DJ Annual Financial Report
M&G Credit Income Investment Trust plc (MGCI) Annual Financial Report 26-Apr-2023 / 07:00 GMT/BST
-----------------------------------------------------------------------------------------------------------------------
LEI: 549300E9W63X1E5A3N24
M&G CREDIT INCOME INVESTMENT TRUST PLC
ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 DECEMBER 2022
AND
NOTICE OF ANNUAL GENERAL MEETING
M&G Credit Income Investment Trust plc announces its annual results for the year ended 31 December 2022 and the publication of its annual report and accounts for the same period, which includes the notice of Annual General Meeting.
Chairman's statement
Performance
The opening NAV on 1 January 2022 (adjusted for the last dividend for 2021) was 99.66p per Ordinary Share and the NAV on 31 December 2022 (adjusted for the last dividend for 2022) was 92.56p per Ordinary Share. Including dividends paid, the NAV total return for the year to 31 December 2022 was -1.7%, compared to our benchmark return of 5.5%.
While it is disappointing that, for the first time in a full year since its Initial Public Offering (IPO), your Company delivered a NAV total return below its benchmark, our Investment Manager firmly believes that the ground will be made up and that an annual total return since inception of SONIA (LIBOR up to 31 December 2021) plus 4% continues to be achievable. The reasons for that belief are set out in the Outlook section below.
The underperformance of the NAV came principally from a widening of credit spreads rather than the well-publicised, and significant, rises in interest rates which occurred over the year. The portfolio was substantially protected from those rate rises by the use of interest rate hedges: these are an integral part of the Company's investment strategy and were the main driver for our significant outperformance of comparably rated public indices such as the ICE BofA BBB Sterling and Collateralised Index (down by 18.87%); ICE BofA 1-3 Year BBB Sterling Corporate & Collateralized Index (down by 6.84%); and the ICE BofA European Currency Non-Financial High Yield 2% Constrained Index (down by 11.59%).
While it is a little comfort to know that 2022 will be remembered as one of the worst years on record for risk assets, you will be pleased that the difficult market conditions have allowed our Investment Manager to position our portfolio for future outperformance.
Share buybacks and discount management
Your board remains committed to seeking to ensure that the Ordinary Shares trade close to NAV in normal market conditions through buybacks and issuance of Ordinary Shares. During the year, the Company undertook a number of share buybacks and share issuances pursuant to the 'zero discount' policy initially announced on 30 April 2021. Satisfactorily, issuance exceeded buybacks, resulting in a net increase for the year of 510,000 shares. The Company's Ordinary Share price traded at an average discount to NAV of 1.6% during the period ended 31 December 2022. On 31 December 2022 the Ordinary Share price was 92.1p, representing a 3.0% discount to NAV as at that date. As at 31 December 2022, 2,512,749 shares were held in treasury with an additional 100,000 repurchased since the period end.
Dividends
In spite of the Company's underperformance, your board decided that it should pay dividends in respect of the year ended 31 December 2022 in accordance with the target set at launch: these totalled 5.35p per Ordinary Share. This represented a dividend yield of SONIA plus 4% on the opening NAV as at 1 January 2022, adjusted for the dividend paid on 25 February 2022; and a dividend yield of 5.6% on the Ordinary Share price on 31 December 2022.
To reflect our Investment Manager's confidence, we have decided to increase the rate of the first three quarterly dividends in respect of each financial year to the full annual rate of SONIA plus 4%, calculated by reference to the opening NAV on 1 January of the year in question, adjusted for the payment of the last dividend in respect of the prior year. The fourth quarterly dividend will be at an equal rate. The dividend yield on the adjusted opening NAV is currently approximately 8%.
Outlook
As at 31 December 2022, the portfolio had a yield to maturity of 8.17%, thereby providing a good foundation for your Company's investment objective. The capital value of the portfolio reflected credit spreads significantly above the levels typical in public investment grade debt markets. As these spreads normalise the Company's NAV can be expected to rise again.
