Chenavari Toro Income Fund (TORO) announced its annual results for the year ended 30 September 2024. The company delivered a NAV total return of 12.76% and a share price total return of 36.36%. Dividends totalling 6.58 cents per share were declared for the year, for a yield of 10.2%. As of publishing, the discount stood at 17%.

The manager noted that during the period, the company continued to optimise allocations within the portfolio. The public ABS strategy increased to 51.82% of NAV as at 30 September 2024 (from 37.9% at 30 September 2023), reflecting the strategy’s strong relative performance. The ABS / CLO risk retention strategy exposure reduced to 41.4% from 47.4%. There was further realisation of the Spanish real estate position, which decreased from 10.3% to 6.7%.

Discussing the performance and the outlook, the manager continued:

“European CLOs emerged as one of the best-performing asset classes in 2024, continuing the momentum from the previous year. Performance was underpinned by low credit losses, elevated interest rates, and a broad-based rally in credit markets. BB, B, and equity tranches delivered double-digit returns, while AA-BBB tranches generated solid returns in the 6–10% range.

“The portfolio manager maintains a cautiously optimistic outlook for the short to medium term, despite recent forecasts from credit rating agencies and investment bank strategists predicting credit deterioration and rising default rates. While an increase in CCC-rated assets has been observed within portfolios, this is primarily attributed to idiosyncratic credit events rather than a systemic decline in overall portfolio quality. Although higher real rates are likely to engineer structurally higher defaults from elevated real interest rates, higher yields provide enough carry to cushion investors against increased credit losses.

“The primary challenges on the European leveraged loan side include looser covenants and loans repricing at tighter credit spreads, both of which are characteristic of a bullish market environment. Despite this, the manager remains vigilant, actively managing exposure to specific credits and sectors. For instance, the portfolio manager recently reduced positions with exposures in the Altice/SFR complex, given medium-term headwinds anticipated for the business, regardless of potential creditor-driven capital stack restructuring. Continuous monitoring of collateral quality and sector-specific risks remains a priority.

“Geopolitical risk is growing in prominence, driven by escalating conflicts such as the Russia-Ukraine war and tensions in the Middle East. These challenges pose significant threats to the global economic outlook, with the potential to disrupt growth, exacerbate inflation, and destabilize financial markets. In response, the portfolio manager remains cautious and vigilant in implementing hedging strategies to mitigate these risks where possible.

“The portfolio manager believes the company continues to represent an attractive investment in European ABS and CLOs, including attractive risk-adjusted returns provided by the CLO retention.”