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Twentyfour ABS Strategies

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Twentyfour ABS Strategies This presentation is for professional investors only / not for public viewing or distribution A BOUTIQUE OF VONTOBEL ASSET MANAGEMENT TwentyFour ABS Strategies June 2020 This presentation is for professional investors only / not for public viewing or distribution Ben Hayward Aza Teeuwen Partner, Portfolio Partner, Portfolio Management Management Right hand side Engagement Panel: Questions > can be submitted at any point throughout todays update Feedback form > your feedback is important to us Document Downloader > view and download our latest factsheets and whitepapers 2 This presentation is for professional investors only / not for public viewing or distribution European ABS overview • Market is in recovery phase after COVID-19 disruption since March • Spreads continue to regain some of the performance lost during the “dash for cash” sell-off • Liquidity in secondary market is more balanced, and currently biased towards adding risk • Primary markets are slowly reopening, but so far have been limited to autos, RMBS and CLOs, with some deals placed on a private/club basis • We expect a material increase in new issues either side of the summer break, but that the long term technical is for lower levels of issuance • Fundamental performance of loan pools is expected to remain positive but will require detailed analysis and dynamic scenario testing to assist modelling Past performance is not a reliable indicator of future performance. These views represent the opinions of TwentyFour as at 26 June 2020, they may change and may have already been acted upon, and do not constitute investment advice or a personal recommendation. Observations are based on TwentyFour’s trading experience and market observations which may not be reflective of those 3 experienced by others. This presentation is for professional investors only / not for public viewing or distribution Spreads movements and funds’ performances since Covid-19 sell-off TwentyFour ABS performance 4,000 100 95 3,500 UK Prime RMBS AAA 90 (lhs) 3,000 85 BBB CLO (lhs) 2,500 80 B CLO (lhs) 2,000 75 1,500 70 TFIF net performance 65 (rhs) 1,000 Monument net 60 performance (rhs) 500 55 0 50 02.20 03.20 04.20 05.20 06.20 ABS and CLOs BWICs Volume ($mm) since Covid-19 sell off Autos 5,000 4,000 CMBS 3,000 European RMBS 2,000 CLOs 1,000 UK RMBS 0 Others 02.20 03.20 04.20 05.20 06.20 Average since Jan 2017 Past performance is not a reliable indicator of future performance. The performance figures shown are in GBP on a mid-to-mid basis inclusive of net reinvested income and net of all fund expenses. Performance data does not take into account any commissions and costs charged when shares of the TwentyFour Income Fund are bought or disposed or when shares of the Monument Bond Fund are issued and redeemed. The value of an investment and the income from it can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested. TFIF and Monument performance figures 4 have been rebased to 100 as of 14 February 2020. Source: TwentyFour AM, Citi Velocity, Morgan Stanley, 26 June 2020. This presentation is for professional investors only / not for public viewing or distribution Changes in spreads since February 2020 Worst Spread since Change from pre 26-Jun Change from Worst 21-Feb-20 COVID-19 sell-off COVID-19 sell-off EUR AAA CLO 170 350 -180 115 +55 EUR AA CLO 230 450 -220 160 +70 EUR A CLO 313 613 -300 205 +108 EUR BBB CLO 475 875 -400 295 +180 EUR BB CLO 760 1525 -765 535 +225 EUR B CLO 1150 2125 -975 795 +355 UK Prime AAA (£3mL) 50 200 -150 38 +12 UK NC AAA (£3mL) 120 300 -180 69 +51 UK 2nd Pay (£3mL) 200 500 -300 110 +90 UK NC Deep Mezz (£3mL) 385 800 -415 245 +140 Dutch Prime AAAs 26 75 -49 10 +16 EUR IG Corps 117 199 -82 63 +54 GBP IG Corps 181 279 -98 129 +52 EU Leveraged Loans 612 1212 -600 409 +203 EUR High Yield 465 708 -243 270 +195 CLO spread includes the value of the floor; 3m Euribor – 40bps. Source: TwentyFour, Barclays, Citi Velocity, Morgan Stanley, Bloomberg, ICE BofA Indices for EUR IG, GBP IG Corps, EUR High Yield and AT1 Index 5 26 June, 2020 This presentation is for professional investors only / not for public viewing or distribution COVID implications for loan pool performance • Payment holidays > Data transparency – monthly reports quick to add payment holiday data > Request/Approvals numbers > High LTV loans – no link of LTV level to PH requests > UK vs € – differentiated approach to support the consumer > Extension of PHs from initial 3 month period – how are lenders adapting? > Will PHs ultimately convert to arrears? > How do borrowers arrange to pay the deferred amounts? • Furlough & unemployment – how does the transition out of support schemes