The industry-specific terminology associated with CLOs can give the impression of a complexity to the product that belies reality, and, in our view, is unhelpful to the Volta investment case. Accordingly, in this note, we give investors a simple guide to what CLOs are, the benefits they provide, and how Volta is taking the market opportunities. The core of CLOs is uncomplicated cashflows. They are just a pooling of loans into a vehicle, which funds itself by issuing a range of debt and equity. The pool has diversification and credit-enhancement benefits, which result in investors in debt getting a better-than-average risk/return, and investors in equity getting double-digit returns.
- Strong current position: Volta’s current cash receipts are ca.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 over recent years into CLO equity.
- Resilience going forward: 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) Volta’s diversification.
- Valuation: Volta trades at a double discount: its share price is at a 16% 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 (11.5% 2023E 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 is an investment for sophisticated investors, as there could be sentiment-driven share price volatility. Long-term returns have been 7.7% p.a. (dividend re-invested basis) since initiation. With above-average returns on recent re-investments, the portfolio’s past six-month cashflow (annualised) yield is 21.8%. We estimate 1.5x 2024 dividend cover.
