Volta Finance Limited (LON:VTA) is the topic of conversation when Hardman & Co’s Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.
Q1: Mark, before we talk about Volta Finance, this report, it sits behind a disclaimer. Can you just remind us why that’s there?
A1: It’s a very 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 seen as a simple asset class, the report should be looked at by professional and qualified investors, but it’s a very standard disclaimer and nothing to worry about.
Q2: What can you tell us about your recent piece, ‘Credit Resilience from CLO Structure and Manager’?
A2: The prices of certain loans which have been affected by the Middle East, such as companies affected by a surge in oil prices, have fallen. So, you’ve seen a falling price in the underlying assets. Additionally, concerns related to AI disruption impacting on software companies, which typically are highly leveraged, has been an additional concern.
Now, what we did in this note was we reiterated why Volta’s underlying exposure is very limited. In particular, we noted the protections which are embedded within CLO structure, which are incremental to the corporate loan market and secondly, the manager’s track record of beating the corporate CLO market. That’s driven by the CLO managers that are selected, and additionally the portfolio construction.
The underlying portfolio, in our opinion, is thus much more likely to be resilient compared to corporate loan markets. We do need to bear in mind sentiment, and that can create a double discount. In uncertain times, Volta’s assets are discounted to their likely long-term value, only for them to be written up again as the uncertainty reduces. Their own share price gets an additional discount to the NAV.
So, the underlying portfolio may be robust, but investors should expect NAV and share price volatility.
Q3: Could you give us a bit more colour as to why the CLO market is lower risk than corporate loans?
A3: I’ll throw some numbers at you at this stage. If we look at early CLOs, so those before the Great Financial Crisis, a recent S&P report noted that of 4,322 ratings, only 40 defaulted, and only 15 of those were investment grade on initiation.
Credit controls after the Great Financial Crisis were tightened, so you got what were called CLO2s, and from 2010 to the end of the fourth quarter of 2025, S&P had rated over 21,000 from more than 2,200 structures, and only 30 of these 21,000 tranches had defaulted. So, the absolute numbers of defaults is very small.
Why have CLOs exhibited below corporate loan exposures? It’s because of the embedded incremental risk protections which are built into the structures. These include limits on average risk, limits on concentration, limits on covenant light loans, spread, average life, over-collateralisation, as well as vehicle cash retention.
Lower risk in CLOs is not an accident, it’s not a fluke, it’s deliberately built into the structures.
Q4: What evidence do you have of Volta Finance’s manager doing better than the CLO market?
A4: In this and in previous notes, what we’ve done is highlight Volta’s performance in a couple of scenarios.
Firstly, if we look at major market risk events, such as the Great Financial Crisis or the early stages of the COVID-19 pandemic, there was considerable outperformance.
Secondly, we looked at a number of scenarios where there had been company-specific news flow, such as Altice, which is a French company which defaulted, and despite Volta being run by a French manager, its exposures were well below average.
In the more recent market attention-grabbing First Brands situation, Volta’s exposure represented less than 10 basis points of its underlying portfolio, roughly half what you’d see in the average of US or European CLO structures.
Now, this lower level of exposure was due to BNP Paribas Asset Management’s preference for high-quality, diversified portfolios managed by managers who focused on actively trading their books. Additionally, BNP Paribas Asset Management’s own proactive management of the portfolio has enhanced the risk controls. Again, not an accident, not a fluke, but the better risk metrics reflect the embedded controls in Volta’s large-scale global manager.
Q5: Finally, Mark, can you tell me about the risks involved?
A5: CLOs obviously bring credit-related risk, but as I mentioned, CLO structures have multiple risk enhancement features, and Volta’s manager has outperformed the CLO market.
Volta’s mark-to-market accounting means its NAV will fall if market sentiment drives down the prices of its assets, and it will rise again when the reverse happens. So, some volatility in the NAV is to be expected.
This can also affect sentiment to the stock, and so the discount that Volta trades to its NAV. Now, sentiment, in our view, could also be affected by the large holding that BNP Paribas Asset Management has on behalf of its clients, and also the historical fees.