Your Company's portfolio (including irrevocable commitments) is now 60% invested in private (not listed) assets, with an additional investment of some 10% in illiquid publicly listed assets which are intended to be held to maturity. While our Investment Manager expects to continue to grow the private asset portion of the portfolio in line with the Company's longer term strategy, it currently sees opportunity to add public bonds into the portfolio at yields that are attractive, relative to the target return of the Company. The Company's GBP25 million revolving credit facility provides valuable flexibility to enable our Investment Manager to take advantage of the volatility and enhanced returns currently available in the public bond market.
The technical backdrop in fixed income markets is much stronger now; all-in bond yields compare favourably to other asset classes, thus attracting capital back into the market. Your Investment Manager believes there is now attractive value to be found in credit, with investors being well paid to take risk. Unlike during the early part of 2022, when risks were not appropriately priced in and the compensation investors were receiving was extremely low, today's investment grade credit investors are in a much better position. The elevated yield provides a good cushion with which to navigate volatile markets although selectivity and fundamental credit analysis will remain key to the way in which the Investment Manager shapes the portfolio in the year ahead.
David Simpson
Chairman
25 April 2023
Financial highlights
Key data
As at As at
31 December 31 December
2022 2021
Net assets (GBP'000) 135,109 143,759
Net asset value (NAV) per Ordinary Share 94.99p 101.44p
Ordinary Share price (mid-market) 92.1p 99.5p
Discount to NAVa 3.0% 1.9%
Ongoing charges figurea 1.22% 1.10%
Return and dividends per Ordinary Share
Year ended Year ended
31 December 31 December
2022 2021
Capital return (6.0)p 1.5p
Revenue return 4.2p 2.7p
NAV total returna (1.7)% 4.3%
Share price total returna (2.8)% 13.0%
Total dividends declaredb 5.35p 4.04p
^a Alternative performance measure. Further information can be found on pages 110 to 111 of the full Annual Report and Accounts.
b The total dividends declared in respect of each financial year equated to a dividend yield of SONIA plus 4% (2022) and LIBOR plus 4% (2021) on the adjusted opening NAV of the relevant year.
Investment manager's report
We are pleased to provide commentary on the factors that have had an impact on our investment approach over the last year. In particular we discuss the performance and composition of the portfolio.
We entered the year with the Company's portfolio relatively defensively positioned. In our opinion bond valuations in early 2022 were expensive on a risk- adjusted basis when considering the prevailing economic headwinds and heightened macroeconomic uncertainty. Against this backdrop, we sold down public bonds that offered very little return over risk free rates whilst continuing to add selectively to our private asset exposure. By mid-February, investor concerns over inflation had already caused credit spreads to widen notably prior to Russia's invasion of Ukraine, however the economic implications of the crisis shocked markets and accelerated the sell off. Inflation spiked, led by food and energy prices, which saw central banks tighten monetary policy more aggressively than investors had anticipated. The message was clear: stamping out inflation was the primary objective for central banks despite the implications for economic growth. Bond yields climbed to their highest levels in over a decade and with returns beginning to look attractive again, we rotated out of high-grade (AAA-rated) ABS and redeployed proceeds into higher yielding, BBB-rated public bonds.
As we moved into the second half of the year, the growth versus inflation narrative continued to play out, leaving markets to grapple with an uncertain and fast-changing outlook for monetary policy. This created volatility, particularly in government bond markets and resulted in considerable credit-spread widening. We used episodes of volatility to reposition the portfolio, taking the opportunity to add risk and yield at levels, which in our opinion, offered attractive relative value. Hawkish central banks, intensifying fears of a recession, and disruptions to Europe's energy supply saw credit weaken further over the summer months. We drew GBP4 million from the Company's credit facility to purchase European REITs, sub insurance/financials and hybrid bonds at valuations which were yielding significantly in excess of the cost of drawings on the credit facility and in line with the Company's target return. In the closing weeks of September, political and market turmoil in the UK saw sterling investment grade credit sell off sharply. Once again, we took advantage of this period of pronounced volatility, drawing an additional GBP4 million from the credit facility to purchase bonds at spreads which were extremely attractive relative to historical levels. Such was the selling pressure on pension schemes which employed Liability-Driven Investment strategies, that we were able to purchase investment grade, sterling utility paper at levels that exceeded the COVID-wides of 2020.
