DJ M&G Credit Income Investment Trust plc: Annual Financial Report
M&G Credit Income Investment Trust plc (MGCI)
M&G Credit Income Investment Trust plc: Annual Financial Report
19-Feb-2020 / 07:00 GMT/BST
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The issuer is solely responsible for the content of this announcement.
M&G Credit Income Investment Trust plc
Annual Financial Report for the period from incorporation on 17 July 2018 to
31 December 2019
The full Annual Report and Accounts will shortly be available via the
Company's website at www.mandg.co.uk/creditincomeinvestmenttrust or by
contacting the Company Secretary on telephone number 020 7954 9529.
The Directors present the results of the Company for the period from
incorporation on 17 July 2018 to 31 December 2019.
Financial highlights
Key data as at
31 December 2019
Net assets (GBP'000) GBP132,232
Net asset value (NAV) per Ordinary Share 101.72p
Mid-market price per Ordinary Share 106.00p
Premium to NAV [a] 4.21%
Ongoing charges figure [a] [b] 0.93%
Return per Ordinary Share period [b] ended
31 December 2019
Capital return 2.7p
Revenue return 2.6p
NAV total return [a] 5.6%
Mid-market price total return [a] 8.2%
First interim dividend 2.09p
Second interim dividend 1.65p
Total dividends declared 3.74p
a) Alternative Performance Measure. Please see full Annual Report and
Accounts for further information.
b) From the date of Initial Public Offering (IPO) 14 November 2018.
Chairman's Statement
I am pleased to present the first annual report for M&G Credit Income
Investment Trust plc (the "Company"). The Company, which was incorporated on
17 July 2018, raised GBP100,000,000 pursuant to its Initial Public Offering
("IPO") and its Ordinary Shares commenced trading on the main market of the
London Stock Exchange on 14 November 2018. An additional 25,000,000 Ordinary
Shares were placed on 31 January 2019, followed by further tap issues
totalling 5,000,000 Ordinary Shares in May and June 2019.
Investment strategy
The Company aims to generate a regular and attractive level of income with low
asset value volatility by investing in a diversified portfolio of public and
private debt and debt-like instruments of which at least 70% is investment
grade. The Company intends, over time, to be invested mainly in private debt
instruments, which are those instruments not traded on a stock exchange and
are typically issued to small groups of institutional investors. This part of
the portfolio may include debt instruments which are nominally quoted but are
generally illiquid. Most of these will be floating rate instruments, purchased
at inception and with the intention to be held to maturity, or until prepaid
by issuers; shareholders can expect their returns from these instruments to
come primarily from the interest paid by the issuers. Our investment manager's
size, experience and reputation mean that it sees a high percentage of the
available market but it only invests in those instruments which it believes
are attractively priced: this takes time and is subject to market conditions.
The remainder of the Company's portfolio is invested in cash, cash equivalents
and quoted debt instruments, which are more readily available and which can
generally be sold at market prices when suitable opportunities arise. These
instruments may also be traded to take advantage of market conditions.
Shareholders can expect their returns from this part of the portfolio to come
from a combination of interest income and capital movements.
This annual report provides you with an array of information on your
investments. Your Board believes that it is not acceptable to invest without
reference to broader environmental, social and governance (ESG) factors. With
this in mind, please do look at the disclosures on our investment manager's
approach to ESG which appear below.
Share issuance and premium management
Your Directors believe that it is in the interests of shareholders for the
Company to increase its assets under management over time as this should
reduce its ongoing charges figure and provide greater market liquidity and
diversification for holders. The Company can do this by issuing additional
Ordinary Shares or a new class of C Shares. In each case, new shares will only
be issued when our investment manager has assured your Board of its confidence
that suitable investments can be made in a timely fashion using the proceeds
of such share issuance. The issue of new shares can also serve to manage the
premium to NAV per Ordinary Share at which the Company's shares trade by
meeting excess demand from investors that cannot be met by supply in the
market. Ordinary Shares will only be issued at a price which enhances the NAV
of the existing Ordinary Shares after all expenses.
On 31 January 2019, the Company announced that it had placed 25,000,000
additional Ordinary Shares in response to strong demand from the market, at an
issue price of 101p per Ordinary Share: this represented a premium to NAV as
at that date of 2.33%. The placing did not materially impact the investment
programme, which was still in its infancy.