evolve? • Commercial property exposure – impact on retail & hotels expected to be significantly greater than on offices & logistics • CLO – most affected sectors – travel and hospitality, transport, retail, leisure etc. • 24AM ABS team – adding COVID relevant stress tests, ongoing due diligence with originators, servicers and managers • Rating agency adjustments to scoring has helped lead to higher support in new issue transactions, but there remains ongoing downgrade risk in pre-COVID deals Source: TwentyFour 6 This presentation is for professional investors only / not for public viewing or distribution How will CLOs behave in a COVID recession? European leverage loan default rate CCC scenarios 12.0% 25.0% 10.0% 20.0% 8.0% 15.0% 6.0% 10.0% 4.0% 2.0% 5.0% 0.0% 0.0% 06.07 06.09 06.11 06.13 06.15 06.17 06.19 06.21 06.23 02.09 02.11 02.13 02.15 02.17 02.19 02.21 02.23 02.25 Leverage loan defaults Typical exposure limit to CCC and below rated loans in CLOs (7.5%) 24AM Forecast Median % Caa1/CCC 24AM Forecast 2nd Lockdown scenario 2nd Lockdown scenario • Q2 Earnings reports could trigger another wave of downgrades of leverage loans • Lower peak of defaults due to Government interventions and higher levels of corporate liquidity than during GFC • But we expect similar cumulative levels of defaults over a longer period of time • Deal specific stress added on top of base lines depends on its exposure to distressed names in the sectors mostly affected by the COVID-19 lock down (Travel, Hospitality & Leisure, Retail, Oil & Gas, etc.) • A second lockdown will provide a lot of uncertainty but we think it will likely be less disruptive for businesses % CCC represents the median % of Caa1/CCC+ or Less in 1.0 and 2.0 CLOs (All CLOs issued from 2007). LHS source: 24 Asset Management, LCD, Barclays, 19 June 2020. RHS source: 24 Asset Management, Morgan Stanley before February 2019, Intex thereafter, 19 June 2020. 7 This presentation is for professional investors only / not for public viewing or distribution RMBS COVID modelling UK Non Conforming, Non Prime BTL and Prime BTL RMBS – UK Non Conforming, Non Prime BTL and Prime BTL arrears rates (adjusted for partial payments) RMBS default rate 12.0% 2.5% 10.0% 2.0% 8.0% 1.5% 6.0% 1.0% 4.0% 0.5% 2.0% 0.0% 0.0% 04.20 10.20 04.21 10.21 04.22 10.22 04.23 10.23 04.20 10.20 04.21 10.21 04.22 10.22 04.23 10.23 Prime BTL Non Prime BTL Non Conforming Non Conforming/ Non Prime BTL Prime BTL • Updated stress modelling based on COVID impact on consumer ability to pay and the introduction of payment holidays > Expect UK unemployment to peak c9% with ongoing furlough for additional c.5%* > House price impact of -20% > Arrears will be lower than GFC due to better underwriting standards, but payment holidays higher than arrears > 2/3 of borrowers on payment holidays will not pay immediately and will fall into arrears > Restrictions on foreclosures until y/e 2020 = lower defaults but higher arrears, lower asset yield and longer recovery lag > Defaults peak at a lower level than GFC but continue for longer, prepayments adjusted materially lower * NB – this is stress model assumption NOT core 24AM outlook Source: TwentyFourAM, Intex, 26 June 2020 8 This presentation is for professional investors only / not for public viewing or distribution Engagement and ESG • Use of proprietary Observatory database to record all engagement with lenders and servicers on current expectations and policies • Informs ESG component of investment thesis >Social – treating customers fairly >Governance – ability to react to evolving challenges of COVID Source: TwentyFour 9 This presentation is for professional investors only / not for public viewing or distribution Monument Bond Fund overview Goal Aims to provide an attractive level of income relative to prevailing interest rates with a strong focus on capital preservation Concept High quality Investment Grade European ABS strategy which aims to remove interest rate risk How Seeks to effectively track base rate (floating rate notes linked to LIBOR) A portion of the portfolio may be held in cash or equivalents to help further enhance liquidity. All currency risks fully hedged Focused on the selection of underlying securities with confidence as to the issuer’s ability to repay the principal due Only invests in floating rate securities – seeking to remove the volatility associated with core government bonds and replace interest rate duration risk/return with credit duration risk/return Strong alternative to investment grade corporate bond funds – comparable return, but with the expectation of better credit Consequence rating and minimal interest rate risk Subject to change, without notice, only the current prospectus or comparable document of the fund is legally binding.
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