Volta Finance Ltd (LON:VTAS) is the topic of conversation when Hardman and Co’s Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.
Q1: Volta Finance was one of the attendees at your recent forum, and you produced a note on the company highlighting the questions and answers from attending investors. I see the first question was about being a forced seller of assets, which sounds like a read-across from the problems seen at Woodford and H20 What can you tell us about that?
A1: We see minimal read-across from those situations.
First, there is no redemption pressure, as the company has the permanent capital of a closed-ended structure.
Second, there is limited gearing – just over 10% of the fund – and this is structured so it can be repaid over a year; by way of comparison, in the last 12 months, total cash generation from income, natural maturities and sales were close to 40% of the portfolio.
Third, the Board is clearly independent from the manager; it combines extensive experience in the industry with a broad investment company knowledge, and critically has individuals who are not afraid to challenge the manager.
Fourth, we detailed in our 26 June note on the Manager’s Hardman & Co Forum presentation the extensive and independent verification of asset values; the actual prices they have achieved on asset sales fully verify its accounting approach.
Finally, the company’s platform distribution is not an issue for the company. Lots of reasons here why there is no read-across at all.
Q2: The bias of other questions appeared to be on credit. Could you comment how VTAS may optimise returns if the expected gentle economic deterioration happens?
A2: Looking forward, AXA IM expects more volatility on credit, and one way to benefit is to invest in CLO equity. Critically, new CLO equity benefits from higher re-investment returns. While this might, at first sight, appear counter-intuitive, the actual market-wide returns from CLO equity issued just before the 2007/08 financial crisis were around twice those issued in the years before.
It is all about balancing higher impairments against higher spreads and picking the right manager to exploit the opportunities.
We discussed downturn scenarios extensively our initiation report in September last year and, more specifically, in our note, Investment opportunities at this point of the cycle, published on 14 January 2019. In summary, we believe the manager has the necessary experience through the cycle and expertise to deliver.
It is worth noting it outperformed the market in generating those higher returns earned from CLOs issued in the financial crisis.
Q3: On credit, we hear a lot about lenders getting squeezed on their security and, especially, so- called cov-lite documentation. How do you see that evolving for them?
A3: Anecdotal evidence from a senior credit executive in a major bank and multiple other sources is that the effective enforceability is weaker than in 2007. For Volta Finance, we need to break up the impact of these changes into the two key credit loss determinants.
First, for a given economic pattern, the probability of default is lower, but, second, the loss in the event of default is higher. At this stage, it is too early to know whether the ultimate economic effect will be different, the company management’s view is that any net impact will be modest. However, we believe investors also need to focus on the sentiment impact. Fewer defaults are better for sentiment than lots of defaults.
As both the company’s NAV and its discount are sensitive to sentiment, in any downside, the extreme sensitivity-driven volatility seen in the past should not recur.
Q4: there were some questions about the relationship with AXA Investment Management. What can you tell us about that?
A4: AXA IM has advantages of scale, risk control, deal access and excellent long-term performance. Axa has a material investment in structured finance, which we believe is a long-term core business to it. For Volta Finance, there are clear conflicts of interest policies and reporting structures in place. Perhaps most critical is the fact that the Board is willing to challenge the manager.