DJ M&G Credit Income Investment Trust plc: Half Year Report
M&G Credit Income Investment Trust plc (MGCI)
M&G Credit Income Investment Trust plc: Half Year Report
29-Sep-2020 / 07:00 GMT/BST
Dissemination of a Regulatory Announcement that contains inside information according to REGULATION (EU) No
596/2014 (MAR), transmitted by EQS Group.
The issuer is solely responsible for the content of this announcement.
LEI: 549300E9W63X1E5A3N24
M&G Credit Income Investment Trust plc
Half Year Report and unaudited Condensed Financial
Statements for the six months ended 30 June 2020
Copies of the Half Year Report can be obtained from the following website:
www.mandg.co.uk/creditincomeinvestmenttrust [1]
Company highlights
Company summary
M&G Credit Income Investment Trust plc (the "Company") was incorporated on 17 July 2018 as a public company
limited by shares. Admission to the London Stock Exchange's (LSE) main market for listed securities and
dealings in its Ordinary Shares commenced on 14 November 2018. The Company is an investment trust within the
meaning of section 1158 of the Corporation Tax Act (CTA) 2010.
Key dates
Period end 30 June 2020
First interim dividend: Payment date 28 May 2020
Second interim dividend: Payment date 28 August 2020
Future dividend timetable
Payment date
Third interim November 2020
Fourth interim February 2021
First interim May 2021
Second interim August 2021
Financial highlights
Key data as at as at
30 June 2020 31 December 2019
(unaudited) (audited)
Net assets (GBP'000) 140,733 132,232
Net asset value (NAV)
per Ordinary Share 97.23p 101.72p
Mid-market price
per Ordinary Share 101.00p 106.00p
Premium to NAV[a] 3.88% 4.21%
Ongoing charges figure[a] 0.92%[b] 0.93%[c]
Return per Ordinary six months ended period[c] ended
Share
30 June 2020 31 December 2019
(unaudited) (audited)
Capital return (3.2)p 2.7p
Revenue return 1.4p 2.6p
NAV total return[a] (2.0)% 5.6%
Mid-market price (2.3)% 8.2%
total return[a]
First interim 0.85p 2.09p
dividend
Second interim 0.77p 1.65p
dividend[d]
Total dividends 1.62p 3.74p
declared
[a] Alternative Performance Measures.
[b] From 1 January 2020.
[c] From the date of Initial Public Offering (IPO) 14 November 2018.
[d] Paid after the period end. Please see note 7 for further information.
Investment objective and policy
Investment objective
The Company aims to generate a regular and attractive level of income with low asset value volatility.
Investment policy
The Company seeks to achieve its investment objective by investing in a diversified portfolio of public and
private debt and debt-like instruments ("Debt Instruments"). Over the longer term, it is expected that the
Company will be mainly invested in private Debt Instruments, which are those instruments not quoted on a
stock exchange.
The Company operates an unconstrained investment approach and investments may include, but are not limited
to:
* Asset-backed securities, backed by a pool of loans secured on,
amongst other things, residential and commercial mortgages,
credit card receivables, auto loans, student loans, commercial
loans and corporate loans;
* Commercial mortgages;
* Direct lending to small and mid-sized companies, including
lease finance and receivables financing;
* Distressed debt opportunities to companies going through a
balance sheet restructuring;
* Infrastructure-related debt assets;
* Leveraged loans to private equity owned companies;
* Public Debt Instruments issued by a corporate or sovereign
entity which may be liquid or illiquid;
* Private placement debt securities issued by both public and
private organisations; and
* Structured credit, including bank regulatory capital trades.
The Company will invest primarily in Sterling denominated Debt Instruments. Where the Company invests in
assets not denominated in Sterling, it is generally expected that these assets will be hedged back to
Sterling.
Investment restrictions
There are no restrictions, either maximum or minimum, on the Company's exposure to sectors, asset classes or
geography. The Company, however, achieves diversification and a spread of risk by adhering to the limits and
restrictions set out below.
Once fully invested, the Company's portfolio will comprise a minimum of 50 investments.
The Company may invest up to 30% of Gross Assets in below investment grade Debt Instruments, which are those
instruments rated below BBB- by S&P or Fitch or Baa3 by Moody's or, in the case of unrated Debt Instruments,
which have an internal M&G rating below BBB-.
The following restrictions will also apply at the individual Debt Instrument level which, for the avoidance
of doubt, does not apply to investments to which the Company is exposed through collective investment
vehicles:
Secured Debt Unsecured Debt
Instruments Instruments
Rating
(% of Gross Assets) (% of Gross Assets)
[a]
AAA 5% 5[b]
AA/A 4% 3%
BBB 3% 2%
Below investment 2% 1%
grade
[a] Secured Debt Instruments are secured by a first or secondary fixed and/or floating charge.
[b] This limit excludes investments in G7 Sovereign Instruments.
