Market Overview
Following the result of the UK's referendum on its membership of the EU, the initial sell-off in indices was on the back of thin trading volumes and activity. We saw bid-offer spreads widen and UK single name levels dropping at the start of the session, only to pair back some of the declines through to the end of the session.
In the days following the vote, credit indices have moved tighter (again on the back of low volumes) as the market digests policy impacts on a longer-term horizon. The predominant focus remains on how central banks will react, if needed, to steady the broader market environment.
The Leave result will likely have a dampening effect on the UK economy, as infrastructure and investment plans are put on hold, but we expect a less pronounced economic impact to the rest of the European economy. However, the questions surrounding the future of the EU as other member states may question their own membership will continue. The UK's decision to leave the EU may lead to continued lender caution around underwriting risk, increased regulation and complexity, and a slowing of M&A deal activity. We expect uncertainty throughout the summer as the next political steps in the UK unfold.
Against this backdrop, there will be opportunities of which to take advantage across the credit spectrum (performing and credit opportunities). Our active management of the portfolio over a longer-term horizon will enable us to weather the effects of a Brexit. The focus for 2016 remains central bank policy, US elections and global growth.
Market volatility naturally creates disconnections with fundamentals in single name credits, and the Fund is well-positioned to be proactive amidst this period of uncertainty.
Portfolio Overview
As discussed on the quarterly calls and monthly reviews, portfolio positioning into the Brexit was conservative whereby the portfolio ~
- Increased exposures to European Performing Credit through 2016 as stability in this market is expected to continue, where the market has seen a 0.5-0.75% draw down the last week
- Raised cash balances into the month end of June to allow for the portfolio to take advantage of any anticipated volatility
- GBP exposures predominantly within Performing Credit (both leading domestic business as well as large cross border transactions) which carry strong credit fundamentals
- Remained low fixed rate liquid high yield exposure - in particular USD cross border positions where the market should see risk off sentiment if uncertainty persists
The Credit Opportunities segment of the portfolio will experience heightened volatility given the risk profile of these assets. To note, GBP Credit Opportunities exposure is less than 1.5% mostly exposed to a single position where the credit fundamentals are solid. We remain comfortable with the Credit Opportunities exposures and anticipate that the pipeline will build in this strategy as the market progresses through this period of transition.
On the hedging side, the portfolio is currency hedged back to the underlying through non-margin swaps and, as such, we are not at any risk of mark to market margin calls on these hedges. We have also remained cash hedged against retail and commodities exposures.
Portfolio management remain cautious in our approach to the investment strategy, given the number of uncertainties ahead. However, management believes that the portfolio is well positioned to take advantage of developments as they flow through the market in the coming quarters.
Disclaimer
This material is not intended to be relied upon as a forecast, research or investment advice and it is not a recommendation, offer or solicitation to buy or sell any shares of CVC Credit Partners European Opportunities Limited (the "Company") or any other securities or to adopt any investment strategy. The opinions expressed are as of 30 June 2016 and may change as subsequent conditions vary. Neither the Company nor CVC Credit Partners, nor any other person is under any obligation to update or keep current the information contained herein. No part of this material nor the fact of its publication, should form the basis of, or be relied on in connection with, any contract or commitment or investment decision whatsoever.
This material contains certain "forward-looking statements" regarding the belief or current expectations of the Company, CVC Credit Partners and members of its senior management about the Company's financial condition, results of operations and business. Such forward-looking statements are not guarantees of future performance. Rather, they are based on current views and assumptions and involve known and unknown risks, uncertainties and other factors, many of which are outside the control of the Company and are difficult to predict, that may cause the actual results, performance, achievements or developments of the Company or the industry in which it operates to differ materially from any future results, performance, achievements or developments expressed or implied from the forward-looking statements.
The information contained in this communication has not been independently verified and no representation or warranty, express or implied, is made as to, and no reliance should be placed on, the fairness, accuracy, completeness or correctness of the information or opinions expressed herein. Nothing contained herein shall be deemed to be binding against, or to create any liability, obligations or commitment on the part of the Company, its directors and officers or CVC Credit Partners. Nothing contained herein is to be construed as investment, legal or tax advice and neither the Company, CVC Credit Partners nor any of their respective directors, officers, employees, partners, members, shareholders, advisers, agents or affiliates make any representation or warranty, express or implied as to the fairness, correctness, accuracy or completeness of this material, and nothing contained herein shall be relied upon as a promise or representation whether as to past or future performance or otherwise. There is no certainty that the parameters and assumptions used can be duplicated with actual trades or investments. There can be no assurance that the strategy described herein will meet its objectives generally, or avoid losses.
This communication is not for release, publication or distribution, directly or indirectly, in or into the United States, Australia, Canada, South Africa or Japan or to US Persons as defined in Regulation S under the US Securities Act ("US Persons"). The information contained herein does not constitute or form part of any offer or solicitation to purchase or subscribe for securities in the United States, Australia, Canada, South Africa or Japan or any other jurisdiction where to do so might constitute a violation of the relevant laws or regulations of such jurisdiction.