By May 2019, the Ordinary Share price premium to NAV was again at levels which
your Directors considered high in light of the status of the investment
programme. Further issues of Ordinary Shares were undertaken in May and June
2019 to satisfy market demand and to seek to manage the premium.
An additional 5,000,000 Ordinary Shares were issued at a premium to the NAV of
not less than 2%, thereby enhancing the NAV per Ordinary Share. Our investment
manager considered the aggregate proceeds raised through these share issues
manageable in executing the overall deployment programme of the Company. Since
mid-June 2019, the share issuance programme has been paused until such time as
our investment manager perceives there to be better value to be found in
adding to the portfolio.
The Company's Ordinary Share price traded at an average premium to NAV of
4.64% during the period from IPO to 31 December 2019. On 31 December 2019, the
Ordinary Share price was 106p, representing a 4.21% premium to NAV as at that
date.
Investment performance
The opening NAV per Ordinary Share, being the gross proceeds of the IPO less
the IPO expenses, was 98.38p. The opening NAV on 1 January 2019 was 97.94p per
Ordinary Share and the NAV on 31 December 2019 was 101.72p per Ordinary Share:
taken with the interim dividend of 2.09p announced on 18 July 2019, these show
NAV total returns of 5.6% since the Company's launch and 6.0% for calendar
year 2019.
The start of 2019 presented good investment opportunities in public markets as
the Company's investment programme commenced. Our investment manager was able
to take advantage of investment grade corporate bonds performing strongly in
the first quarter of 2019, with credit spreads tightening. High yield markets
also made significant gains. The improving market continued into the second
quarter, which put downward pressure on yields generally, amid falling
expectations for global economic growth. With investors maintaining confidence
in the major central banks to take action to prevent a slowdown, credit
spreads remained tight as investors chased yield. In contrast, private market
opportunities were scarcer than anticipated in the first half of 2019.
During the second half of 2019, bond yields fell to new lows, credit spreads
tightened further and unusual yield curves developed in an environment of high
levels of political uncertainty.
Throughout the year, the flow of attractive opportunities to invest in private
debt instruments was disappointing. We ended 2019 with only 16.6% of the
portfolio in direct investments in this segment although these were
supplemented by our holding in the M&G European Loan Fund, thereby giving us a
total of 27.41% in higher yielding assets. Fortunately, the portfolio enjoyed
significant capital gains over the period as a result of the market's yield
compression. This more than made up for the lack of income in the short term
and resulted in your Company's strong total return performance.
Dividends
Your Company announced a second dividend for 2019 of 1.65p, payable on 28
February 2020. This payment, in combination with the Company's first dividend
of 2.09p per Ordinary Share (paid on 23 August 2019 for the period from its
IPO on 14 November 2018 to 30 June 2019), is equivalent to the annualised rate
of LIBOR plus 2.5% which was initially targeted: the total return for 2019, as
detailed above, was comfortably in excess of this.
Your Directors have chosen to apply the 'streaming' regime to that part of the
second dividend which was covered by the Company's interest income, net of
expenses. Accordingly, the Company has designated 1.33p per Ordinary Share as
an interest distribution and 0.32p per Ordinary Share as a dividend. The
Company made use of reserves derived from capital gains to support the
dividend, reflecting the investment performance of the Company's portfolio,
where capital growth was stronger than anticipated, but yields lower. The
Company's NAV per Ordinary Share as at 31 December 2019, adjusted for the
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DJ M&G Credit Income Investment Trust plc: Annual -2-
payment of the second dividend, was 100.07p, an increase of 1.7% from its
opening NAV of 98.38p per Ordinary Share as at IPO.
The Company uses the average daily three-month LIBOR as its reference for the
purposes of its targeted dividend rate.
Outlook
Your Company has performed well since its IPO with over half of its total
return coming from capital gains. These gains were principally a consequence
of the tightening of the overall credit markets; unfortunately, the other
effect of this is that cash income yields have reduced. This, taken with the
smaller than expected number of attractive private debt opportunities, means
that the annual dividend target of LIBOR plus 4% currently looks difficult to
achieve in the near term. Your Board believes that it should pay dividends
from income and prior capital gains. We propose to start the quarterly
dividends for 2020 at the increased annual dividend rate of LIBOR plus 2.75%,
calculated by reference to the opening NAV as at 1 January 2020, adjusted for
the payment of the second dividend in respect of last year; we will plan to
increase this as the Company's exposure to higher yielding private assets
grows.
