Restructurings starting to bear fruit

CVC Credit Partners 10 March 2020 Update
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CVC Credit Partners European Opps

Restructurings starting to bear fruit

Investment companies
Debt: Loans and bonds

10 March 2020

Price

96.2p/€0.94

Market cap

£239.1m €122.1m

AUM

£263.9m €130.7m

NAV*

105.65p

Discount to NAV

8.9%

NAV**

100.38c

Discount to NAV

6.4%

*CCPG. **CCPE. Excluding income. At 21 February 2020.

Yield

5.7/5.9%

Ordinary shares in issue

248.9m/129.8m

Code

CCPG/CCPE

Primary exchange

LSE

AIC sector

Debt – Loans and Bonds

Share price/discount performance

Three-year performance vs index

52-week high/low

109.5p/€1.06

96.2p/€0.94

109.1p/€1.05

103.3p/€0.98

*Including income.

Gearing

Gross*

0.0%

Net*

0.0%

*At CCPEOL level.

Analyst

Milosz Papst

+44 (0)20 3077 5700

CVC Credit Partners European Opportunities is a research client of Edison Investment Research Limited

CVC Credit Partners European Opportunities (CCPEOL) achieved an NAV return of 3.1% in sterling and 1.6% in euro terms in FY19. The investment vehicle through which CCPEOL invests achieved a gross return of 2.9% (in euro terms), behind its target of 8–10% per year. This was largely due to several restructuring processes within the credit opportunities pool taking longer than expected. However, these have shown good progress recently and, together with prospective new credit investment opportunities, now offer further upside potential for 2020. Meanwhile, the performing credit holdings delivered solid returns as the investment manager was able to profit from the recent ‘flight to quality’ in credit markets.

The flight to quality in 2019

Source: Credit Suisse Western European Leveraged Loan Index, Edison Investment Research

The market opportunity

CCPEOL offers investors daily traded exposure to a diversified portfolio of sub-investment grade debt, with facilities providing liquidity to investors and a buyback strategy limiting the discount to NAV. The portfolio is split into two pools: performing credit and credit opportunities. Whereas in the latter pool CCPEOL was focused on turnaround processes in existing investments in 2019, the investment manager is likely to source new stressed assets in 2020 to leverage its restructuring expertise. At the same time, it offers exposure to high-quality and highly liquid investments in the performing credit part of the portfolio.

Why consider investing in CCPEOL?

Investment manager has 15 years’ experience.

Debt specialist with relatively un-constrained mandate, able to invest in situations where technicals diverge from fundamentals.

Current depressed valuations in credit opportunities allow the investment manager (CVC European Credit Opportunities, CEC) to invest at an above-average YTM.

Valuation: Higher discount enhances yield to 5.7%

On average, both CCPEOL share classes have traded close to NAV since the fund was launched in June 2013. This is due to share conversion facilities, active trading in treasury shares and the quarterly tender facility. Recent market downturn due to coronavirus outbreak has brought the discount to a record-high 10.1% (including income).

Exhibit 1: Company at a glance

Investment objective and fund background

Recent developments

CVC Credit Partners European Opportunities (CCPEOL) is a closed-end investment company, domiciled in Jersey and listed in London. It invests through a Luxembourg vehicle, CVC European Credit Opportunities (CEC), aiming to provide investors with regular income and capital appreciation from a diversified portfolio of predominantly sub-investment grade debt instruments. The portfolio is split into two pools: performing credit and credit opportunities. CCPEOL has two classes of share: sterling shares (CCPG) and euro shares (CCPE) traded on LSE.

19 February 2020: no requests for conversion of shares in March.

27 January 2020: interim dividend declared at 1.375p/€0.01375 per share, ex-dividend date of 6 February 2020.

15 November 2019: 81,693,230 CCPG and 2,455,926 CCPE shares tendered for December quarterly tender process crossing 24.99% threshold, 76,796,296 CCPG shares accepted.

