DJ M&G Credit Income Investment Trust plc: 2021 Interim Results
M&G Credit Income Investment Trust plc (MGCI) M&G Credit Income Investment Trust plc: 2021 Interim Results 16-Sep-2021 / 15:43 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.
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LEI: 549300E9W63X1E5A3N24
M&G Credit Income Investment Trust plc
Half Year Report and unaudited Condensed Financial
Statements for the six months ended 30 June 2021
Copies of the Half Year Report can be obtained from the following website:
www.mandg.co.uk/creditincomeinvestmenttrust
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 2021 2021 First interim dividend: Payment date May 2021 2021 Second interim dividend: Payment date August 2021
Future dividend timetable
Payment date 2021 Third interim November 2021 2021 Fourth interim February 2022 2022 First interim May 2022 2022 Second interim August 2022
Financial highlights
As at As at
Key data 30 June 2021 31 December 2020
(unaudited) (audited)
Net assets (GBP'000) 146,297 146,628
Net asset value (NAV) per Ordinary Share 102.04p 101.40p
Ordinary Share price (Mid-market) 97.20p 92.00p
Discount to NAV[a] 4.74% 9.27%
Ongoing charges figure[a] 1.08%[b] 0.87%
Six months ended Year ended
Return and dividends per Ordinary Share 30 June 2021 31 December 2020
(unaudited) (audited)
Capital return 2.0p 1.3p
Revenue return 1.3p 2.9p
NAV total return[a] 3.3% 3.7%
Share price total return[a] 8.7% (9.7)%
First interim dividend 0.74p 0.85p
Second interim dividend 0.76p[c] 0.77p
Third interim dividend - 0.71p
Fourth interim dividend - 1.95p[c]
Total dividends declared 1.50p 4.28p
[a] Alternative Performance Measure.
[b] The increase in the ongoing charges figure mainly shows the annualised effect of the increase in the investment management fee from 0.5% to 0.7% per annum. This increase in fee took effect on 1 April 2021, reflecting the fact that the portfolio is now appropriately positioned with regard to the Company's dividend target set at launch.
[c] Paid after the period/year end. Please see note 6 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 invests primarily in Sterling denominated Debt Instruments. Where the Company invests in assets not denominated in Sterling, it is generally the case that these assets are 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.
The Company's portfolio comprises 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 Instruments Unsecured Debt Instruments Rating (% of Gross Assets) [a] (% of Gross Assets) AAA 5% 5%[b] AA/A 4% 3% BBB 3% 2% Below investment grade 2% 1%
[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.
The Company typically invests directly, but it also invests indirectly through collective investment vehicles which are managed 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 managed primarily on an ungeared basis although the Company may, from time to time, be geared tactically through the use of borrowings. Borrowings will 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 Financial Conduct Authority (FCA).
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. The Company is mainly invested in private debt instruments. This part of the portfolio generally includes 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.
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DJ M&G Credit Income Investment Trust plc: 2021 -2-
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. Fixed rate instruments will often be hedged in order to protect the portfolio from adverse changes in interest rates. 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
I am delighted that your Company continues to show returns above those originally targeted at its launch. The NAV total return for the half year to 30 June 2021 was 3.3%. Including dividends paid, the annualised NAV total return was 4.8% from inception to 30 June 2021. Your Board considers these to be strong performances, noting the relatively low risk in the underlying investments.
In the first quarter of the year markets were preoccupied by the risk of inflation and economic overheating which led to a global sell-off in government bonds. During this period the Company's short position in the 10 year gilt future successfully offset any pricing weakness related to interest rate risk in our holdings. By hedging interest rate risk and maintaining low duration our Investment Manager was able to negate the effect of rising risk-free rates on portfolio returns, allowing the Company to capture positive credit spread performance.
Although upward pressure on government bond yields cooled during the second quarter, sovereign debt markets remained volatile. As the period progressed, central banks began to discuss timelines for the tightening of monetary policy. Counterintuitively, government bond markets, led by the US, rallied to end the quarter at levels last seen at the end of February. Our Investment Manager was able to benefit from the strength of credit markets over this period to realise capital gains on the sale of bonds that had been purchased at much cheaper levels during 2020. These capital gains, along with low portfolio duration, contributed to the NAV outperforming fixed income indices such as the ICE BofA Sterling and Collateralised Index (down by 2.6%) and the ICE BofA European Currency Non-Financial High Yield 2% Constrained Index (up by 3.0%) over the period.
Share buybacks and discount management
Your Board believes the volatility in the price of the Ordinary Shares has not reflected the stability and low volatility of the underlying NAV. On 30 April 2021, the Company announced a 'zero discount' policy (the 'Policy') to seek to manage the discount or premium to NAV at which the Company's Ordinary Shares trade.
