Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by Alcentra European Floating Rate Income. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
Alcentra European Floating Rate Income (AEFS) invests principally in loans issued by European companies (including those in the UK). The vast majority of the loans are senior in the capital structure and secured against the companies’ assets, meaning that the historic levels of defaults are very low (AEFS has not experienced a default in the portfolio since it was launched in 2012). Furthermore, the floating rate nature of the loans means they offer a yield which rises along with interest rates and less volatile price behaviour than fixed interest bonds.
The trust yields 4.6% on a historic basis and has displayed low volatility since launch. Over five years, the standard deviation has been just 2.3% compared to 8.3% on European high yield bonds and 8.5% on US high yield bonds, using the ICE BofAML indices. The cautious sector positioning contributes to the defensive nature of the income stream.
Alcentra is a major player in the European loans market and has a long track record in this rapidly growing asset class. This gives it preferential access to deals and the ability to act as a key investor in new syndications. The manager, Graham Rainbow, and his deputy, Daire Wheeler, work with a team of eight dedicated credit analysts based in London as well as a similar team in the US. This allows them to do detailed work on the individual borrowers, which should allow them to pick superior credits. This expertise has contributed to the trust suffering no defaults since launch, while there is also a distressed debt team within Alcentra who would be able to work to recover the maximum from any default should they occur.
Loans are floating rate, meaning that they pay a coupon of EURIBOR plus a spread, and therefore the income rises and falls with interest rate changes. Most of the loans are in euros, but because the trust hedges the currency exposure back into GBP, the trust is exposed to UK interest rates. Unlike investing in US loans, where hedging removes the US interest rate benefit and has been a net cost to capital and income in recent years, this hedging has been an advantage in the euro loans market. Although interest rates are negative in Europe, euro loan coupons typically have a floor at 0%, meaning that the least that investors can receive is the spread, not the spread minus the impact of negative rates.
Thanks to the nature of floating rate bonds, the trust has a minimal duration and should not suffer significant capital losses due to rising interest rates. Unlike a fixed coupon bond, the income would rise in such a scenario rather than remain the same. It also contributes to the stable, low volatile nature of the trust.
Since the trust was launched the prospects for rate rises in Europe and the UK have fallen, and the trust has fallen onto a discount. However, the board has taken radical action to attempt to reverse this trend: from December there will be a quarterly liquidity event allowing investors to exit up to 20% of their position at a 1.5% discount to NAV (discussed in the discount section).
This report has been issued by Kepler Partners LLP. The analyst who has prepared this report is aware that Kepler Partners LLP has a relationship with the company covered in this report and/or a conflict of interest which may impair the objectivity of the research.
Past performance is not a reliable indicator of future results. The value of investments can fall as well as rise and you may get back less than you invested when you decide to sell your investments. It is strongly recommended that if you are a private investor independent financial advice should be taken before making any investment or financial decision.
Kepler Partners is not authorised to market products or make recommendations to retail clients. This report has been issued by Kepler Partners LLP, is based on factual information only, is solely for information purposes only and any views contained in it must not be construed as investment or tax advice or a recommendation to buy, sell or take any action in relation to any investment.
The information provided on this website is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation or which would subject Kepler Partners LLP to any registration requirement within such jurisdiction or country. In particular, this website is exclusively for non-US Persons. Persons who access this information are required to inform themselves and to comply with any such restrictions.
The information contained in this website is not intended to constitute, and should not be construed as, investment advice. No representation or warranty, express or implied, is given by any person as to the accuracy or completeness of the information and no responsibility or liability is accepted for the accuracy or sufficiency of any of the information, for any errors, omissions or misstatements, negligent or otherwise. Any views and opinions, whilst given in good faith, are subject to change without notice.
This is not an official confirmation of terms and is not a recommendation, offer or solicitation to buy or sell or take any action in relation to any investment mentioned herein. Any prices or quotations contained herein are indicative only.
Kepler Partners LLP (including its partners, employees and representatives) or a connected person may have positions in or options on the securities detailed in this report, and may buy, sell or offer to purchase or sell such securities from time to time, but will at all times be subject to restrictions imposed by the firm’s internal rules. A copy of the firm’s Conflict of Interest policy is available on request.
PLEASE SEE ALSO OUR TERMS AND CONDITIONS
Kepler Partners LLP is authorised and regulated by the Financial Conduct Authority (FRN 480590), registered in England and Wales at 9/10 Savile Row, London W1S 3PF with registered number OC334771.
Invesco UK Equities managers Jonathan Brown and Robin West discuss three stocks that have fulfilled their investment thesis over the last few years...
Amid the recent revival for emerging markets, investors have remained focused on Asian markets. Should they be looking further afield to Latin America? Ed Kuczma, co-manager of the BlackRock Latin ...
For several years, quality as an investing style has dominated, outperforming both value and growth. We examine why the case for quality remains strong and the importance of taking an active approach…
We examine the AIC's revised sector classifications and discuss whether further improvements could be made...