TwentyFour Inc Fd Portfolio Update
23 March 2020 - 6:00PM
UK Regulatory
TIDMTFIF
23 March 2020
TwentyFour Income Fund Limited
(a non-cellular company limited by shares incorporated in the Island of
Guernsey under the Companies (Guernsey) Law 2008, as amended, with registered
number 56128 and registered as a Registered Closed-ended Collective Investment
Scheme with the Guernsey Financial Services Commission. LEI:
549300CCEV00IH2SU369)
Re: Portfolio Update
Market Commentary
It has been a challenging couple of weeks for obvious reasons, which by turns
we have compared to the market volatility seen in late 2018 (the Fed at odds
with the market about rate policy, the US-China trade war, Brexit), early 2016
(deteriorating economic data, energy/oil crisis, Deutsche Bank solvency), and
2011 (Spain/Italy default risk, US downgrade, introduction of Basel III) as
well as the global financial crisis of 2008. Notably these are all periods
where it felt incredibly challenging to be an investor, but which also provided
some of the best investment opportunities most of us have seen.
As with most of those other events, European ABS have lagged behind the
volatility seen elsewhere principally as market participants believed that the
direct link to fundamental risk in European ABS remained weak - a belief we
continue to hold for the significant majority of the market. However, as also
seen during those other periods, as risk sentiment deteriorates we expect to
eventually experience some correlation with other markets, which can often
happen sharply. We won't necessarily see the same kind of moves, but history
suggests that some of the changes experienced can happen in more of a step-like
manner, which exaggerates the aggression of the move. Typically this is a
function of bank trading desks feeding prices through into pricing vendors. For
mezzanine ABS, where TFIF tends to invest, the moves are greater than for the
lower yielding parts of the market.
What we can continue to have faith in is the performance of our asset class.
Unlike the US ABS market, the European version does not feature aircraft
securitisations, European CLO exposure to the oil and gas industry is close to
zero, there are very few hotel-backed CMBS deals and relatively low levels of
retail in CMBS as well. We have written recently on the resilience of RMBS to
exaggerated, prolonged non-payment of mortgage interest ( https://
twentyfouram.com/2020/03/17/how-will-rmbs-cope-with-covid-19-disruption/).
There is no primary European ABS issuance in the pipeline that we're aware of,
so the technical driver of performance we're seeing is purely through secondary
trading, where supply (selling by investors repositioning/fund outflows) is
keeping demand at bay. We think every ABS fund manager would welcome the
opportunity to invest at current levels, but won't until they are confident
that the supply has abated. As a closed ended fund TFIF is optimally placed to
deal with this volatility and expects to find excellent investment
opportunities.
We have included below a table showing current spreads available and the
movement since the market sell-off.
19-Mar-20 21-Feb-20 Change
(bp) (bp) (bp)
EUR BBB CLO 750 295 +455
EUR BB CLO 1200 535 +665
EUR B CLO 1600 795 +805
UK Prime AAA (GBP3mL) 120 38 +82
UK NC AAA (GBP3mL) 200 69 +131
UK 2nd Pay (GBP3mL) 475 110 +365
UK NC Deep Mezz (GBP3mL) 675 245 +430
CS Eur Lev Loans 1030 409 +621
EUR HY (HE00 index) 678 270 +408
Portfolio Commentary and Outlook
As a closed ended vehicle investing in the less liquid part of the market, and
with a clear aim to provide a high level of income, TFIF's portfolio tends to
remain well invested. However as we have commented before, during 2019 we
rebalanced the portfolio incrementally to reduce exposure to what we saw as
building risks away from our market. Principally this reflected the belief that
the ongoing trade war, Brexit negotiations and their effect on UK politics, the
changing global growth outlook and other risks might see a spill-over into
European ABS performance in terms of risk sentiment rather than fundamentals.
As a result the PM team reduced beta principally by dropping the allocation to
CLOs from 37% to 31% (Dec 18 vs Feb 20) and shortening the time to maturity of
the portfolio from 4.1yrs to 3.3yrs (Dec 18 vs Feb 20), as well as increasing
our exposure to higher rated assets.
Clearly we have seen significantly more volatility than was expected, however
we continue to believe in the quality of our investments, and will look to take
advantage of the extraordinary value on offer when appropriate by rebalancing
the portfolio back towards its more traditional bias, and deploying the
flexibility offered by the financing facility introduced last year.
Historically we have not disclosed the mark-to-market yield on the portfolio,
principally as the fund pays dividends based on the purchase yield (which we do
disclose in our factsheet and was 7.80% at the end of February based on a NAV
of 111.69). However bearing in mind the material change in spreads and pricing
on the portfolio, as well as the establishment of a significant discount on the
fund, it is worth pointing out that that the MTM yield at the publication of
the last NAV (106.29) was 8.94% (compared to 6.85% at February end).
While a period of lockdown would naturally be expected to lead to a higher
level of arrears, the offsets to this are a) the credit profile of the
borrowers are typically biased away from the most susceptible to a downturn
(e.g. those within the gig economy), b) banks already have ongoing forbearance
policies that are in line with what we are hearing from banks/politicians, c)
the structural benefits of junior bonds, excess profit and cash reserves and d)
the transparency of the loan pools that allow for accurate modelling of missed
payments and defaults. In addition, the multiple recent announcements of
government support are intended to act as an offset to further stress at a
corporate and consumer level, and affordability should be further supported by
likely lower rates for longer in the UK and Europe. In such a scenario of low
rates and government bond curves, yield will be driven by credit spread, which
ABS has traditionally had more of than the rest of fixed income.
For further information, please contact:
Numis Securities Limited:
Nathan Brown +44 (0)20 7260 1000
Hugh Jonathan
TwentyFour Income Fund Limited:
John Magrath +44 (0)20 7015 8900
Alistair Wilson
END
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