25 October 2019: scrip dividend facility suspended.

27 September 2019: half year report publication: NAV return at 1.43% (CCPE) and 2.13% (CCPG).

Forthcoming

Capital structure

Fund details

AGM

April 2020

Ongoing charges

1.07% (FY18)

Group

CVC Credit Partners

Interim results

March 2020

Net gearing

Zero at CCPEOL level

Manager

Team-managed

Year end

31 December

Annual mgmt fee

1.0% at underlying fund level

Address

111 Strand,
London, WC2R 0AG

Dividend paid

Quarterly (since FY16)

Performance fee

See page 6

Launch date

25 June 2013

Company life

Indefinite

Phone

+44 (0) 20 7420 4200

Continuation vote

See page 6

Loan facilities

None at CCPEOL level

Website

www.ccpeol.com

Dividend policy and history (financial years)

Share buyback policy and history (financial years)

In Q217, CCPEOL raised its full-year dividend target to 5.5p/€0.055 per share, which had been 5.0p/€0.05 per share since its first full financial year. Dividends have been paid quarterly since H216, in May, August, November and February. Previously dividends were paid in two instalments. FY16 was a transitional period, when three dividends were paid.

CCPEOL operates a contractual quarterly tender system, a monthly conversion facility between sterling and euro share classes and may issue shares from treasury in response to market demand. The chart below is for sterling shares (CCPG); repurchases include tendered shares and repurchases and allotments both include share conversions and the placing of treasury shares.

Shareholder base (at 25 February 2020)

Currency breakdown at 31 January 2020

Top five issuers (at 31 January 2020)

Portfolio weight %

Company

Country

Sector

January 2019

January 2018*

Concordia

UK

Healthcare and pharmaceuticals

2.6

N/A

Civica

UK

Electronics

2.5

2.8

Doncasters

UK

Diversified/conglomerate service

2.5

N/A

Swissport

Switzerland

Diversified/conglomerate service

2.4

N/A

Kirk Beauty

Germany

Retail Stores

2.3

N/A

Top 5 (% of holdings)

12.3

12.9

Source: CVC Credit Partners European Opportunities, Edison Investment Research, Refinitiv. Note: *N/A where not in end-December 2018 top five.

2019: A year of ‘flight to quality’ in credit markets

In FY19, CCPEOL’s investment vehicle (CEC) delivered a 2.9% gross return, which was behind its 8–10% target. That said, CEC’s overall inception-to-date (itd; since April 2009) performance remains solid at 10.8% per year. After accounting for ongoing charges (including management fee) at the CEC and CCPEOL level, CCPEOL’s gross return translated into an FY19 NAV total return of 3.1% for the sterling shares and 1.6% for the euro shares. Year to date (to 21 February 2020) CCPEOL posted a healthy 2.1% NAV TR in sterling terms (2.0% in euro), which we believe was due to a combination of positive developments in the credit opportunities portfolio coupled with credit spreads tightening in the broader market.

Performing credit: Focus on high-quality debt

The performing credit strategy delivered a gross return of 7% in FY19, which is at the top of its 4–7% target, translating into a 3.3pp gross return attribution at the portfolio level (in line with historical averages and compared to 1.0pp in FY18). As expected by the investment manager, debt markets in 2019 were characterised by a ‘flight to quality’, as illustrated by the BB institutional loan spreads tightening to 221bp in January 2020 from close to 300bp in mid-2019, according to S&P. The investment manager was able to benefit from this trend by overweighting high-quality and highly liquid (but still mostly sub-investment grade) investments. This is illustrated by the decrease in CCPEOL’s combined exposure to non-rated and CCC-rated debt by 10pp to 25% of the portfolio over the year, as well as minor (1%) exposure to triple-A assets at end-January 2020. Consequently, the average price of CCPEOL’s performing credit pool increased to 99.8% of par at end-FY19 from 98.5% at end-FY18.

Credit opportunities: Restructuring processes starting to pay off

In contrast, the return on the credit opportunities portfolio in FY19 was 0% (vs its target of 7–20+% per year), affected by delays in restructuring processes within existing investments (while new investments in this area were limited). We note, however, that returns from this part of CEC’s portfolio tend to vary on a year-by-year basis (see Exhibit 2), as the investment manager sources investments in periods of risk-off attitudes, which should subsequently deliver value on successful restructurings. Consequently, despite the credit opportunities portfolio missing its targets in FY14, FY18 and FY19, it still delivered an annualised return of 16% pa since CEC's inception in April 2009 to end-2019.

