CVC Income & Growth Limited (CVCG) announced annual results for the year ended December 2022. The company saw solid NAV growth of 6.75%, following on from last year’s 12.2% while also increasing its dividend from 4.6 to 5.7%. Despite this, shares fell around 7%. The company does not provide a benchmark in the annual report, however performance was well ahead of the MSCI ACWI index. The company has also been doing a successful job in managing its discount which was close to par at year-end, although has since widened to around 7% reflecting broader market weakness over the last couple of months.
Chairman Richard Boléat commented on the current conditions and market outlook;
“As I indicated in my statement accompanying the semi-annual results to 30 June 2022, I believe the current market conditions are inherently attractive for the Company. I indicated that the combination of increased credit spreads, taken together with increasing risk free rates on offer by central banks, drive current yield on the underlying investment vehicle portfolio to levels not seen for many years. At 28th February 2023, being the most recent published data available, yield to maturity of the underlying Investment Vehicle portfolio was 17.3% (€ hedged) / 19.0% (GBP hedged) and running cash yields of 11.5% (EUR hedged) / 13.1% (GBP hedged) are being achieved. These are very significant numbers. Floating rate instruments at that date comprised 83.2% of the portfolio. Current economic conditions and inflation data appear to indicate, both in Europe and the United States, a “higher for longer” expectation for risk free rates, thus indicating continual favourable conditions for the underlying portfolio as the Investment vehicle Manager continued to deploy capital to fresh positions with “built in” higher all-in rates.
“Recent events in the banking sectors, both in the US and Europe, of course deserve special mention. The root causes of the failure of Silicon Valley Bank, and the difficulties faced by First Republic, are US centric, complex, technical and do not warrant comment here other than to note that we assess them as having no direct or indirect effect on the Investment Vehicle portfolio or our chosen asset class environment as a while. Credit Suisse’s troubles are different, more driven by long terms problems in the senior management of the organisation, and whilst call into question the commercial viability of the organisation as a whole, do not call into question its solvency. So far so good. The difficulty, if there is one, is that banking sector stress generally drives tighter credit conditions. Tighter conditions are per se attractive for the Company, as they drive credit spreads higher, feeding through positively to the yield to maturity and running cash yields that I mentioned earlier. The inverse of this is that central bank reactions are naturally to adopt an easing bias when considering the direction of future risk-free rates. Currently, and has been observed by many economic commentators, central banks will struggle to position this way given that they have arguably fallen behind the curve in seeking to tame inflation through increases in risk-free rates, and would need to keep such rates higher for longer in order to have the desired monetary policy effects. Chris Giles wrote in the Financial Times just before Christmas that central bankers will, in 2023, need “nerves of steel and the hides of rhinos”. They face significantly greater difficulties now.
“I mention all of this because I am sure that investors in the Company will want to understand how the Board sees the short to medium term future given recent events. Our base case, which is that relevant risk-free rates will remain at or around current levels through 2022, and credit spreads will remain elevated, remains unchanged.
“When I say “relevant”, I exclude UK rates, which are likely to show a materially softer performance than other developed markets due to the ongoing damage caused by the effects of Brexit and government missteps, because the underlying portfolio’s geographical exposure to the UK is only 28% of the whole, and in practice is even less than that, given that both Doncasters and Wella, being both UK issuers and totalling together 8.75% of the portfolio at 28th February 2023, are global businesses with only a small fraction of their revenues being earned in the UK.
“A necessary caveat to our base case is that it would not be surprising to see further pockets of stress arising in other parts of the financial markets, particularly within more highly leveraged market participants, which could exacerbate the dilemmas facing central banks and upend markets again, with unforeseeable consequences. Investors should be alive to this and monitor markets carefully in order to ensure that their portfolios are properly positioned and nimble.”
CVCG : CVC Income & Growth impresses despite broader market conditions