Volta Finance Ltd (LON:VTA) is the topic of conversation when Hardman & Co’s Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.
Q1 Your recent report sits behind a disclaimer. What can you tell us about that?
A1: It is just the 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 a simple asset class, the report should be looked at only by professional/qualified investors.
Q2: You called your recent piece ‘Insights from the Report and Accounts’, what can you tell us about it?
A2: In this note, we review the key information and messages investors should take from the recent Report and Accounts. In particular, we note the detailed explanations as to how Volta Finance is delivering strong returns.
This performance reflects the sound fundamentals of the CLO investment market and the value specifically added by the manager, reaffirming the issues we identified in our note ‘The benefits of having AXA IM as the manager’.
In terms of outlook, the expected relative resilience of the portfolio was also noted. By way of example, the CLO managers in which the fund invests, are expected to mitigate the impact of anticipated market-wide lower recoveries through investing in better-quality underlying assets.
Q3: So, tell us a bit more about the strong current position?
A3: Theircurrent cash receipts are over 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 the portfolio positioning in recent years into CLO equity.
Q4: In plain English, why is the outlook resilient?
A4: The rating agency’s, the fund and 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) diversification.
Q5: The chair’s comments in a R&A often encapsulate the companiey’s views. In a few words, what did Dagmar say this time?
A5: The key soundbites were i) through these uncertain times, the portfolio has remained resilient, ii) a high discount is also paradoxical – this conclusion was after taking a deep dive into the valuation approach, iii) CLO portfolios are as yet showing few signs of stress (my point o0n resilience), iv) AXA IM Alts is one of the longest-established, most experienced and high-quality teams in the CLO market globally.
Finally, the conclusion was “I remain excited about the strong cashflows that Volta generates”.
Q6:What about the risk?
A6: Credit is the obvious risk but CLO structures have multiple risk-enhancement features.
Cash is retained in SPV/used to repay investment-grade debt if the level of collateral or interest cover falls below set levels. There are multiple income, risk and concentration tests that maintain that an ongoing risk profile of SPV is within known parameters. There is less of a maturity mismatch, with interest and principal repayments from assets matching CLO liabilities. Assets are backed by good-quality security.
AXA IM’s (manager) skill in picking good managers was shown early in the pandemic, when ca.20% US CLOs saw cash diversion, and Volta Finance had none. The end result is shown by the absence of any CLO investment-grade defaults over 2012-21, and losses under the Fed stress-test scenario were just 1/35th the level of corporate loans.
