Volta Finance not expecting significant increase in default rates – The debt sector structured finance company, Volta Finance (VTA), has reported annual results to July 31 2019. VTA, which aims to preserve capital across the credit cycle, recorded a 2.5% increase in total return NAV, while the shares increased 7.9%, over the year.
Managers report – Not expecting significant increase in default rates
“For some time now, we have been managing VTA’s assets in an environment that can be considered as an “end of cycle” environment. By that, we mean that the positive economic and financial cycle that came as a consequence of the trauma of the global financial crisis and of the euro sovereign debt crisis has ended.
- In many countries employment grew and unemployment rates are at record low levels
- The Federal Reserve finished normalizing its monetary policy (the ECB was unable to start doing so)
- Almost everywhere economic growth is more modest than 1, 2 or 3 years ago
A greater than 10-year cycle has ended or is coming to an end and we have to prepare ourselves for a different environment henceforth. The trade war between the US and China, Brexit, the Italian situation and Iranian sanctions are all symptoms of a global environment with less cooperation and higher episodic volatility. Looking forward, we aren’t expecting a brutal economic downturn but several years driven by successive risk off/risk on periods in line with a more turbulent but still modestly supportive environment. We had a good illustration of that through the multiple drawdowns on the S&P500 (Q1 2018, Q4 2018, May 2019, August 2019) and most investors are interpreting the decline in yields almost everywhere as a sign that further economic disappointments are coming.
Regarding credit, for the coming twelve months, we still do not expect any significant increase in default rates but do expect default rates more in line with historical averages (we have been below these levels for many years) mostly driven by industry issues rather than by an overall depressed economic environment. We expect as well to see more loans being downgraded relative to recent history (in 2018 in the US loan market there were almost 2 upgrades for each downgrade) given the amount of leverage and less protective loan documentations. Volta’s performance, continued to be positive through the most recent years: almost 8% from end of July 2018 to end of July 2019 and 9.9% per annum for the 3-year period ending in July 2019 (performance of the share price total return for Volta Finance Ltd (Euronext Amsterdam)).”
VTA’S investment objectives are to preserve capital across the credit cycle and to provide a stable stream of income to its shareholders through dividends. Volta seeks to attain its investment objectives predominantly through diversified investments in structured finance assets. The assets that the company may invest in either directly or indirectly include, but are not limited to: corporate credits; sovereign and quasi-sovereign debt; residential mortgage loans; and, automobile loans. The company’s approach to investment is through vehicles and arrangements that essentially provide leveraged exposure to portfolios of such underlying assets. The company has appointed AXA Investment Managers Paris an investment management company with a division specialised in structured credit, for the investment management of all its assets.
VTA: Volta Finance not expecting significant increase in default rates