For the purposes of the above investment restrictions, the credit rating of a Debt Instrument is taken to be
the rating assigned by S&P, Fitch or Moody's or, in the case of unrated Debt Instruments, an internal rating
by M&G. In the case of split ratings by recognised rating agencies, the second highest rating will be used.
It is expected that the Company will typically invest directly, but it may also invest indirectly through
collective investment vehicles which are expected to be managed or advised by an M&G Entity. The Company may
not invest more than 20% of Gross Assets in any one collective investment vehicle and not more than 40% of
Gross Assets in collective investment vehicles in aggregate. No more than 10% of Gross Assets may be
invested in other investment companies which are listed on the Official List.
Unless otherwise stated, the above investment restrictions are to be applied at the time of investment.
Borrowings
The Company is expected to be managed primarily on an ungeared basis although the Company may, from time to
time, be geared tactically through the use of borrowings. Borrowings would principally be used for
investment purposes, but may also be used to manage the Company's working capital requirements or to fund
market purchases of Shares. Gearing represented by borrowing will not exceed 30% of the Company's Net Asset
Value, calculated at the time of draw down, but is typically not expected to exceed 20% of the Company's Net
Asset Value.
Hedging and derivatives
The Company will not employ derivatives for investment purposes. Derivatives may however be used for
efficient portfolio management, including for currency hedging.
Cash management
The Company may hold cash on deposit and may invest in cash equivalent investments, which may include
short-term investments in money market type funds ("Cash and Cash Equivalents").
There is no restriction on the amount of Cash and Cash Equivalents that the Company may hold and there may
be times when it is appropriate for the Company to have a significant Cash and Cash Equivalents position.
For the avoidance of doubt, the restrictions set out above in relation to investing in collective investment
vehicles do not apply to money market type funds.
Changes to investment policy
Any material change to the Company's investment policy set out above will require the approval of
Shareholders by way of an ordinary resolution at a general meeting and the approval of the UK Listing
Authority.
Investment strategy
The Company seeks to achieve its investment objective by investing in a diversified portfolio of public and
private debt and debt-like instruments of which at least 70% is investment grade. Over the longer term, it
is expected that the Company will be mainly invested in private debt instruments. 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.
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.
Chairman's statement
Performance
(MORE TO FOLLOW) Dow Jones Newswires
September 29, 2020 02:00 ET (06:00 GMT)
DJ M&G Credit Income Investment Trust plc: Half Year -2-
Your Company's net asset value (NAV) per Ordinary Share at its launch on 14 November 2018, being the gross proceeds of the Initial Public Offering (IPO) less the IPO expenses, was 98.38p. The opening NAV on 1 January 2020 was 101.72p per Ordinary Share and the NAV on 30 June 2020 was 97.23p per Ordinary Share. Including dividends paid, the NAV total return was 3.5% since launch although the NAV total return for the half year to 30 June was -2.0%, reflecting the fall in asset values due to the COVID-19 pandemic. Having started the year with a positive outlook, supported by central bank monetary policy and benign economic conditions, the first quarter of 2020 will be remembered for the human and economic costs of the COVID-19 pandemic. As the full force of the virus became apparent governments around the world put their populations and economies into lockdown. Equity and bond markets fell sharply, with the 10-year US Treasury and UK Gilt yields falling to new all-time lows. Public corporate bond credit spreads widened significantly and private debt markets effectively closed. Credit and equity markets recovered strongly during the second quarter, although not fully to pre-COVID-19 levels. The Company was defensively positioned going into the sell-off which allowed our Investment Manager to benefit from the market weakness by purchasing attractively priced public corporate bonds and then realising gains as the market recovered. Private debt markets re-opened in the latter part of the period, beginning to provide attractive opportunities at the spread levels anticipated when the Company was first conceived. 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. On 4 June 2020, given the favourable opportunities arising from the market dislocation due to the COVID-19 pandemic and the reopening of the private debt markets, the Company announced that it had placed a further 14,745,770 Ordinary Shares at an issue price of 97.0p per Ordinary Share, raising GBP14.2m net of expenses. This represented a premium to the last published NAV (adjusted for the payment of the first quarter dividend) of 1.98%. Between the placing and the date of this report GBP9.3m has been invested in a number of attractive private opportunities. The Company will continue to issue new shares at a premium to NAV when appropriate opportunities arise. The Company's Ordinary Share price traded at an average premium to NAV of 3.62% during the period from IPO to 30 June 2020. On 30 June 2020 the Ordinary Share price was 101p, representing a 3.88% premium to NAV as at that date. Dividends Your Company is currently paying quarterly dividends for 2020 at an annual rate of LIBOR plus 2.75% and has accordingly paid dividends of 0.85p and 0.77p per Ordinary Share in respect of the quarters to 31 March 2020 and 30 June 2020 respectively. The Company has a preference to pay dividends from income and prior capital gains. Following the fall in capital value of the Company as a result of the COVID-19 market dislocation, the Company's Investment Manager completed a detailed