In this note, we remind investors of Volta’s many attractions, and examine what would be required for the Volta 9%+ yield to be seriously threatened. We note the broad diversification of underlying cashflows, the consistency of income and monthly returns, and the manager’s excellent track record. We also explore the business dynamics in a downturn and how investor sentiment may be less volatile with increased cov-lite documentation. The discount appears anomalous relative to peers given Volta’s track record and the issues identified above.
Volta’s flexible mandate allows it to nimbly exploit whichever part of the structured credit market is offering optimal risk-adjusted returns. The manager has the scale to access all deals, as well as invest heavily in risk controls and obtain the deepest market understanding. The five-year return is 10.8% p.a.
The trailing yield is 9.2% and, critically, this is covered by interest and coupon cashflows, which continue whatever short-term noise is thrown into the pot. The income is generated from a diversified portfolio and has consistently delivered returns. There will be noise, but look to the cashflow.
Volta trades at a 15% discount to NAV. Peer-structured finance funds, and a range of other debt funds, on average, trade at smaller discounts. Volta has delivered faster NAV growth than its immediate peers and inline/lower volatility, making this absolute and relative discount an anomaly.
Credit risk is a key sensitivity. We examined the valuation of assets, highlighting the multiple controls to ensure its validity, in our initiation note last September. NAV is affected by sentiment towards its own and underlying markets. Volta’s long $ position is only partially hedged.
Volta is an investment for sophisticated investors, as there could be sentiment-driven, share-price volatility. Long-term returns have been good: ca.10% p.a. returns (dividend reinvested basis) over five years. The current portfolio-expected NAV return is broadly similar. The 2019/20E dividend yield of 9.2% will be covered, in our view, by predictable income streams.