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Alcentra EurFltRt Fd (AEFS)


Friday 15 May, 2020

Alcentra EurFltRt Fd

Portfolio Update

RNS Number : 1049N
Alcentra European Fltng Rate Inc Fd
15 May 2020

Alcentra European Floating Rate Income Fund Limited


Market Commentary


The Fund was up 4.44% (gross) in April, behind both the Credit Suisse Western European Leveraged Loan Index ("CS WELLI") (hedged to GBP) which was up 6.59%1, and the Credit Suisse Western European Leveraged Loan Index excluding USD which was up 7.48%2 for the month.

After a very weak March in which the market traded materially lower on concerns around the impact of the Covid-19 virus on global economies, April saw a strong recovery. Loan prices rebounded c.7%3 as sentiment improved on the back of supportive government and central bank actions, as well as due to an improvement in fund flows and a lack of new loan issuance. While the initial rebound in late March saw higher quality and defensive names outperform, the recovery in April saw the strongest performance in B and CCC assets as well as in the sectors that were the weakest in March (Metals/Minerals, Housing, Retail, Chemicals). After seeing some initial underperformance relative other credit asset classes in March, European Loans outperformed in April, returning more than US Loans (4.2%)4, EU HY (5.82%)5 and US HY (3.68%)6, benefitting from the improved sentiment and technicals as well as a from a lower energy exposure.

Given the recent market volatility we did not see any new loan deals price in April. However, we have seen high yield bond issuance, both from higher quality credits (e.g. Netflix), but also names looking to improve their liquidity buffers (e.g. Merlin), although overall issuance volumes remain low. Looking forward we do think there is scope for companies to look to access the primary loan market, with higher quality and rated companies looking to term-out maturities (e.g. Synlab and Nielsen currently in market) and potentially companies looking to improve liquidity, however the scope for material M&A driven issuance remains muted.

The market for CLO formation has also re-opened, with three new deals pricing in the last week of the month amounting to c.€0.8bn7 total volume. Despite this, for now, arbitrage conditions remain difficult and a standard four-year reinvestment period deal does not work. Recent issuance has been focussed on issuing smaller, shorter and less levered deals in order to term out warehouses. This is a positive indication of the maturity of the European CLO market and is a trend that is expected to continue. In addition, demand has been aided by more positive fund flows into unlevered funds and SMAs.

While the S&P default rate for the 12 months ending April remained stable at 0.42%8, it is expected to increase in the coming months. S&P are forecasting an 8%9 default rate for the European Loan market, although the final figure will depend on the length and severity of the pandemic and the resulting economic weakness. Initially we believe defaults will be concentrated on more directly impacted businesses, where travel and mobility restrictions, as well as working capital unwinds, mean they are at risk of seeing near term liquidity pressure. The S&P distress ratio, a measure of names in the market trading below 80 has shown a material improvement from >50% at the trough in mid-March, c.36% at the end of March to c.18% at the end of April10.

Our focus continues to be on understanding the impact of lock-down and quarantine measures on a sector by sector and company by company basis. We have focused on reducing our exposure to companies where we see the most downside and look to position the fund in names we think have better scope for recovery as economies begin to normalise. The technicals in the European Loan market remains solid with limited new loan issuance and solid demand from both unlevered funds/SMAs, as well as buying of lower rated lower priced credits by credit opportunities funds. While the prospect for volatility remains, particularly idiosyncratic volatility as companies begin to report results, we do think returns on offer remain attractive, particularly in the single B space where spreads of 600bps-800bps are on offer.



1 Credit Suisse Western European Leveraged Loan Index, All Denom, hedged to GBP, 30 April 2020

2 Credit Suisse Western European Leveraged Loan Index, Non USD, hedged to GBP, 30 April 2020

3 Credit Suisse Western European Leveraged Loan Index, Non USD, hedged to EUR, 30 April 2020

4 Credit Suisse Leveraged Loan Index, All Denom, hedged to EUR, 30 April 2020

5 Ice of BAML European High Yield: HP00, 30 April 2020

6 Ice of BAML US High Yield: H0A0, 30 April 2020

7 S&P Global Market Intelligence, CLO Historical Stats, 2 May 2020

8 S&P Default Ratio, 30 April 2020

9 S&P Global Market Intelligence, European Weekly, 2 May 2020

10 S&P Distress Ratio, 30 April 2020




Portfolio Manager's Commentary


Generally the best performing credits in the fund were names that underperformed in March and benefitted from the improved sentiment and outlook in April. The top performing credit was a French software distribution business that was up +35.6% on better results and outlook. The second best performing credit was a UK based child care provider that initially traded lower on concerns around the lock-down impact in demand, but rebounded +34.8% due to increased investor confidence given the importance of the firm's activity.

