M&G CREDIT INCOME INVESTMENT TRUST PLC Credit markets rallied strongly towards the end of 2020, bolstered by vaccine optimism, the removal of uncertainty over the US presidency and continued central bank support. Returns for the year as a whole finished in positive territory in both investment grade and high yield markets. Credit spreads in high yield markets ended the year higher than they were at the start of 2020, with investment grade credit spreads broadly unchanged despite the substantially different economic climate. In the public markets, we took the opportunity to reduce our exposure to sectors that may experience difficulty over the short-to-medium term, where spreads were no longer sufficiently wide enough to compensate for the associated risks. In addition, we sold some of the more defensive positions in the portfolio which had tightened significantly versus the long-term target of the Company. This improved the risk profile, realised capital gains and added to the yield of the portfolio The proceeds were used to purchase new private transactions.
We continue to hedge the interest rate risk of the fixed rate bonds in the portfolio to reduce the portfolio's sensitivity to changes to interest rates Gilt futures are used to maintain a modified duration of between 1 and 1.5 years. When the Gilt yields fall this position will detract from the portfolio performance however, in a rising yield environment, the hedging strategy will provide an offset to a fall in price of duration sensitive fixed rate bonds.
In June 2020, the Company raised an additional GBP14.2 million (net of expenses) via a placing of Ordinary Shares. The money raised was initially invested in a variety of public corporate bonds that were offering good relative value, but has since been redeployed into private and more illiquid public assets. In the second half of 2020, the Company entered into an unsecured revolving credit facility with State Street Bank International GmbH. It is intended that this will be used to provide liquidity for investing when it is unattractive to sell existing holdings. The facility will be particularly useful when there is a significant number of private investments due to settle within a short period.
Outlook
In early 2021, investor sentiment is optimistic and appears to be assuming a smooth recovery, no doubt buoyed by the vaccine rollout and the agreement of the Brexit deal between the UK and the EU. This investor confidence, coupled with central bank support, has resulted in a rally in credit market spreads offset by an increase in Government yields across most developed markets.
Underlying NAV performance has had a strong start to 2021. In the first quarter of the year NAV total return was up by 2.02%, which compares well to the performance on fixed income indices such as the ICE BofA Sterling and Collateralised Index which fell by 4.48% and the ICE BofA European Currency Non-Financial High Yield 2% Constrained Index which rose by 1.51%. The Company performance compares well to these fixed income indices due to both its low interest rate risk, achieved by hedging the fixed-rate instruments in the portfolio, and to the tightening credit spread environment.
The Company is now reaching its long-term state of deployment and is delivering on its long-term performance objective set out at launch. The pipeline for new private investments remains strong with GBP32 million expressions of interest given with an average yield in line with the long term dividend policy of the Company. However, there has been some compression in illiquidity premia vs public markets as public market tightening is now beginning to be reflected in private transactions. Therefore, selecting the correct investments will be key.
Looking ahead, the Company will continue to sell strongly performing public bonds. These were generally bought at much wider spread levels in 2020 and will realise good capital gains. The cash raised will be redeployed into private assets which are being presented to us at attractive yield levels and will improve the income coverage of the dividend.
M&G Alternatives Investment Management Limited
27 April 2021
Portfolio analysis
Top 20 holdings
Percentage of
as at 31 December 2020 portfolio of
investmentsa
M&G European Loan Fund 11.98
Atlas 2020 1 Trust Var. Rate 30 Sep 2050 1.76
Delamare Finance 1.2255% 19 Feb 2029 1.59
Finance for Residential Social Housing
1.58
8.569% 4 Oct 2058
Hall & Woodhouse Var. Rate 30 Dec 2023 1.52
Signet Excipients Var. Rate 20 Oct 2025 1.42
Regenter Myatt Field North Var. Rate 31
1.37
Mar 2036
Newday Partnership Funding 2017-1
1.37
0.779% 15 Dec 2027
Hammond Var. Rate 28 Dec 2025 1.32
Project Driver TL Var. Rate 1.32
RIN II 1.88% 10 Sep 2030 1.27
Sonovate Limited Var. Rate 12 Apr 2021 1.22
Westbourne 2016 1 WR Senior Var. Rate
1.17
30 Sep 2023
Finance for Residential Social Housing
1.16
8.369% 4 Oct 2058
Ripon Mortgages 1.251% 20 Aug 2056 1.04
Luminis Var. Rate 23 Sep 2025 1.02
Marston's Issuer 1.653% 15 Oct 2031 1.02
LPG 4.49% 21 May 2024 0.99
Gongga Var. Rate 2 Aug 2025 0.98
Iliad 2.375% 17 Jun 2026 0.96
Total 36.06
a Including cash on deposit and derivatives.
Source: State Street Geographical exposure
Percentage of
as at 31 December 2020 portfolio of
investmentsa
United Kingdom 59.22%
United States 7.95%
France 5.18%
Australia 3.45%
European Union 3.11%
Other 21.09%
a Excluding cash on deposit and derivatives.
Source: M&G and State Street as at 31 December 2020 Portfolio overview
as at 31 December 2020 % Cash on deposit 2.77 Public 52.98 Asset-backed securities 22.37 Bonds 30.61 Private 44.09 Asset-backed securities 6.29 Bonds 1.28 Investment funds 11.98 Loans 13.81 Private placements 0.99 Other 9.74 Derivatives 0.16 Debt derivatives (0.26) Forwards 0.42 Total 100.00
Source: State Street
Credit rating breakdown
as at 31 December 2020 % Unrated 0.16 Derivatives 0.16 Cash and investment grade 79.27 Cash on deposit 2.77 AAA 5.53 AA+ 2.53 AA 4.66 AA- 3.98 A+ 0.21 A 1.67 A- 3.28 BBB+ 10.51 BBB 11.38 BBB- 22.96 M&G European Loan Fund (ELF) (see note) 9.34 Sub-investment grade 20.57 BB+ 4.76 BB 2.81 BB- 4.24 B+ 1.40 B 3.08 B- 0.39 CCC+ 0.58 CC 0.42 D 0.25 M&G European Loan Fund (ELF) (see note) 2.64 Total 100.00 Source: State Street
Note: ELF is an open-ended fund managed by M&G which invests in leveraged loans issued by, generally, substantial private companies located in the UK and Continental Europe. ELF is not rated and the Investment Manager has determined an implied rating for this investment, utilising rating methodologies typically attributable to collateralised loan obligations. On this basis, 78% of the Company's investment in ELF has been ascribed as being investment grade, and 22% has been ascribed as being sub-investment grade. These percentages have been utilised on a consistent basis for the purposes of determination of the Company's adherence to its obligation to hold no more than 30% of its assets in below investment grade securities.
Top 20 holdings %
Company description
as at 31 December
2020
M&G European Loan Open-ended fund managed by M&G which invests in leveraged loans issued by, generally, substantial
Fund private companies located in the UK and Continental Europe. The fund's objective is to create
attractive levels of current income for investors while maintaining relatively low volatility of
11.98% NAV. (Private)
Atlas 2020 1 Trust
Var. Rate 30 Sep 2050 Floating-rate, senior tranche of a bilateral RMBS transaction backed by a pool of Australian
equity release mortgages (Private)
1.76%
Delamare Finance
1.2255% 19 Feb 2029 Floating-rate, senior tranche of a CMBS secured by the sale and leaseback of 33 Tesco superstores
and 2 distribution centres. (Public)
1.59%
Finance for
Residential Social (MORE TO FOLLOW) Dow Jones Newswires
April 28, 2021 02:01 ET (06:01 GMT)
