Volta Finance Limited (VTA) has reported its annual results for its financial year ending 31 July 2022.
VTA reported a NAV total return of -7.3% and share price total return of -4.3%. The chairman believes these movements are broadly in line with the wider market.
Over the period VTA paid a dividend of EUR 0.57 per share. This was equal to a dividend yield of 9.9% based on its year-end share price.
VTA ended its financial year on a discount of 15.8%, trading on a share price of EUR5.24
VTA’s investment manger believes that there are no clear signs of deterioration in CLO metrics, having seen more upgrades than downgrades both in the US and in the European loan market so far this year and since loans are trading at a discount for several months,
CLO managers have been able to build some par, i.e. cushion for the future.
Even though the managers expect to see an increase in default rates (mostly in 2023), they do not expect any interruption for VTA’s incoming cash flows nor any significant deterioration in terms of projected yield.
Thanks to the very high dividend coverage for VTA, the managers have been generating excess cash which can be used to seize opportunities that are currently yielding far above VTA’s usual target return.
They also comment that under market standard scenarios, VTA will receive a significant amount of interest and coupon income relative to its NAV in the upcoming year. The managers do not foresee any change in their allocations between CLO debt and CLO equity. They have circa one third in CLO debt and two thirds in CLO equity, which allows VTA to generate solid cash flows and seize opportunities thanks to significant dividend cover.
VTA’s chairman, Dagmar Kershaw, in his first statement as VTA’s new chairman said: “Against this challenging backdrop, there are some rays of sunlight and I believe Volta is one of them. The performance of Volta’s underlying portfolio is strong and cashflows are at all-time highs with a portfolio total cash return of 18.0% in the past year. You might wonder how that can be, but Volta’s fundamentals are sound.
CLOs are a sophisticated asset class with a number of moving parts, but history of over 20 years of CLO investing shows that in challenging markets, the structures function in the manner that they are planned to do. Sentiment may affect market pricing of the underlying assets and Volta’s share price but the payment priorities and structural protections embedded in these funds hold firm and good fundamental credit investments will continue to perform.”
[VTA has shown that even a well diversified, complex, and what may once have been seen as ‘lower risk’ asset like CLOs cannot act as the safe haven investors may have desired in today’s market. Yet income investors are still very well served, given its near double digit yield. VTA appears to be in a good position however, at a fundamental level, as the managers are sufficiently confident in their dividend coverage to use the capital as possible dry powder. One would hope that they will be able to capitalise on today’s valuations to reverse the under performance while still maintaining the integrity of the dividend]