Moreover, we note that positive performance in Q419 and strong year-to-date performance indicate the restructurings are starting to bear fruit. The investment manager presents an industrial and aerospace company as one of the key contributors. This company is undergoing a managed sell down, with the first-lien term loan well covered by the indicated sum-of-the-parts value. The process initiated in August 2019 and successful disposals triggered a loan price appreciation, as illustrated by the US$ term first-lien loan price rising from 70% of par in August 2019 to 85% in February 2020. CEC targets an IRR of over 20% on this investment. The management indicates that several further ongoing processes are nearing completion and should be reflected in CCPEOL’s valuation in the near term.

Exhibit 2: Historical net return attribution (investment vehicle)

Source: CVC Credit Partners, Edison Investment Research. Note: Data from first full year of operation. Ytd to 30 September 2019.

Current portfolio positioning

At end-January 2020, CCPEOL’s portfolio continues to be skewed towards floating-rate (84.5% of the portfolio, broadly flat year on year) senior debt (85.5% of gross asset value (GAV) -4pp y-o-y). CEC invests in large-cap companies with a weighted average EBITDA of over €400m (compared to €585m a year earlier), which are domiciled or have most of their operations in Europe. In total, 64% of assets are euro denominated, while the largest country exposure is to US-based companies at 28%.

The assets held in the portfolio at end-January 2020 represent a 5.7% cash yield on average and are valued at 6.5% YTM (compared to 7.7% at end-2018). The decrease in YTM during 2019 followed the tightening spreads and higher-quality investments in the performing credit portfolio (current YTM at 4.7%, down 0.1pp since end-2018), as well as ongoing restructurings in credit opportunities (YTM at 8.9%, down 2.1pp).

Exhibit 3: Portfolio analysis

Asset breakdown at 31 January 2020

Look-through credit rating (at 31 January 2020)

Source: CVC Credit Partners European Opportunities, Edison Investment Research

Outlook for 2020: New opportunities ahead

In the credit opportunities portfolio, CEC searches for investments to leverage its expertise in turnaround situations and buy in to assets at depressed valuations. The investment manager highlights that refinancing activity in recent years has been high but there were some companies ‘left behind’, which are now in a stressed situation facing upcoming maturities. We also believe the availability of bargain purchases should be amplified by two major trends in the global economy: the ongoing ‘flight to quality’ described above, resulting in a widening difference between investment grade and high yield spreads, and the signs of global economic slowdown, which triggered deratings of debt assets as described in detail in our January 2020 note. Further debt market volatility may come from the recent coronavirus outbreak.

Within the performing credit portfolio, the investment manager intends to continue the strategy it followed in 2019 – harvesting tightening spreads in the upper range of sub-investment grade ratings. The exposure to higher-rated debt is likely to increase as long as overall market conditions lead to tightening spreads in this asset subclass. We note that according to Bloomberg, Partners Group is considering the imminent sale of Civica, which is currently the second-largest single exposure in CCPEOL’s portfolio (2.5% of GAV at end-January 2020). Although further details are not available, we note that most senior private debt agreements include a prepayment fee in the case of an ownership change.

At present, CEC favours sub-investment grade loans over high-yield (HY) bonds (63% vs 14% exposure at end-January 2020) and is likely to maintain this approach into 2020 given the low-spread environment seen in recent months, which makes pricing bonds (which are more widely publicly traded) more vulnerable to any changes in market sentiment. Global capital markets are watching political tensions and looming global economic slowdown and are likely to be prone to short-term selloffs as seen in Q418, and currently amid coronavirus outbreak. In recent weeks, spreads went above the peak of the Q418 sell-off. In the US, HY spreads widened to 668bp (9 March 2020) from 356bp on 14 February. Similarly in Europe, spreads moved to 539bp from 305bp in less than a month. Consequently, the investment manager does not consider the current risk-reward profile of HY bonds as attractive.