The year finished on a positive note as signs of weakening inflation saw investors ramp up bets that central banks would slow the pace of rate hikes in 2023. In the UK, the transition to a new Prime Minister also helped to calm markets, with 10-year gilt yields falling from a peak of around 4.5% in early October to 3.7% by the end of the year. Although government bond markets remained volatile and interest rates climbed even higher, risk assets performed strongly in the final quarter as investor optimism over a 'soft landing' grew. We used this appetite for risk to reduce exposure to bonds which had tightened notably so as to, in our view, no longer offer attractive risk-adjusted returns. We redeployed proceeds into new issues in financials which continued to offer an attractive new issue premium and compared strongly on a relative value basis to corporate bonds.
2022 saw a slowdown in the rate of deployment into private assets as deal flow in this part of the market remained constrained given the volatility in wider public markets. Despite this we were able to add 15 new private assets to the portfolio. The funded private asset portion of the portfolio increased only marginally to 57.02% (versus 56.5% at 31 December 2021) as new private asset purchases were offset by repayments approximating 6% over the course of the year. An additional investment of 3% has been transacted in private assets after the period end, or is committed to be drawn down beyond the date of this report. This is expected to take the Company's overall private asset exposure to approximately 60%. We actively monitor the portfolio for signs of distress and currently have holdings in two assets, amounting to 0.4% of the latest NAV, which are either in technical default or for which we foresee restructuring as a likely future outcome.
Outlook
After a positive start to 2023 for bonds and equities, hopes of a 'soft landing' have given way to recessionary fears and a 'mini banking crisis'. Silicon Valley Bank and Credit Suisse were the first major casualties to emerge from the most synchronized and aggressive global rate hiking cycle in 40 years. The evidence so far is that the current banking episode is a crisis triggered by fear rather than fundamentals, fuelled by specific instances of idiosyncratic risk rather than something more systemic. Despite this, markets remain fragile and fears of wider contagion in the financial sector remain close to the surface. What is clear is that there has been an adjustment in the risk appetite of investors which has resulted in a notable widening in credit spreads. Additionally, increased risk aversion from lenders is causing credit conditions to tighten and in our opinion will only worsen already anaemic growth forecasts. Although the banking sector is where the first visible stresses have occurred, the viability of capital structures in the non-financial corporate bond market look set to be tested by weaker growth and tighter financial conditions in the next 12-18 months. The private sector, both corporate and consumer, has so far been largely shielded from the impact of higher interest rates because of a lag in policy rate transmission. This lag has been extended by the increased liquidity built up through corporate issuers extending maturity profiles on their debt and consumers building up savings in the aftermath of COVID-19. However, we are starting to see signals in economic data which indicate a deterioration in macroeconomic conditions and a recession in late 2023 has reemerged as the base-case amongst market participants.
Given the more challenging operating environment, fundamental credit analysis at this stage of the economic cycle becomes even more imperative and our experience in fixed income investing alongside our large in-house credit research capacity will be key in navigating markets over the next 12 months. Our bottom-up investment approach, which has been consistent since launching the Company in 2018, ensures each investment is made based on an analysis and understanding of individual credit fundamentals. We have constructed a sector agnostic, well-diversified portfolio, designed to provide protection from the type of valuation drawdowns that can occur from overexposure to any one sector, region or issuer, particularly during periods of market stress. Also, by investing predominantly in the higher quality (investment grade) part of credit markets we look to mitigate the potential impact of rising default rates which typically occur in the lower-rated (sub- investment grade) space. We maintain an overall c.23% exposure in the Company's portfolio to sub-investment grade issuers, however half of this is in invested in private assets where we take comfort from enhanced controls and monitoring that exists in these largely bilateral transactions, with robust covenant packages designed to prevent write- downs or capital loss.
