CVC Credit Partners European Opportunities (CCPEOL) seeks returns of 8-12% a year by investing mainly in high yielding sub-investment grade loans. A focus on senior secured assets mitigates the higher risk from lower credit quality. The bias to floating rate credits means rising interest rates should be a benefit rather than a drag. The portfolio is split roughly 50/50 between performing credit, where returns come mainly in the form of income, and credit opportunities, where assets are priced below par and thus offer potential for capital appreciation and downside protection due to the discounted price. There are relatively few alternative ways for individual investors in Europe to access the senior loans market, since loans are not permitted investments in open-ended UCITS funds. Sterling and euro share classes are available, and a recent placing of treasury shares has increased the market cap of each class by £77.55m and €13.87m, respectively.
CCPEOL invests through CVC European Credit Opportunities (CEC), of which it represents c 75% of AUM. CEC’s performing credit and credit opportunities portfolios are managed by specialist teams within CVC Credit Partners. Analysts monitor a universe of c 3,000 credits, of which c 600 are held across the firm’s portfolios at any one time. Fundamental analysis is used to arrive at a diversified portfolio, spread across a core average of 60-65 issuers. Managers may trade within the capital structure of an issuer to take advantage of relative value opportunities.
Regulatory requirements continue to ensure a supply of loans to institutional investors as banks restructure their balance sheets. Meanwhile, demand for such floating rate assets is strong as the prospect of higher base interest rates makes low-coupon fixed rate bonds relatively less attractive. While high-yield spreads have tightened recently in both bond and loan markets, investors with a flexible, opportunistic approach may still obtain satisfactory returns from credit investments.
At 13 July 2017, CCPG (sterling) and CCPE (euro) shares traded respectively at a 1.0% and a 3.7% premium to NAV. A quarterly redemption facility for up to 25% of shares at close to NAV helps limit discount volatility and matches the liquidity profile of the investment vehicle. The company announced the placing of 69.2m CCPG and 12.6m CCPE treasury shares at a 0.75% premium to NAV on 30 June 2017. The yield to maturity on the portfolio is c 8.5%, meaning the 8-12% return target does not look unrealistic. The sterling and euro shares currently each yield 4.8%.