by AXA IM: AXA IM adds value, with its scale bringing i) specialist expertise to identify mis-priced opportunities and manage risk, ii) a broad network with informational advantages, and iii) business introduction and pricing opportunities. We also highlight its portfolio construction/asset selection.
- Valuation: Volta Finance trades at a double discount: its share price is at a 17% discount to NAV, and we believe its MTM NAV still includes a further sentiment-driven discount to the present value of expected cashflows. Volta targets an 8% of NAV dividend (9.6% 2025E yield, on current share price).
- Risks: Credit risk is a key sensitivity. In this note, we examine the valuation of assets, highlighting the multiple controls to ensure its validity. The NAV is exposed to sentiment towards its own and underlying markets. Volta’s long $ position is only partially hedged.
- Investment summary: Volta Finance’s NAV, and the discount to NAV, may be volatile over time. Fundamental long-term returns have been robust: 9.0% p.a. (dividend reinvested basis) since inception. Volta’s performance relative to that of its peers, and the market it operates in, have been strong. Returns for investments made after the financial crisis were double those in prior years.