review of each investment and has expressed its confidence to the Board that the outlook for the portfolio remains strong. On the basis of this and on the need to make decisions that are right for the Company's shareholders over the longer term, your Board has determined that it remains appropriate to pay dividends at a rate of LIBOR plus 2.75% per annum. To date, this has required partial distributions from special reserves. Your Directors have chosen to apply the 'streaming' regime to that part of each dividend which was covered by the Company's interest income, net of expenses. Accordingly, of the first dividend declared in the period, the Company designated 0.72p per Ordinary Share as an interest distribution and 0.13p per Ordinary Share as a dividend to shareholders. Of the second dividend declared in respect of the period, the Company designated 0.63p per Ordinary Share as an interest distribution and 0.14p per Ordinary Share as a dividend to shareholders. The Company uses the average daily three-month LIBOR as its reference for the purposes of its targeted dividend rate. Portfolio Manager In May 2020, the Company announced that Jeremy Richards planned to retire from full time employment and that Adam English, (then Deputy Fund Manager), had been appointed as Fund Manager. The Board is grateful to Jeremy for his work on the portfolio since inception and is delighted that Adam has been appointed as Fund Manager. Adam has been managing credit portfolios at M&G, alongside Jeremy, for over 20 years having joined the business in 1999. The Board has worked closely with Adam and the wider investment team since the launch of the Company and has full confidence in Adam's ability to continue to build the portfolio in line with the investment mandate. Outlook The Investment Manager's prudent approach to capital deployment throughout 2019 and the start of 2020 meant that the Company was well positioned coming into the crisis. We are now in a robust position to deploy capital into the increasing number of attractive private debt opportunities that are currently being presented. We are, of course, carefully monitoring the performance of all of our underlying issuers in these uncertain times. 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 50 basis points (bps) per annum of your Company's NAV for the time being instead of the originally agreed increase to 70bps. Credit markets currently reflect an unprecedented level of government stimulus which has made it increasingly hard to find long term value in public markets. That said, we have a strong portfolio and our Investment Manager remains confident that it will continue to find attractive opportunities, particularly in private assets. David Simpson Chairman 28 September 2020 Investment manager's report We are pleased to provide commentary on the factors that have impacted our investment approach since the start of the year with particular reference to the performance and shape of the portfolio as we have sought to build it in accordance with the mandate agreed at IPO. The first half of 2020 has seen the Company navigate a unique set of economic circumstances. The shock to credit markets caused by the spread of the COVID-19 virus and the ensuing response from governments and central banks has presented investors with a number of challenges. However, such a significant market event has inevitably created opportunities and the Company has been well positioned to take advantage of those that have arisen. Whilst asset valuations have been notably affected, resulting in the NAV of 97.23p per Ordinary Share as at 30 June 2020 being below the NAV at launch, the Investment Manager has been able to use this period of market dislocation to reposition the portfolio by increasing credit exposure and yield. For the period ended 30 June 2020, the Company has declared dividend payments of 1.62p per Ordinary Share (of which 0.85p per Ordinary Share was paid in May 2020 and 0.77p per Ordinary Share was paid in August 2020). As at the period end, the annualised dividend yield was 3.23%. This is equivalent to an annual rate of 2.75% over LIBOR on the opening NAV adjusted for the final interim dividend in respect of last year. The mid-market price total return from 1 January to 30 June 2020 was -2.3%, whilst the NAV total return for the same period was -2.0%. 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 for the portfolio. Portfolio activity and positioning The year began with a continuation of the trend seen throughout 2019, as low government bond yields and tight corporate credit spreads meant attractive assets were scarce to find. The Company maintained its cautious positioning with a large holding in high grade asset-backed securities (ABS) and covered bonds. In the last week of February 2020, there were signs that COVID-19 concerns had begun to impact credit markets, with the pandemic truly taking hold of financial markets in March 2020. The speed with which credit spreads moved wider was extraordinary, causing a depreciation in the value of debt instruments across all sectors, regardless of credit quality or duration. As a result, the NAV of the Company declined. However, this dislocation presented attractive opportunities in the public markets. We were able to use existing cash holdings alongside proceeds from the sale of ABS and covered bonds to redeploy into mispriced longer dated, fixed rate investment grade and high yield corporate bonds. Private transactions were put on hold, with almost all lenders and borrowers awaiting some semblance of market stabilisation and the establishment of a "new normal" before re-engaging. Following the unprecedented fiscal and monetary policy measures implemented by governments and central banks around the world, by the end of the second quarter investor confidence recovered and markets retraced many of the losses that occurred during the initial onset of the pandemic. As liquidity in the ABS market improved, we were able to continue adding credit risk to the portfolio and increase the yield by switching
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