2022 witnessed a material shift for fixed income investors. After a decade of depressed bond yields and credit spreads remaining largely within a (tighter) lower range, we are now seeing an increased volume of opportunities in the public market to purchase good quality, investment grade credits which can offer returns in line with the Company's dividend objective. Additionally, in the private space, a prolonged period of adjustment to the higher interest rate environment has meant we are seeing fewer opportunities which offer attractive relative value versus public comparators or that match the Company's return objective. In many instances there is an insufficient illiquidity premium on offer and relative value analysis has not supported allocation of capital over a multi-year horizon, particularly considering the uncertain economic outlook. We therefore expect the ratio of private to public assets to trend lower in the short term, although as always this will remain dependent on our appraisal of where the most attractive relative value can be found. The Company is well positioned to take advantage of future episodes of market volatility. We have recently fully repaid our credit facility after increasing leverage in late 2022, which, as we move through the year, will provide us the flexibility and firepower to capitalise on opportunities as and when market conditions present them.
M&G Alternatives Investment Management Limited
25 April 2023
Portfolio analysis
Top 20 holdings
As at 31 December 2022 Percentage of portfolio of investmentsa M&G European Loan Fund 11.73 Project Mercury Var. Rate 21 May 2024 1.80 Delamare Finance FRN 1.279% 19 Feb 2029 1.65 Hall & Woodhouse Var. Rate 30 Dec 2023 1.58 PE Fund Finance III Var. Rate 16 Dec 2023 1.46 RIN II FRN 1.778% 10 Sep 2030 1.45 Millshaw SAMS No. 1 Var. Rate 15 Jun 2054 1.40 Hammond Var. Rate 28 Oct 2025 1.37 Atlas 2020 1 Trust Var. Rate 30 Sep 2050 1.34 Regenter Myatt Field North Var. Rate 31 Mar 2036 1.27 Signet Excipients Var. Rate 20 Oct 2025 1.25 STCHB 7 A Var. Rate 25 Apr 2031 1.20 Gongga 5.6849% 2 Aug 2025 1.19 Dragon Finance FRN 1.3665% 13 Jul 2023 1.18 Citibank FRN 0.01% 25 Dec 2029 1.17 Finance for Residential Social Housing 8.569% 4 Oct 2058 1.13 Income Contingent Student Loans 1 2002-2006 FRN 2.76% 24 Jul 2056 1.09 Harmoney Warehouse No. 2 Var. Rate 31 Dec 2026 1.06 Zurich Finance Ireland Designated Activity 5.125% 23 Nov 2052 0.98 Luminis 4.9268% 23 Sep 2025 0.98 Total 36.28
a Including cash on deposit and derivatives.
Source: State Street
Geographical exposure
Percentage of portfolio of investments
as at 31 December 2022a
Percentage of portfolio of investments United Kingdom 54.44% Europe 30.61% United States 8.46% Australasia 4.13% Global 2.36%
a Excluding cash on deposit and derivatives.
