Guernsey, 19 December 2008 - Volta Finance Limited (the "Company" or
"Volta Finance" or "Volta") has published its November monthly
report. The full report is attached to this release and is available
on Volta Finance Limited's financial website (www.voltafinance.com).
Gross Asset Value
+---------------------------------------------------------+
| | At 28.11.08 | At 31.10.08 |
|-----------------------------+-------------+-------------|
| Gross Asset Value (GAV / €) | 73,036,443 | 89,527,470 |
|-----------------------------+-------------+-------------|
| GAV per share (€) | 2.43 | 2.98 |
+---------------------------------------------------------+
As of the end of November 2008, the Gross Asset Value (the "GAV") of
Volta Finance Limited (the "Company", "Volta Finance" or "Volta") was
€73.0 m or €2.43 per share, a decrease of €0.55 from €2.98 per share
at the end of October 2008.
The October mark-to-market variations* of Volta Finance's asset
classes have been: +1% for ABS investments, -15% for CDO investments
and -22.8% for Corporate Credit investments.
The significant decrease of the GAV in November is the consequence of
the continual increase in the discount margin of structured credit
products and the decline in prices of underlying assets of structured
credit products in conjunction with the significant worsening of the
economic situation.
Since the end of November, one of Volta's Corporate Credit
investments, ARIA II, has been affected by the default of Tribune
Co., which accounted for 0.2% of the underlying CDS portfolio.
As regards leveraged loans, to which Volta gains exposure through
investments in CLOs, over the previous weeks, the market has been
characterised by a protracted decline in prices of underlying loans,
as well as by a wave of negative migration of ratings and the
continuing occurrence of defaults particularly in the US loan market.
Two of Volta's 13 residual positions in CLOs have suffered
particularly from this situation. As a result, payments to the
residual positions of these two CLOs have been significantly reduced
or even totally suspended. This situation is likely to persist.
MARKET ENVIRONMENT AND LATEST DEVELOPMENTS
In November, the financial and economic crises have continued to
extend their reach. Most central banks cut interest rates
significantly and are expected to continue doing so. In spite of
these monetary actions, economic difficulties have continued to arise
and structured credit asset prices have continued to spiral downward.
>From the end of October to the end of November, the spread of the 5y
European iTraxx index (series 10) widened significantly from 153 bps
to 170 bps and its Crossover counterpart (5y iTraxx European
Crossover index series 10) continued to widen from 777 bps to 889
bps. According to the CSFB Leverage Loan Index, the average price for
US liquid first lien loans declined from 71.58% to 65.56%.**
VOLTA FINANCE PORTFOLIO
As regards the Company's Corporate Credit holdings, one of the three
assets held by the Company has been hit by the Tribune Co.
bankruptcy. Based on Tribune Co.'s 0.2% exposure in the ARIA II
underlying CDS portfolio, considering a hypothetical recovery of 5%
on the CDS and prior to the reinvestment of the recovered amount,
this default implies a decrease of 19% of the asset's nominal value
and coupons. As a result, ARIA II, which was a 0/0.71%
attachment/detachment at the end of October, is expected to become a
0/0.52% tranche. All in all, ARIA II has so far lost 48% of its
originally expected coupon and principal.
The Corporate Credit holdings of the Company remain at risk of a
significant increase in the default rate given the particularly
difficult current economic cycle.
As regards Volta's positions in residual and mezzanine debt of CDOs,
the increasing number of underlying loans being downgraded to CCC or
below or that have defaulted, particularly in the US loan market,
combined with the significant loan price decline, have particularly
impacted the following two of our 13 residual positions in CDOs
through the CCC haircut mechanism (i.e. when assessing the level of
collateralization for determining whether payments are allowed to the
residual holders, CCC loans in excess of a defined proportion of the
underlying portfolio are valued at their market value instead than at
their par amount):
- The residual position in Northwoods Capital VIII (USD8m of
nominal) missed its last payment and is expected to continue doing
so.
- The residual position in Carlyle High Yield Partner IX
generated a very small payment for the last quarter and is expected
to have ongoing difficulties for the coming quarters.
Only a significant price rebound of loans rated CCC or below and the
upgrade of some CCC- or below- rated assets above CCC could reverse
the current situation. However, considering the current economic and
market situation, such a reversal of fortune seems highly improbable
for the coming quarters.
The previous monthly reports highlighted that, at some point in time,
the worsening of the economic situation could have a negative impact
on the expected cash flows of some of the Company's CDO residual
holdings. This point has been reached for two of these holdings, and
considering the rhythm at which rating agencies are restating ratings
on this market, the continual increase in defaults and the depressed
level of loan prices reached in previous weeks, we now expect to have
to reassess in the coming months the expected cash flows for most of
the other 11 residual positions in CDO held by the Company.
Nevertheless, the current average price for the 13 CDO residual
holdings (22% of par) probably overestimates the level of losses that
will be recognised on these assets when having to reassess their
expected cash flows.
As regards Volta's six UK non-conforming residual holdings, the
payments received since the end of November on certain holdings seem
to demonstrate further deterioration that should impact both the
price and the expected cash flows of these assets in the coming
weeks.
The previous monthly report highlighted the liquidity risk incurred
by the Company due to the margin calls on the currency hedge of the
USD investments (mostly residuals of CLOs). Considering the reduction
in short-term expected USD cash flows and the growing uncertainty
surrounding medium- to long-term USD cash flows as well as the
necessity to minimise the liquidity risk, the Company took the
opportunity of the recent USD depreciation to reduce the USD amount
sold forward and to cap the amount that could be required through
margin calls. The capping strategy has been implemented by selling
USD Put and buying USD Call for the USD amount that is sold forward.
As a result of this strategy, uncertain medium- to long-term USD cash
flows are now unhedged.
As of the end of November the Company's cash position was €18.1m
(€0.60 per share) following the dividend payment of €0.25 per share.
Taking into account the sharp reduction of the liquidity risk
inherent to its currency hedge positions, the Company could now
consider investing a portion of the cash available. For the time
being, the Company refrains from investing as it continues to assess
the financial and economic environment.
In November, Volta's assets have generated the equivalent of €1.3m of
cash flows (non-Euro amounts converted into Euro using end-of-month
currency cross rates), bringing the total of cash flows generated
since the start of the current semi-annual period that began on 1
August 2008 to €8.5m, compared to €10.8m for the same four-month
period in 2007.
* "Mark-to-market variation" is calculated as the Dietz-performance
of the assets in each bucket, taking into account the MtM of the
assets at month-end, payments received from the assets over the
period, and assuming that changes in cross currency rates have no
impact given that Volta Finance implements a currency hedge on
non-Euro assets. Nevertheless, some residual currency effects could
impact the aggregate value of the portfolio when aggregating each
bucket.
** Index data source: Markit, Bloomberg
(Full monthly report in attachment or on www.voltafinance.com)
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