TFIF Twentyfour Income Fund Limited

 
TIDMTFIF 
 
23 March 2020 
 
                        TwentyFour Income Fund Limited 
 
(a non-cellular company limited by shares incorporated in the Island of 
Guernsey under the Companies (Guernsey) Law 2008, as amended, with registered 
number 56128 and registered as a Registered Closed-ended Collective Investment 
Scheme with the Guernsey Financial Services Commission. LEI: 
549300CCEV00IH2SU369) 
 
Re:      Portfolio Update 
 
Market Commentary 
 
It has been a challenging couple of weeks for obvious reasons, which by turns 
we have compared to the market volatility seen in late 2018 (the Fed at odds 
with the market about rate policy, the US-China trade war, Brexit), early 2016 
(deteriorating economic data, energy/oil crisis, Deutsche Bank solvency), and 
2011 (Spain/Italy default risk, US downgrade, introduction of Basel III) as 
well as the global financial crisis of 2008. Notably these are all periods 
where it felt incredibly challenging to be an investor, but which also provided 
some of the best investment opportunities most of us have seen. 
 
As with most of those other events, European ABS have lagged behind the 
volatility seen elsewhere principally as market participants believed that the 
direct link to fundamental risk in European ABS remained weak - a belief we 
continue to hold for the significant majority of the market. However, as also 
seen during those other periods, as risk sentiment deteriorates we expect to 
eventually experience some correlation with other markets, which can often 
happen sharply. We won't necessarily see the same kind of moves, but history 
suggests that some of the changes experienced can happen in more of a step-like 
manner, which exaggerates the aggression of the move. Typically this is a 
function of bank trading desks feeding prices through into pricing vendors. For 
mezzanine ABS, where TFIF tends to invest, the moves are greater than for the 
lower yielding parts of the market. 
 
What we can continue to have faith in is the performance of our asset class. 
Unlike the US ABS market, the European version does not feature aircraft 
securitisations, European CLO exposure to the oil and gas industry is close to 
zero, there are very few hotel-backed CMBS deals and relatively low levels of 
retail in CMBS as well. We have written recently on the resilience of RMBS to 
exaggerated, prolonged non-payment of mortgage interest ( https:// 
twentyfouram.com/2020/03/17/how-will-rmbs-cope-with-covid-19-disruption/). 
 
There is no primary European ABS issuance in the pipeline that we're aware of, 
so the technical driver of performance we're seeing is purely through secondary 
trading, where supply (selling by investors repositioning/fund outflows) is 
keeping demand at bay. We think every ABS fund manager would welcome the 
opportunity to invest at current levels, but won't until they are confident 
that the supply has abated. As a closed ended fund TFIF is optimally placed to 
deal with this volatility and expects to find excellent investment 
opportunities. 
 
We have included below a table showing current spreads available and the 
movement since the market sell-off. 
 
                         19-Mar-20  21-Feb-20   Change 
                            (bp)       (bp)      (bp) 
 
EUR BBB CLO                 750        295       +455 
 
EUR BB CLO                  1200       535       +665 
 
EUR B CLO                   1600       795       +805 
 
UK Prime AAA (GBP3mL)         120         38       +82 
 
UK NC AAA (GBP3mL)            200         69       +131 
 
UK 2nd Pay (GBP3mL)           475        110       +365 
 
UK NC Deep Mezz (GBP3mL)      675        245       +430 
 
CS Eur Lev Loans            1030       409       +621 
 
EUR HY (HE00 index)         678        270       +408 
 
Portfolio Commentary and Outlook 
 
As a closed ended vehicle investing in the less liquid part of the market, and 
with a clear aim to provide a high level of income, TFIF's portfolio tends to 
remain well invested. However as we have commented before, during 2019 we 
rebalanced the portfolio incrementally to reduce exposure to what we saw as 
building risks away from our market. Principally this reflected the belief that 
the ongoing trade war, Brexit negotiations and their effect on UK politics, the 
changing global growth outlook and other risks might see a spill-over into 
European ABS performance in terms of risk sentiment rather than fundamentals. 
As a result the PM team reduced beta principally by dropping the allocation to 
CLOs from 37% to 31% (Dec 18 vs Feb 20) and shortening the time to maturity of 
the portfolio from 4.1yrs to 3.3yrs (Dec 18 vs Feb 20), as well as increasing 
our exposure to higher rated assets. 
 
Clearly we have seen significantly more volatility than was expected, however 
we continue to believe in the quality of our investments, and will look to take 
advantage of the extraordinary value on offer when appropriate by rebalancing 
the portfolio back towards its more traditional bias, and deploying the 
flexibility offered by the financing facility introduced last year. 
 
Historically we have not disclosed the mark-to-market yield on the portfolio, 
principally as the fund pays dividends based on the purchase yield (which we do 
disclose in our factsheet and was 7.80% at the end of February based on a NAV 
of 111.69). However bearing in mind the material change in spreads and pricing 
on the portfolio, as well as the establishment of a significant discount on the 
fund, it is worth pointing out that that the MTM yield at the publication of 
the last NAV (106.29) was 8.94% (compared to 6.85% at February end). 
 
While a period of lockdown would naturally be expected to lead to a higher 
level of arrears, the offsets to this are a) the credit profile of the 
borrowers are typically biased away from the most susceptible to a downturn 
(e.g. those within the gig economy), b) banks already have ongoing forbearance 
policies that are in line with what we are hearing from banks/politicians, c) 
the structural benefits of junior bonds, excess profit and cash reserves and d) 
the transparency of the loan pools that allow for accurate modelling of missed 
payments and defaults. In addition, the multiple recent announcements of 
government support are intended to act as an offset to further stress at a 
corporate and consumer level, and affordability should be further supported by 
likely lower rates for longer in the UK and Europe. In such a scenario of low 
rates and government bond curves, yield will be driven by credit spread, which 
ABS has traditionally had more of than the rest of fixed income. 
 
For further information, please contact: 
 
Numis Securities Limited: 
Nathan Brown   +44 (0)20 7260 1000 
Hugh Jonathan 
 
TwentyFour Income Fund Limited: 
John Magrath   +44 (0)20 7015 8900 
Alistair Wilson 
 
 
 
END 
 

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