‘Recovery in fortunes’ continues for CQS New City High Yield – CQS New City High Yield (NCYF) has posted its annual financial report for the year to 30 June 2021. During the period under review, it delivered an NAV total return of 21.38% and a share price total return of 26.31%.
The trust achieved a dividend yield of 8.16%, based on dividends at an annualised rate of 4.47 pence and a share price of 54.80 pence as at 30 June 2021. £6.4m of equity was raised during the year and NCYF saw its premium grow from approximate parity at 0% to 4.14% at the end of the financial year.
In December 2020 the company renewed its Scotiabank loan facility with a one year £35m facility at a current all-in rate of 1.387%. £33m was drawn down at 30 June 2021 and NCYF had an effective gearing rate of 9.45%. The board believes that a modest but meaningful amount of gearing is desirable and expects to maintain approximately this level of gearing during the next financial year.
Chair, Caroline Hitch, noted that the ‘recovery in the company’s fortunes since the onset of the COVID-19 pandemic wreaked havoc on the markets’ has continued since she last wrote to shareholders in February 2021.
Investment manager’s review
Market and economic review
The first half of our financial year featured the twin spectacles of Brexit and the US election as well as Western economies lurching between opening (remember “eat out to help out”!) and locking back down again. The only positives appeared to be stock markets looking ahead and the vaccine news announced towards the end of 2020.
As we entered 2021 and we started to see a way out of lockdown the UK economy signalled that it was ready for a post lockdown recovery, with business activity expanding and a rise in new orders being seen. The UK economy this year is all about how much of the mothballed spare capacity and furloughed workforce can come back on stream and how quickly the demand side recovers. The other major difference is that we now risk inflation rapidly increasing due to supply side shortages and commodity price inflation pushing prices higher, rather than the healthier demand led inflation, which signals a strong economy. The services side of the economy is also showing strength, with demands for restaurants, hotels and leisure for staycations in full flow. Forecasters are predicting that this strong growth will persist along with higher inflationary pressure, the latter will be the worrying factor later in the year.
The Eurozone also saw a surge in the demand for goods and services, which was at its steepest for 15 years with the lockdown restrictions being eased to their lowest since October last year. This has had a particularly positive effect on service sector activity and close to record growth in the manufacturing sector, but employers are still having difficulty filling vacancies and experiencing record supply chain delays. The imbalance between supply and demand is pushing inflationary pressures sharply upwards, and how long this lasts is crucial to the long term stability of economies. Much like the UK, Europe is hoping for the supply of raw materials to come back in line with demand in short order.
In the US, the story is very similar to that of the UK and Europe with output expanding rapidly, supply chain disruption leading to soaring costs and backlogs of orders rising at the fastest rate on record. Again, there is mention that companies are unable to hire sufficient staff, this may be because employees are being pickier as to what jobs they want to do, or that they are making the most of federal and local government payments until they run out in July. Hence, the backlog of work as firms fail to meet demand. We wait to see how this pans out when the subsidies cease.
Portfolio Review
We have continued to maintain a diversified portfolio across a range of sectors and have a good proportion of the portfolio in non-sterling currencies. Turnover within the portfolio has remained low; we tend to have a buy and hold strategy for most of our fixed interest securities with most turnover coming from when we see portfolio investments redeem their bonds either at their scheduled repayment date or earlier if the opportunity arose. A good example of this would be Punch Taverns 7.75% 2025 bonds which was one of our largest positions and was recently called and repaid at par by the company.
Three of the new holdings in the top ten over the year are in positions that we have held for some time; namely One Savings Bank FRN, Raven Russia preference shares and Bracken Midco 8.875% 2023. The new holding in the top ten is Boparan Finance 7.625% 2025 which is a subsidiary of the 2 Sisters Food Group, one of the UK’s largest diversified food manufacturers.
I mentioned in last year’s report that the most notable investment negatively affected by COVID-19 issues was Matalan Finance where the company was badly affected by the lockdown and its bond price fell to 41 as at the end of June 2020. We believe that this security will recover, have remained holders throughout the year and have seen the bond price recover to 60 at our year end.
During the year we have also looked to take advantage of companies where we believed that their debt prices were undervalued; one example of this would be the French supermarket group Casino Guichard 3.992% Perpetual where we started buying last Autumn at around the 35/40 level and have been recently selling at 70.
The revenue account has seen earnings per share of 4.18p come in below our total dividend of 4.47p for the year. In past years we have been able to put significant sums into revenue reserves and we have modestly utilised these this year to ensure that the dividend is paid to shareholders. In my regular discussions with Shareholders, revenue and dividends are topics of crucial importance and the ability of any portfolio company to pay its coupon or expected dividend is one of the major indicators we follow.
Outlook
The future as always is difficult to predict. We have inflation rising and spreading from financial assets into the real economy, the prospect of tapering in the United States sooner rather than later, and in Europe the winding down of quantitative easing also looking near the top of the agenda as inflation levels are worrying Germany and France. We would expect to see larger issuance of debt by corporates spurred on by their investment bank advisors to lock in to the low rates whilst they last. For the UK economy a lot depends on the hope that inflation is a short lived entity and the shortage of staff in various industries is fulfilled by the unfortunate employees being made redundant when furlough is ceased, but there is definitely a danger that many will not want to work for the same remuneration they did previously. Finally supply chains need to improve quickly as scarcity of product itself is leading to upward pressure on input and output prices. The next twelve months will hopefully see markets and economies coming more into line with each other, but there is a definite risk that this is not a smooth ride for either.
I will be working as usual over the forthcoming months to look after your portfolio and ensure that it is in the best possible position to stand against whatever lies ahead.
NCYF : ‘Recovery in fortunes’ continues for CQS New City High Yield