Source: M&G and State Street as at 31 December 2022
Portfolio overview
As at 31 December 2022
%
Cash on deposit 0.36
Public 42.01
Asset-backed securities 15.34
Bonds 26.67
Private 57.01
Asset-backed securities 5.22
Bonds 2.30
Investment funds 11.73
Loans 22.62
Private placements 2.14
Other 13.00
Derivatives 0.62
Debt derivatives 0.72
Forwards (0.10)
Total 100.00
Source: State Street
Credit rating breakdown
As at 31 December 2022
%
Unrated 0.62
Derivatives 0.62
Cash and investment grade 75.90
Cash on deposit 0.36
AAA 2.79
AA+ 0.32
AA 3.53
A+ 1.27
A 1.17
A- 4.64
BBB+ 12.38
BBB 18.01
BBB- 22.28
M&G European Loan Fund (ELF) (see note) 9.15
Sub-investment grade 23.48
BB+ 6.15
BB 3.07
BB- 2.99
B+ 3.89
B 3.03
B- 0.78
CCC+ 0.43
CCC- 0.34
D 0.22
M&G European Loan Fund (ELF) (see note) 2.58
Total 100.00
Source: State Street.
Note: ELF is an open-ended fund managed by M&G that 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 %
as at 31 December 2022 Company description
Open-ended fund managed by M&G which invests in leveraged loans issued by, generally,
M&G European Loan Fund substantial private companies located in the UK and Continental Europe. The fund's objective
is to create attractive levels of current income for investors while maintaining relatively
11.73% low volatility of NAV. (Private)
Project Mercury Var. Rate Floating-rate, senior secured tranche of a real estate loan to fund the construction and
21 May 2024 development of a residential led luxury scheme in Bayswater, West London. (Private)
1.80%
Delamare Finance FRN Floating-rate, senior tranche of a CMBS secured by the sale and leaseback of 33 Tesco
1.279% 19 Feb 2029 superstores and 2 distribution centres. (Public)
1.65%
Hall & Woodhouse Var. Rate Bilateral loan to a regional UK brewer that manages a portfolio of 219 freehold and
30 Dec 2023 leasehold pubs. (Private)
1.58%
PE Fund Finance III Var. Senior secured commitment providing NAV facility financing to a private equity firm
Rate 16 Dec 2023 investing in debt and equity special situations across Europe. (Private)
1.46%
RIN II FRN 1.778% 10 Sep Mixed CLO (AAA). Consists primarily of senior secured infrastructure finance loans managed
2030 by RREEF America L.L.C. (Public)
1.45%
Millshaw SAMS No. 1 Var. Floating-rate, single tranche of an RMBS backed by shared-appreciation mortgages. (Public)
Rate 15 Jun 2054
1.40%
Hammond Var. Rate 28 Oct Secured, bilateral real estate development loan backed by a combined portfolio of 2 office
2025 assets leased to an underlying roster of global corporate tenants. (Private)
1.37%
Atlas 2020 1 Trust Var. Floating-rate, senior tranche of a bilateral RMBS transaction backed by a pool of Australian
Rate 30 Sep 2050 equity release mortgages. (Private)
1.34%
Regenter Myatt Field North PFI (Private Finance Initiative) floating-rate, amortising term loan relating to the already
Var. Rate 31 Mar 2036 completed refurbishment and ongoing maintenance of residential dwellings and communal
infrastructure in the London borough of Lambeth. (Private)
1.27%
Signet Excipients Var. Fixed-rate loan secured against 2 large commercial premises in London, currently leased to 2
Rate 20 Oct 2025 FTSE listed UK corporations. (Public)
1.25%
STCHB 7 A Var. Rate 25 Apr Floating-rate, mezzanine tranche in a regulated capital securitisation where the portfolio
2031 consists of 36 loans, secured on the undrawn Limited Partner (LP) investor capital
commitments. (Private)
1.20%
Gongga 5.6849% 2 Aug 2025 Structured Credit trade by Standard Chartered referencing a USUSD2bn portfolio of loans to
companies domiciled in 36 countries. (Private)
1.19%
Dragon Finance FRN 1.3665% Floating-rate, subordinated tranche of a securitisation of the sale and leaseback of 10
13 Jul 2023 supermarket sites sponsored by J Sainsbury plc ('Sainsbury's'). (Public)
1.18%
Citibank FRN 0.01% 25 Dec
2029 Floating-rate, mezzanine tranche of a regulatory capital transaction backed by a portfolio
of loans to large global corporates, predominantly in North America. (Private)
1.17%
Finance for Residential
Social Housing 8.569% 4
Oct 2058 High grade (AA/Aa3), fixed-rate bond backed by cash flows from housing association loans.