Our investment manager continues to believe that a total return, and thus
ultimately a dividend yield, of LIBOR plus 4% is achievable over the longer
term, based on its long experience of credit markets through the cycle. Our
investment manager's annual management fee is being kept at the current level
of 50bps per annum of your Company's net asset value for the time being
instead of the originally agreed increase to 70bps. Your Directors are
extremely supportive of our investment manager's conservative approach; it is
not chasing yield at the expense of making the right investments. We have a
strong portfolio and our investment manager remains confident that it will
find attractive opportunities to increase yield while retaining a cautious and
steady approach.
Annual General Meeting
Our annual general meeting will be held on Monday 30 March 2020 at 1.30pm at
10 Fenchurch Avenue, London EC3M 5AG. This will include a presentation from
our investment manager on the performance of the Company and its future
prospects. I very much hope that you will be able to join us.
David Simpson
Chairman
18 February 2020
Investment manager's report
We are pleased to provide commentary on the factors that have impacted our
investment approach since IPO, the challenges that we as investors have
navigated and, above all, the performance and shape of the portfolio as we
have sought to build it in accordance with the mandate agreed at IPO.
The Company was launched on 14 November 2018 amid volatile market conditions
with asset price movements heavily influenced by geopolitical events and
macroeconomic uncertainty. This uncertainty continued throughout 2019,
resulting in periods of increased risk aversion and market turbulence.
We are delighted to be reporting strong performance against our key
performance indicators. Full details are provided below. However, highlights
include:
· delivering dividend payments per Ordinary Share of 3.74p (of which 2.09p
per Ordinary Share was paid in August 2019 and 1.65p per Ordinary Share paid
in February 2020);
· an annualised dividend yield since IPO of 3.13%; and
· mid-market price total return of 8.2%; and
· net asset value total return of 5.6%.
On an annualised basis, this total return is comfortably in excess of the
initial target of LIBOR plus 2.5% per annum.
As market conditions have changed throughout the period, our bottom-up,
investment-by-investment approach has enabled us to respond accordingly. With
a team of more than 100 credit analysts covering both the public and private
markets, we are well placed to review opportunities as and when they arise.
Leveraging this resource, our fund managers have continued to seek the right
investment opportunities to build the portfolio steadily, with a view to
delivering sustainable returns.
Deployment of funds and year-end portfolio positioning
Deployment of the cash raised at IPO and subsequent fundraisings in February,
May and June 2019 was efficient. Many of the initial investments were intended
to be a stepping stone until the right opportunities arose. Good examples of
this were the asset-backed securities (ABS) transactions made at the end of
2018. These comprised mostly AAA and some AA rated mortgage-backed floating
rate bonds and were ideal interim investments, being very low risk and easily
tradeable.
During the first half of 2019, the performance of global markets recovered
from the disappointing end to 2018. A general slowdown in economic growth and
muted inflation led to dovish commentary by many central banks, suggesting
that interest rates would remain on hold for the time being. This, combined
with better-than-expected earnings for many companies in the final quarter of
2018, drove market sentiment. Given this backdrop, it proved challenging to
meaningfully increase the yield of the portfolio. However, the Company had
some success in finding illiquid assets that lagged the rally in credit
markets. The availability of private debt opportunities was more constrained
than anticipated.
Fixed income markets were generally stronger in the third quarter, underpinned
by supportive central bank policies and further declines in government bond
yields. Investment grade and high yield credit markets benefited from these
moves. Yield curves became unusually shaped, with 10-year gilt yields falling
below short-term reference rates. This resulted in duration risk being
penalised rather than rewarded. With Brexit appearing no closer to a clear
resolution, bond yields continued to fall to record lows and the yield curve
developed a pronounced downward slope out to seven-year maturities. At this
point, we started selling three- to eight-year fixed corporates and
reinvesting in AAA floating rate ABS. In addition to realising some capital
gains, we were able to pick up yield, reduce interest rate volatility and
improve credit quality and liquidity. The overall impact of investment
activity during the third quarter was to modestly increase the yield on the
asset portfolio whilst reducing interest rate and spread duration against a
backdrop of public bond yields falling by 30-40 bps.