Exhibit 4: BofAML US high-yield credit spread

Exhibit 5: BofAML euro high-yield credit spread

Source: Refinitiv

Source: Refinitiv

Exhibit 4: BofAML US high-yield credit spread

Source: Refinitiv

Exhibit 5: BofAML euro high-yield credit spread

Source: Refinitiv

CCPEOL enters 2020 with an ample cash position at 13.2% of GAV as at end-January 2020. This reflects the payment schedule of debt securities, which results in a higher cash positions at the turn of the year (11% in January 2019, 10.6% in January 2018). The cash should be deployed swiftly early in 2020, as CEC invests mostly in highly liquid debt and is actively trading its assets (especially within the performing credit portfolio), as highlighted by its portfolio turnaround of around 1.6x in 2019. Additionally, the investment manager believes 2020 should offer plenty of investment prospects for the credit opportunities portfolio and it is likely to increase its weighting to these investments in 2020 (from 39% at end-2019).


Peer group comparison

The significant share of the overall portfolio in stressed assets weighed on CCPEOL’s 2019 performance and the NAV return lagged its peers in both share classes. Despite short-term underperformance, the five-year return remains above its peers and the broader subsector average. Annualised NAV TR since inception (June 2013) stands at a creditable 5.6%, and the dividend yield is in line with other debt-focused peers.

Although CCPEOL itself does not charge a performance fee and does not use leverage, they are applied at the investment vehicle level. The management fee is 1% of the NAV per year; the performance fee amounts to 15% over the 5% hurdle rate and is subject to a high water mark. The investment vehicle may gear up to 100% of net assets and the actual leverage was 22.3% of the NAV at end-FY18 (latest available data).

Every quarter investors can tender up to 24.99% of the shares for repurchase at a price close to NAV. Every month the CCPG shares can be converted into CCPE shares and vice versa. To supplement this, CCPEOL actively trades its treasury shares and may issue new shares to meet investor demand, which effectively minimises the discount (since CCPEOL’s launch in June 2013 it has averaged 0.1%). CCPEOL’s board would be required to propose a continuation vote if the average discount to NAV exceeded 10% over any rolling 12-month period or if net assets fell below €75m (currently c €436.0m).

Exhibit 6: Selected peer group at 8 March 2020*

% unless stated

Market
cap (£m)

NAV TR
1 year

NAV TR
3 year

NAV TR
5 year

Ongoing
charge

Perf.
fee

Discount/
premium
(ex-par)

Net
gearing

Dividend
yield

CVC Credit Partners Euro Opps GBP

239.1

4.2

13.4

32.7

1.1

No**

(8.9)

100*

5.7

CVC Credit Partners Euro Opps EUR

106.4

2.1

9.5

30.2

1.1

No**

(6.4)

100*

5.9

Alcentra Eur Floating Rate Inc

101.3

7.5

13.3

24.9

1.1

No

(4.8)

96

4.7

Axiom European Financial Debt Fund

81.7

13.9

26.3

1.5

Yes

(12.9)

100

6.7

NB Global Floating Rate Income

334.8

11.2

15.2

25.1

1.0

No

(12.5)

100

5.7

Peer group average (3 funds)

172.6

10.8

18.3

25.0

1.2

(10.1)

99

5.7

Subgroup average (11 funds)

134.1

4.5

11.0

27.9

2.0

(11.1)

99

4.4

CCPG rank in peer group

2

4

3

1

3

3

2

3

CCPE rank in peer group

3

5

5

2

3

2

2

2

Source: Morningstar, Edison Investment Research. Note: *Performance to 31 January 2020. TR: total return, in sterling terms (CCPE in euro terms; CCPG shares are hedged back to euros). Net gearing is total assets less cash and equivalents as a percentage of net assets (100=ungeared). **At the CCPEOL level a performance fee is charged and leverage is applied at the investment vehicle level.


General disclaimer and copyright

This report has been commissioned by CVC Credit Partners European Opportunities and prepared and issued by Edison, in consideration of a fee payable by CVC Credit Partners European Opportunities . Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

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Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

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Frankfurt +49 (0)69 78 8076 960

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60325 Frankfurt

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London +44 (0)20 3077 5700

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London, WC1V 7EE

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1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by CVC Credit Partners European Opportunities and prepared and issued by Edison, in consideration of a fee payable by CVC Credit Partners European Opportunities . Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

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The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

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Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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