(Public)
1.13%
Income Contingent Student Floating-rate, mezzanine tranche of a portfolio comprised of income- contingent repayment
Loans 1 2002-2006 FRN student loans originally advanced by the UK Secretary of State for Education. (Public)
2.76% 24 Jul 2056
1.09%
Harmoney Warehouse No. 2 Floating-rate, junior mezzanine tranche in a securitisation providing debt financing for a
Var. Rate 31 Dec 2026 portfolio of unsecured personal loans originated in New Zealand by a New Zealand and
Australian marketplace lender. (Private)
1.06%
Zurich Finance Ireland Zurich Finance is ultimately owned by Zurich Insurance Group, a company providing
Designated Activity 5.125% insurance-based financial services. The Company offers general and life insurance products
23 Nov 2052 and services for individuals, small businesses, commercial enterprises, mid-sized and large
corporations, and multinational companies. (Public)
0.98%
Luminis 4.9268% 23 Sep Floating-rate, mezzanine tranche of a regulatory capital transaction backed by a portfolio
2025 of predominantly revolving facilities extended to blue chip corporates in the Americas and
EMEA. (Private)
0.98%
Annual General Meeting
The Company's Annual General Meeting will be held at the offices of M&G Alternatives Investment Management Limited, 10 Fenchurch Avenue, London EC3M 5AG at 11.30 am on Thursday, 15 June 2023. The formal Notice of AGM can be found within the Annual Report.
Further Information
The full Annual Report and Accounts can be obtained from the Company's website at www.mandg.co.uk/ creditincomeinvestmenttrust or by contacting the Company Secretary at mandgcredit@linkgroup.co.uk.
A copy of the Annual Report and Accounts will be submitted shortly to the National Storage Mechanism ("NSM") and will be available for inspection at the NSM, which is situated at: https://data.fca.org.uk/#/nsm/ nationalstoragemechanism, in accordance with DTR 6.3.5(1A) of the Financial Conduct Authority's Disclosure Guidance and Transparency Rules.
Notification in accordance with Listing Rule 9.6.11
On the recommendation of the Nomination Committee, the Board of Directors have agreed the following changes to the role and responsibilities of the Directors, with effect from 26 April 2023:
-- Barbara Powley to chair the Management Engagement Committee, previously chaired by David Simpson;
-- Jane Routledge to chair the Remuneration Committee, previously chaired by Barbara Powley; and
-- Barbara Powley will also assume the position of Senior Independent Director.
David Simpson will continue as chair of the Board of Directors and Nomination Committee, Richard Boléat will continue as chair of the Audit Committee.
This notification is made in accordance with Listing Rule 9.6.11 (3).
ENDS
Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on this announcement (or any other website) is incorporated into, or forms part of, this announcement.
----------------------------------------------------------------------------------------------------------------------- Dissemination of a Regulatory Announcement, transmitted by EQS Group. The issuer is solely responsible for the content of this announcement.
-----------------------------------------------------------------------------------------------------------------------
ISIN: GB00BFYYLXXX, GB00BFYYTXXX Category Code: ACS TIDM: MGCI LEI Code: 549300E9W63X1E5A3N24 OAM Categories: 1.1. Annual financial and audit reports Sequence No.: 239491 EQS News ID: 1616955 End of Announcement EQS News Service =------------------------------------------------------------------------------------
Image link: https://eqs-cockpit.com/cgi-bin/fncls.ssp?fn=show_t_gif&application_id=1616955&application_name=news
(END) Dow Jones Newswires
April 26, 2023 02:00 ET (06:00 GMT)