The fourth quarter saw government bond yields rise and spreads tighten. Our
interest rate hedge via gilt futures proved effective, and we took advantage
of the tighter spreads to sell some longer dated fixed rate corporates -
mostly in the financial sector - that had performed very well. These longer
dated fixed rate bonds had been purchased towards the end of 2018, and the
market rally at the end of the year enabled us to realise some attractive
capital gains on these investments. We continued to look for attractive
floating rate assets and we added GBP3m to our leveraged loan exposure as at 1
October, as they offered good relative value. The end of December saw
increased private asset deal activity, but with greater uncertainty as to
whether completion would be achieved before year-end. By investing in the M&G
European Loan fund we are able to gain access to the private European leverage
loan market which has proved to be typically more stable than traditional
public debt markets and which has historically provided an attractive level of
income on a risk vs return basis. In accessing this market via a collective
rather than holding direct exposure to any one issuer, we are able to maintain
the risk profile of the portfolio in line with the Company's objectives.
We consider the portfolio as at 31 December 2019 to be well diversified with
respect to issuers and sectors, which provides a strong platform for building
on during the course of 2020. Whilst only 27.41% of the portfolio (including
the investment in collective loans) was invested in private assets at the
year-end, with the yield profile of the portfolio therefore lower than
anticipated, we continue to strive to make the right investments for the
delivery of long-term sustainable performance.
Outlook
With public corporate bond yields at historic lows, rather than chasing yield,
our inclination is to continue to be defensive in our approach. Substantial
liquidity remains in the portfolio, in the form of AAA rated floating rate
ABS, which should enable us to access further private deals when opportunities
arise or take advantage of any opportunities should markets sell off. Our
longer-term aims for the portfolio remain unchanged.
The global outlook continues to be uncertain and the UK, in particular, could
be subject to considerable economic and political turbulence around its exit
from the EU and trade negotiations. This will inevitably bring both challenges
and opportunities.
M&G Alternatives Investment Management Limited
18 February 2020
Portfolio analysis
Top 20 holdings
as at 31 December 2019 Percentage of portfolio of
investment (including cash on
deposit and derivatives)
M&G European Loan Fund 10.81
Hall & Woodhouse 1% 30 Dec 2023 1.70
Sonovate Limited 1% 12 Apr 2021 1.59
Warwick Finance Residential 1.54
Mortgages Number One 1.9996% 21
Sep 2049
Silverstone Master Issuer 1.53
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1.1654% 21 Jan 2070
NewDay Partnership Funding 1.53
2017-1 1.4306% 15 Dec 2027
Paragon Mortgages No 25 1.4371% 1.51
15 May 2050
RIN II 3.7841% 10 Sep 2030 1.45
Brass No.6 1.1675% 16 Dec 2060 1.44
Marston's Issuer 2.35% 15 Oct 1.37
2031
Yorkshire Building Society 1.32
3.375% 13 Sep 2028
Westbourne 2016 1 WR Senior 1% 1.30
30 Sep 2023
Leeds Building Society 3.75% 25 1.19
Apr 2029
Gongga 1% 02 Aug 2025 1.17
Hammerson 6% 23 Feb 2026 1.16
Ripon Mortgages 2.0024% 20 Aug 1.16
2056
NewRiver REIT 3.5% 07 Mar 2028 1.15
Kennedy Wilson Europe Real 1.12
Estate 3.95% 30 Jun 2022
Castell 2018-1 1.943% 25 Jan 1.08
2046
Finsbury Square 2018-2 1.7286% 1.07
12 Sep 2068
Total 36.19
Source: State Street
Geographical exposure
as at 31 December 2019 Percentage of portfolio of investments
(excluding cash on deposit and
derivatives)
United Kingdom 70.26%
Global 14.37%
United States 5.76%
France 2.61%
Germany 2.05%
Italy 1.60%
Netherlands 1.17%
Switzerland 0.92%
European Union 0.83%
Hong Kong 0.43%
100.0%
Portfolio overview
as at 31 December 2019 %
Cash on deposit 1.85
Public 70.34
Asset backed securities 37.66
Bonds 32.68
Private 27.41
Asset backed securities 0.14
Bonds 0.81
Investment funds 10.81
Loans 11.28
Other 4.37
Derivatives 0.40
Debt derivatives 0.12
Forwards 0.28
Portfolio of investments 100.00
Source: State Street
Credit rating breakdown
as at 31 December 2019 %
Unrated 0.40
Derivatives 0.40
Cash and investment grade 79.85
Cash on deposit 1.85
AAA 23.94
AA+ 3.39
AA 4.16
AA- 2.54
A+ 0.26
A 0.33
A- 1.02
BBB+ 8.79
BBB 9.26
BBB- 15.88
M&G European Loan Fund ("ELF") (note) 8.43
Sub-investment grade 19.75
BB+ 4.58
BB 4.47
BB- 2.81
B+ 1.17
B 2.90
B- 1.44
M&G European Loan Fund ("ELF") (note) 2.38
Portfolio of investments 100.00
Source: State Street
Note: ELF is an open-ended fund managed by M&G which invests in leveraged
loans issued by, generally, substantial private companies located in the UK
and Continental Europe. ELF is not rated and the Investment Manager has
determined an implied rating for this investment, utilising rating
methodologies typically attributable to collateralised loan obligations. On
this basis, 78% of the Company's investment in ELF has been ascribed as being
investment grade, and 22% has been ascribed as being sub-investment grade.