The Policy has been adopted because the Board believes that it is important for Shareholders to be able to benefit appropriately from the Company's investment objective which is to generate a regular and attractive level of income with low asset value volatility. The Company therefore will seek to ensure that the Ordinary Shares trade close to NAV in normal market conditions through a combination of Ordinary Share buybacks and the issue of new Ordinary Shares, or resale of Ordinary Shares held in treasury, where demand exceeds supply. Further issuance would allow the Company to take advantage of opportunities in the private debt markets as they arise, as well as to increase the size of the Company, which should reduce the ongoing charges figure and improve the liquidity of the Ordinary Shares.
Your Company has undertaken a number of share buybacks pursuant to the Policy. In addition, the Company's Investment Manager has held meetings with both existing and potential investors. Pleasingly, these endeavours, coupled with a more positive market backdrop, have led to a narrowing of the discount to NAV at which the Ordinary Shares trade.
The Company's Ordinary Share price traded at an average discount to NAV of 7.5% during the period from 2 January to 30 June 2021. On 30 June 2021 the Ordinary Share price was 97.20p, representing a 4.7% discount to NAV as at that date. As at 30 June 2021, 1,238,000 shares had been purchased as part of the Policy and were held in treasury.
Board
Mark Hutchinson retired from the Board on 31 August 2021. This coincided with Mark leaving his role as Chair of Private Assets at M&G Alternatives Investment Management Limited, your Company's Investment Manager. We thank him for his wise counsel, commitment and for his considerable contribution since the inception of the Company.
Your Board has commenced the search process for an additional non-executive Director and, in due course, will consider replacing Mark.
Dividends and transition from LIBOR to SONIA
Your Company is currently paying three, quarterly interim dividends at an annual rate of LIBOR plus 3%, calculated by reference to the opening NAV as at 1 January 2021, adjusted for the payment of the last dividend in respect of the last financial year (adjusted opening NAV). In addition your Company will pay a variable, fourth interim dividend to be determined after the year end, which will take into account the net income over the whole financial year and, if appropriate, any capital gains. The Company paid dividends of 0.74p and 0.76p per Ordinary Share in respect of the quarters to 31 March 2021 and 30 June 2021 respectively.
The Company currently uses the average daily three-month LIBOR as its reference for the purposes of its targeted dividend rate. LIBOR is in the process of being phased out by 31 December 2021 in favour of a new measure called Sterling Overnight Index Average (SONIA).
Since the global financial crisis over a decade ago, banks have been making less use of the interbank lending market. This has raised the question of the robustness and reliability of some of the rates which arise from that process, particularly at the less frequently used maturity points. Additionally, LIBOR has faced concerns regarding its reputation, since manipulation of quotes for the rates by some market participants was discovered to have taken place around the time of the global financial crisis. Financial regulators need standard measures of market interest rates to be trusted and relevant and for the process used to calculate them to be credible, transparent and robust for the long term. Instead of quotations provided by a panel of banks, which is the process for the calculation of LIBOR, regulators have decided that benchmark rates must hereafter both be administered by central banks and be based on actual transactions in deep and liquid markets. Introducing SONIA to replace LIBOR for sterling interest rates aims to achieve those objectives.
The key difference between the two measures is that LIBOR is forward-looking and SONIA is backward-looking: SONIA cannot be determined until the end of an agreed interest period.
Although SONIA gives a different result from LIBOR, based upon the performance of the two measures over the recent past, we do not expect our adoption of it to make a significant difference.
Your Board has, therefore, decided that it is in the best interests of Shareholders and the Company simply to substitute SONIA for LIBOR with effect from 1 January 2022 for the purpose of guidance on future dividends as well as for benchmarking the Company's investment performance.
The adoption of SONIA will not affect the way in which the portfolio is managed. Your Company's Investment Manager continues to believe that an annual total return, and thus ultimately a dividend yield, of LIBOR (and SONIA from January 2022) plus 4% will continue to be achievable although there can be no guarantee that this will occur in any individual year.
Outlook
Your Company's portfolio (including irrevocable commitments) is now 58.9% invested in private (non- listed) assets, with an additional investment of some 10% in illiquid publicly listed assets which are intended to be held to maturity. Public bond valuations are currently expensive by historical standards and on a risk adjusted basis appear unattractive relative to the target return of the Company. Our Investment Manager will continue to grow the private asset portion of the portfolio to achieve additional returns compared to public markets, further progressing the yield of the portfolio.
The Company maintains access to an undrawn GBP25 million revolving credit facility which should enable us to weather any future market shocks while having the firepower to purchase suitable assets as they arise. We have not yet used this facility but it continues to provide a valuable source of additional liquidity.
Based upon income earned and gains on sales of securities already realised in the portfolio, we believe the Company is in a good position to achieve its return and dividend objectives, as set out above in the section entitled 'Dividends and transition from LIBOR to SONIA', for the current financial year.
David Simpson
Chairman
16 September 2021
Investment manager's report
We are pleased to report strong NAV total return performance of 3.3% in the first half of the year which leaves the Company currently ahead of its dividend target. For the period ended 30 June 2021, the Company had declared dividend payments of 1.50p per Ordinary Share (of which 0.74p per Ordinary Share was paid in May 2021 and 0.76p per Ordinary Share was paid in August 2021). The share price total return from 1 January to 30 June 2021 was 8.7%.
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