# Volta Finance: Yield (10%, covered and growing) + capital growth

- Link: https://www.directorstalkinterviews.com/volta-finance-yield-10-covered-and-growing-capital-growth/4121014100
- Published: 2021-08-02T12:37:21+01:00
- Author: Amilia Stone

In our note, ‘Re-Set, Re-Fi, Re-Light my Fire’, published on 5 May 2021, we explored
how favourable market conditions mean that CLO vehicles can re-finance debt cheaply.
This enhances the value of **[Volta Finance](https://www.directorstalkinterviews.com/company/volta-finance/vta.as)
Ltd** ([LON:VTA](https://www.directorstalkinterviews.com/company/volta-finance/vta.as))
CLO equity positions, which have been increased substantially in recent years, and
is expected to lift total returns by 1%-1.5% p.a. for several years. The higher 
cashflow further backs an already covered dividend, with a 2022E yield of 10.1%.
With returns above the cost of the dividend, the NAV is growing (supporting further
dividend growth). With income and capital growth appealing to a range of investors,
the discount to NAV may narrow.

 * **Re-set/Re-fi opportunity:** Volta Finance has already seen nine positions re-
   finance, at savings of 15bps-27bps. 20 positions could benefit, seeing the expected
   total returns rise by 1%-1.5% p.a. Where CLO debts are re-financing at lower 
   rates, there are multi-year gains. Introducing new debt structures can see one-
   off gains.
 * **Lower-than-expected defaults:** In FY’21, the rolling 12-month global default
   rate has been falling, and, in May, it was 1.7%. We think this is below most 
   market forecasts for FY’21. CLO vehicles have rules and restrictions, which mean
   their defaults have typically been around half the wider market average.
 * **Valuation:** Volta trades at a double discount: its share price is at a 16%
   discount to NAV, and we believe its mark-to-market NAV includes a further sentiment-
   driven discount (5%-10%) to the present value of expected cashflows. Volta targets
   an 8% of NAV dividend (10.1% 2022E 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](https://www.hardmanandco.com/research/corporate-research/delivering-the-structured-finance-opportunity/),
   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 Finance is an investment for sophisticated investors,
   as there could be sentiment-driven share price volatility. Long-term returns 
   have been good: ca.8.5% 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 18.0%. We expect 1.6x adjusted and 1.8x statutory
   dividend cover in 2022E.

[DOWNLOAD THE FULL REPORT](https://www.hardmanandco.com/research/corporate-research/yield-10-covered-and-growing-capital-growth/?dm_i=49CL,14DWZ,6NAI95,54F67,1#report-download)

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