These percentages have been utilised on a consistent basis for the purposes of
determination of the Company's adherence to its obligation to hold no more
than 30% of its assets in below investment grade securities.
Top 20 holdings % Company description
M&G European Loan Fund Open-ended fund managed by M&G
which invests in leveraged loans
issued by, generally,
substantial private companies
10.81% located in the UK and
Continental Europe. The fund's
objective is to create
attractive levels of current
income for investors while
maintaining relatively low
volatility of NAV. (Private.)
Hall & Woodhouse 1% 30 Dec 2023 Bilateral loan to a regional UK
brewer that manages a portfolio
of 219 freehold and leasehold
pubs. (Private.)
1.70%
Sonovate Limited 1% 12 Apr 2021 Bilateral loan to a company
providing companies in the
recruitment industry with an
integrated service that
1.59% incorporates placement
management, invoicing and
financing. (Private.)
Warwick Finance Residential High grade ABS (AAA), UK RMBS.
Mortgages Number One 1.9996% 21 Mezzanine tranche of
Sep 2049 securitisation backed by
portfolio of UK non-conforming
residential mortgages originated
by Co-operative Bank. (Public.)
1.54%
Silverstone Master Issuer High grade ABS (AAA). UK RMBS.
1.1654% 21 Jan 2070 Securitisation of residential
British mortgage loans
originated and/or acquired by
Nationwide Building Society.
1.53% (Public.)
NewDay Partnership Funding High grade ABS (AAA). UK credit
2017-1 1.4306% 15 Dec 2027 card. Securitisation of a
portfolio of designated consumer
credit card, store card and
instalment credit accounts
1.53% initially originated or acquired
by NewDay Ltd in the UK.
(Public.)
Paragon Mortgages No 25 1.4371% High grade ABS (AAA). UK RMBS.
15 May 2050 Five-year revolving
securitisation of a portfolio of
UK buy-to-let mortgages in
England and Wales, originated
1.51% and serviced by Paragon.
(Public.)
RIN II 3.7841% 10 Sep 2030 Mixed CLO (AAA). Consists
primarily of senior secured
infrastructure finance loans
managed by RREEF America
1.45%
L.L.C. (Public.)
Brass No.6 1.1675% 16 Dec 2060 High grade ABS (AAA), UK RMBS.
Senior tranche of securitisation
backed by portfolio of UK
residential mortgages orginated
1.44% by Accord Mortgages Ltd.
(Public.)
Marston's Issuer 2.35% 15 Oct Marston's PLC is a leading
2031 independent brewing and pub
retailing business. Marston's
Issuer PLC operates as a special
purpose entity on behalf of
1.37% Marstons PLC, formed for the
purpose of issuing debt
securities to repay existing
credit facilities, refinance
indebtedness, and for
acquisition purposes. (Public.)
Yorkshire Building Society Yorkshire Building Society
3.375% 13 Sep 2028 provides banking services. The
bank offers saving accounts,
mortgages, savings, insurance,
life plans, credit cards, loans
1.32% and travel products to customers
in the United Kingdom. This is a
subordinated, fixed-to-floating
callable bond. (Public.)
Westbourne 2016 1 WR Senior 1% Westbourne provides working
30 Sep 2023 capital finance to SMEs in the
UK. The company is focused on
small borrowers and has
1.30%
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