The prices of loans that could be affected by recent events in the Middle East (e.g. surge in energy prices) have fallen. Additionally, concerns related to AI disruption following Anthropic’s legal AI tool launch have penalised loans granted to software companies. In this note, we reiterate why Volta Finance Limited (LON:VTA) exposure is limited, noting i) the protections embedded within CLO vehicles, ii) the manager’s track record of better-than-CLO market risk management, driven by CLO manager selection and portfolio construction. In our view, Volta’s modest share price reaction to the Anthropic news reflects its below-average risk exposure model.
- CLO market protections: CLOs have exhibited below corporate loan average losses because of the embedded incremental risk protections built into these structures. These include limits on average risk, concentration, covenant light, spread, average life and over-collateralisation as well as vehicle cash retention.
- Volta better than market: We highlight Volta’s performance in major market risk events such as the GFC and the early stages of the pandemic and note how well it performed when there was company-specific news flow such as Altice. These all reflect the embedded risk controls in its large-scale, global manager.
- Valuation: Volta trades at a double discount: its share price is at a 16% 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 (11% 2026E 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 validity. The NAV is exposed to sentiment towards its own and underlying markets. Volta’s long dollar 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: 9.1% p.a. (dividend-reinvested basis) since inception. Volta’s performance relative to that of its peers, and the market it operates in, has been strong. Returns on investments made after the financial crisis have been double those pre crisis.
