AcenciA Debt Strategies has announced its interim results for the six month ended 30 June 2016. During the period, the company provided an NAV total return of 1.1% but, reflecting a widening of the discount during the period (from 9.3% to 13.9%) its price total return was -3.7%. The company’s chairman, William Scott, says that 2016 has so far been a reasonable period for AcenciA’s portfolio. He also says that, “Looking forward, the Board believes that it would be in the best interests of Shareholders as a whole for the Company to continue”. In his view, there is mounting evidence that the next default cycle is looming, and he says that, with increasing allocations to distressed being reported, Acencia’s Investment Adviser believes that we are now in an environment where low to mid double digit returns are potentially achievable without any reliance on a rise in credit or equity markets. The chairman says that Acencia is well placed to take advantage of these market conditions to the benefit of its shareholders.
Acencia’s managers say that the opportunity set for distressed credit managers continued to expand over the first half of 2016, as the rate of defaults increased. They say that, by the end of June 2016, 37 companies in the US had defaulted in the calendar year, with total debt of $43.8 billion, which is already 16% higher than the $37.7 billion of defaulted debt in all of 2015. Reflecting this, they say that the S&P has projected the last twelve month’s high yield default rate to reach 5.3% by March 2017. However, they also say that, whilst opportunities have been prevalent, a few of their underlying managers have struggled with various hedges in the first half of the year, as equities have rallied and high yield spreads have tightened. Acencia’s managers say that, during the first quarter, volatility in the credit markets created a number of attractive opportunities for their underlying managers to realise profits on names acquired recently at much lower prices. They say that profitable trades included names such as WPX Energy, Sabine Pass Liquefaction, Williams Partners and Neiman Marcus.
The managers say that there has been a large increase in the percentage of bonds with spreads over 1000bps and now a majority of industries have distress ratios exceeding 10% including utilities, telecom, tech, media, gaming, hotels, consumer products, transportation, retail, materials and energy. They say that energy has been a particular focus for many of their underlying managers in 2016.
In the structured credit space, AcenciA’s managers say that, in their view, the first few months of the year saw a continuation of the disconnect between fundamental performance in structured
credit and price action that they experienced at the end of 2015. They say that a positive trend in real estate fundamentals has continued this year as US residential housing has appreciated. However, they say that mortgage-backed securities and other structured credit experienced continued selling pressure. AcenciA’s managers say that structured credit is attractive to their managers as a way of investing in the underlying assets at a discount. They say that, during the
quarter, this was the case with CLOs, which were among the hardest hit securities, trading down much more than comparable corporate bonds. AcenciA’s managers say that structured credit markets have stabilised over the last few months, reflecting the continued positive trend in underlying collateral performance. Specifically, they say that Mortgage Backed Security (MBS) bonds (residential properties) experienced positive returns, while CMBS bonds (commercial properties) were flat to negative.
In the event-driven equity space, AcenciA’s managers say that despite the volatility of markets in January and February, there was a substantial amount of corporate activity during the first few months of 2016, which provided event-driven managers continuing opportunities. In the merger and acquisition space, one underlying manager correctly anticipated that a competitive bid would materialize for Starwood Hotels after its announced merger with Marriott International and took profits as Anbang Insurance Group stepped in with an improved offer (later withdrawn). This underlying manager also took profits after Office Depot rallied 30% during the quarter, when the FTC’s lawsuit challenging its merger with Staples lost ground as they had expected.
AcenciA’s managers say that, since March, their event-driven managers have performed well, as a mix of solid fundamental performance from companies and event catalysts have been driving returns.
Acencia Debt Strategies chairman believes a continuation is in shareholder’s interests : ACD