Volta Finance (VTA) announced its annual results for the 12 months to 31 July 2024. The company saw a NAV total return of 19.7%, while the share price total return was 13.6% with the discount widening to 27.1% despite the strong results. The dividend was maintained in line with the board’s current policy of 8% of NAV paid quarterly, equating to an annualised yield of 11.2%.
The company remains happy with the performance of the portfolio which has continued to generate strong net operating cashflows, growing at 21.7% in FY2024, which allowed for payment of the dividend (and all fees) whilst contributing to a growing NAV. The company’s assets are predominantly floating rate so enjoy the benefits of higher interest rates. The other significant factor in Volta’s performance is its underlying portfolio quality and the financial year 2024 has been another year of low defaults and continued expert stock-picking by the portfolio managers. Despite this, chair Dagmar Kershaw notes that the continuing share price discount to NAV is disappointing but attributable to two main factors: firstly, discounts for many investment trusts remain wide, particularly those invested in alternatives, and secondly, the company became aware of a large investor reducing its position, creating a temporary imbalance in demand and supply. The board and the investment manager continue to believe that the discount is too high and the NAV is a more true reflection of the company’s long term value and financial strength.
Discussing the outlook for the trust, the manager commented:
“Looking ahead, we believe that H2 2024 could bring some volatility on CLO spreads as there are still unresolved issues on the macro front (core inflation is not tamed) as well as on the political front with the US elections and their implications regarding global trade and the Ukraine-Russia and Middle East conflicts. Looking at CLOs, we see a strong CLO supply into year-end fueled by refinancings and anticipate—if not a widening of spreads—higher tiering between managers and transactions. On the fundamentals side, although default rates have remained contained at historically low levels, we are conscious of the increased presence of LMEs and believe they could act as a trigger for spread stabilization despite strong investor demand, until the easing rate cycle is properly engaged by central banks. Those remain ‘data dependent’ for now and we expect forward guidance to gain visibility into the new year, as the initial rate reductions will have been implemented and digested.
“As a result, we remain convinced that Volta needs to remain extremely diligent when purchasing assets. Trade origination has been and will remain key to performance. We believe that the default pattern will not negatively impact Volta’s cash flow generation since we do not anticipate defaults to deviate from the historical average. Volta’s diversification is a true asset, the CLO debt tranches are FRNs and benefit from significant credit enhancement, while the higher portion of reinvesting CLOs in the portfolio naturally increases Volta’s capacity to weather significant stress.
“In terms of positioning, adding slightly more US CLO exposure is in scope, preferably via the primary markets since they give exposure to fresh collateral portfolios that have no defaults and limited CCCs, therefore being able to generate attractive risk-adjusted cash flows. This will also organically contribute to the current efforts of increasing the portion of reinvesting CLOs in the portfolio, which is an axis of development for the year to come. Deep mezzanine tranches from top-tier managers make sense, especially if rates remain elevated, although we need to see some softening on that part of the capital structure, especially in the US. Increasing velocity and capturing par gains whenever possible will secure Volta’s return and provide the company with capacity to deploy in higher-yielding assets.
“Equity tranches remain attractive, combining a warehouse facility and following up with the equity tranche provides double-digit return expectations. While accessing best-in-class CLO managers’ warehouse facilities and equity tranches is challenging, we are confident that Volta will be able to secure those trades as it has successfully and consistently done in the past.”
VTA : Volta Finance continues to impress despite stubborn discount
