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 the Chairman’s statement from Non-Executive Independent Director of the Company, Paul Meader. The full report is attached below.
I am pleased to report further strong performance in the second half of the Company’s financial year, building upon the exceptional gains of the first half. The net asset value (“NAV”) total return for the six months ending 31 July 2021 was 9.2%, with share price returns almost exactly in line, thus bringing the total NAV return for the financial year to 37.8% and the share price total return to 51.4%.
To a significant extent the recovery in the Company’s NAV and share price reflects the tide that floats all boats. Economic and fiscal support by governments and central banks has continued at pace and buoyed all assets. By way of example, US equities, measured by the S&P500 total return index, rose a similar 36.5% during the Company’s financial year. The recovery has been rapid and unprecedented and valuations of many assets are rather heady. This must act as something of a headwind in due course. That is not to predict that any market will fall any time soon but it seems highly probable that broad asset class returns over the medium to long term will be below historical norms because risk premia have become so compressed. That is as true for many credit assets as it is for equities. So Volta faces some of those headwinds, just like others. However, I believe that there are also reasons to be optimistic for Volta’s share price over the medium term. Given that we live in a world starved of yield and facing a reduction in the massive support from the authorities, it is worth reflecting upon why that might be.
Firstly, yields have compressed less in the CLO markets than in many other areas of the credit markets. In part this is what drives the record level of cash flows currently being received by the Company. I make no apology for repeating myself regularly in relation to this factor because I believe that the cash flows that we are due to receive from our holdings are fundamental to understanding the medium to long term return prospects for the Company. It is these cash flows that produce shareholder returns, not the vagaries of the short term mark-to-market pricing of our assets. Key to our cash flows is loan defaults. Current default rates are very low and, whilst some creeping higher seems inevitable, a rise to levels that would meaningfully challenge the Company’s cash flows seems unlikely in the foreseeable future. Taking standard historical default rates, the expected IRR of the Volta portfolio is 12.7%.
In addition, our investment manager, AXA IM Paris, through its scale in the structured finance markets, has been successful in building control positions in a number of our CLO holdings. This has allowed them to be able to control the reset and refinance of a number of our CLO equity positions to the significant benefit of present and future returns. It seems likely that AXA IM will be able to continue this process on further CLO equity positions, accruing additional benefit. The nature of the process means that whilst there is some short term uplift into the NAV from this process, this is relatively modest. The real harvest is seen over the medium term. AXA IM estimates that the refi/reset processes should embed around 1% to 2% of additional NAV return per annum over the coming years.
This enhanced return combined with the highly attractive dividend stream of 8% per annum (approximately 9.3% based on the share price as at 31 July 2021) makes for a compelling investment case. As I always caveat, we are subject, of course, to the vagaries of economies, sentiment and markets. But the Company appears attractive relative to other investment opportunities, especially at its current share price discount to NAV of around 15%.
One of the reasons underpinning our strong cash flow receipts is the increasing concentration of the portfolio in CLO equities. AXA IM shifted the portfolio towards CLO equities several years ago, to good effect. At recent Board strategy discussions, AXA IM confirmed that CLOs remain attractive relative to other structured finance assets. AXA IM expect to continue to reinvest the proceeds of our other assets into CLOs over time with a view to CLOs representing the overwhelming majority of the portfolio in due course. Furthermore, the proportion allocated to CLOs managed by AXA’s US and European teams is also expected to grow over time. AXA’s CLO team is increasingly recognised as a global leader. As Volta’s management fee is waived on its allocation to primary AXA IM product, this is a double benefit for Shareholders. The Board has debated these proposals at length with AXA IM and are very supportive of this shift in orientation. It is logical from the perspective of risk and return within the portfolio but also brings some welcome simplification of what, on occasions, could be a complex mandate. This reorientation will not prohibit AXA IM from allocating to other structured finance assets aside from CLOs in future. But the best way of thinking about this, in my view, is that the bar has been set much higher for other assets to earn a place in our portfolio: CLOs, and CLO equity in particular, are likely to predominate.
Before closing, there are two more things that I would like to touch upon. The first is an update on the use of ESG criteria in structured finance and in our portfolio. As I noted in my report last year, AXA IM have been at the forefront of implementing ESG criteria into structured finance assets. This is not easy but it is important. We welcome their engagement on the matter, more on which is outlined in their report on page 8 and 9. I would encourage you to read this.
The other is both to welcome Dagmar Kent Kershaw to the Board and to thank Paul Varotsis, who is retiring as a director shortly. We are delighted that we were able to attract someone of Dagmar’s expertise and standing in the industry. Dagmar joined the Board on 30th June this year and is already making a very positive contribution to our discussions. She does, however, have big shoes to fill. Paul Varotsis will not be standing for re-election at the forthcoming Annual General Meeting in early December. A seasoned veteran of the structured finance markets, he has guided and challenged as an independent director since the inception of the Company. He has always done this calmly, effectively and with good humour. I know that I speak for all of the Board, and for AXA IM as well, in thanking him: we will miss him and his wise counsel on both a professional and a personal level. Following Paul’s retirement, Steve le Page will be appointed as Senior Independent Director.
In closing, I am very aware that the extraordinary circumstances of the last 18 months have limited the extent to which we have all been able to meet face to face. With my fingers crossed, it seems that this is now changing for good. So, I would encourage you to make contact through the Company Secretary as I would welcome the opportunity to meet with any Shareholders. My colleagues and I appreciate your continued support and I look forward to reporting to you again in the spring.
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 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).