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Upcoming Event | Hardman & Co: Bank North management presentation and Q&A

In this note, we explore the dividend yield uplift that Volta offers investors. It is generated from six asset yield uplifts inherent to its model, including: i) structured debt yields above mainstream debt; ii) CLOs’ yield above structured debt; iii) Volta’s flexible mandate generating yields above the CLO market as whole; iv) current reinvestments at an above-average yield over the market; v) reinvestment yields offering a material pick-up against maturing business; and vi) expectation of a pick-up in Volta’s dividend with retentions, and as asset valuations approach forecast cashflows and sentiment-driven discounts reduce.

  • Superior yield: Volta’s asset yield was ca.15% of NAV at end-November 2020 (or ca.18% of market capitalisation). With reinvestment earnings IRR above historical averages, higher-than-usual returns appear likely in the near term. Volta’s high dividend is nearly 2x covered by statutory EPS.
  • Rising dividend outlook: Volta targets an 8% of NAV payout. Since end-March 2020, its NAV has rebounded 29% (including +7% in November), but its dividend has yet to catch up with the rising NAV. Further NAV accretion (and a rising dividend) appear likely with retentions and as residual adverse sentiment unwinds.
  • Valuation: Volta trades at a double discount. Its share price is at a 14% discount to NAV. In addition, its mark-to-market NAV, we believe, includes a further sentiment-driven discount (5%-10%) to the present value of expected cashflows. Volta targets an 8% of NAV dividend (11.4% 2022E yield on current share price).
  • Risks: Credit risk is a key sensitivity. We examined the valuation of assets, highlighting the multiple controls to ensure its validity, in our initiation note, in September 2018. The NAV is exposed to sentiment towards its own and underlying markets. Volta’s long $ position is only partially hedged.
  • Investment summary: Volta is an investment for sophisticated investors, as there could be sentiment-driven share price volatility. Long-term returns have been good: ca.7% p.a. returns (dividend-reinvested basis) since initiation. With above-average returns on recent reinvestments, the portfolio’s six-month historical cashflow yield is ca.15%, and we expect 1.5x adjusted and nearly 2x statutory dividend cover in 2022.
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