The weakest credits continued to be those most at risk of needing nearer term liquidity. The largest decline, an outdoor clothing retailer, was down -25.7% on concerns around outlook and recovery for their business. The second weakest credit, a European mobile holidays business, was -20.7% lower due to concerns around the impact of the virus on demand and the need to raise extra liquidity.







For further information please contact:

Alcentra Limited

Simon Perry   +44 20 7367 5272



An accompanying factsheet which includes the information above as well as wider commentary on the investments made by the Fund can be found on the Fund's website .


Background Information

Alcentra European Floating Rate Income Fund Limited, a Guernsey Authorised Closed-Ended Collective Investment Scheme, regulated by the Guernsey Financial Services Commission and listed on the Main Market of the London Stock Exchange invests predominantly in senior secured loans and senior secured bonds issued by European corporates and targets returns (net of fees and expenses) of 7% to 10% per annum. The Fund targets a dividend yield of 5.5 pence per £1.00 issue price of the initial offering of shares in the Fund for the first full year of investment, paid quarterly.


Important Notices

Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.


This report is aimed at existing investors in the fund and has not been approved by any competent regulatory authority.

The information contained in this document is given as at the date of its publication (unless otherwise marked) and is based on past performance. Past performance is not a guide to future performance and the value of investments and investment value can go down as well as up. The future performance of the Fund will depend on numerous factors which are subject to uncertainty. Including changes in market conditions and interest rates and exchange rates and in response to other economic, political or financial developments, investment return and principal value of your investment will fluctuate, so that when your investment is sold, the amount you receive could be less than what you originally invested. Past or current yields are not indicative of future yields.

This document does not contain any representations, does not constitute or form part of any solicitation of any offer to sell or invitation to purchase any securities of the Fund, nor shall it or any part of it or the fact of its distribution form the basis of or be relied upon in connection with any contract therefor, and does not constitute a recommendation regarding the securities of the Fund. Nothing in this document should be construed as a profit or dividend forecast.

This document includes statements that are, or may be deemed to be, "forward-looking statements". These forward-looking statements include, without limitation, statements typically containing words such as "believes", "considers", "intends", "expects", "anticipates", "targets", "estimates", "will", "may", or "should" and words of similar import. The forward-looking statements are based on the beliefs, assumptions and expectations of future performance and market development of Alcentra Limited ("Alcentra"), taking into account information currently available and made as at the date of this document. These can change as a result of many possible events or factors, not all of which are known or within Alcentra's control. If a change occurs, the Fund's business, financial condition, liquidity and results of operations may vary materially from those expressed in the forward-looking statements. By their nature, forward-looking statements involve known and unknown risks and uncertainties. Forward-looking statements are not guarantees of future performance. Alcentra qualifies any and all of the forward-looking statements by these cautionary factors. Please keep this cautionary note in mind while reading this document.

An investment in the Fund is suitable only for investors who are capable of evaluating the merits and risks of such an investment and who have sufficient resources to be able to bear losses (which may equal the whole amount invested) that may result from such an investment. An investment in the Fund should constitute part of a diversified investment portfolio. Accordingly, typical investors in the Fund are expected to be sophisticated and/or professional investors who understand the risks involved in investing in the Fund.

Alcentra gives no undertaking to provide recipients of this document with access to any additional information, or to update this document or any additional information, or to correct any inaccuracies in it which may become apparent including in relation to any forward-looking statements. The distribution of this document shall not be deemed to be any form of commitment on the part of Alcentra to proceed with any transaction.

This document is issued by Alcentra Limited, which is authorised and regulated in the United Kingdom by the Financial Conduct Authority and whose registered address is at 160 Queen Victoria Street, London, United Kingdom, EC4V 4LA.

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