Voya Senior Income Fund Quarterly Commentary - 2Q22

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Actively managed, ultra-short duration floating-rate income strategy that invests primarily in privately syndicated, below investment-grade senior secured corporate loans.

Senior Loan Access through Closed-End Interval Fund

Key Takeaways

  • In 2Q22, a confluence of macro risks weighed on investor sentiment in the loan market, leading to notable weakness in the secondary market, muted new loan issuance and outflows from retail loan funds and exchange-traded funds (ETFs).
  • Against this backdrop, the S&P/LSTA Leveraged Loan index (the “index”) lost 4.45% for the quarter.
  • Market technical factors reversed the healthy dynamics seen in 1Q22, as new loan supply was muted in the last two months and totaled just $56 billion for the quarter, a 50% reduction from 1Q22.
  • For the quarter, the Fund return underperformed the index.

Current Strategy and Outlook

In 2Q22, a confluence of macro risks weighed on investor sentiment in the loan market, leading to notable weakness in the secondary market, muted new loan issuance and outflows from retail loan funds and ETFs. Against this backdrop, the index lost 4.45% for the quarter. The average index bid price fell by 544 basis points (bp) from March levels to 92.16, a level not seen since August 2020 during the Covid-19 recovery phase. Not surprisingly, the market was firmly in risk-off mode with returns for BB-, single-B- and CCC-rated loans coming in at -3.11%, -4.91% and -7.69%, respectively. The dislocation amongst different ratings buckets and liquidity profiles increased in June with better-rated and liquid areas holding better, as lower quality and illiquid names starting to come under pressure. On a relative basis, loans still meaningfully outperformed other risk assets during the quarter such as investment-grade (IG) bonds, high-yield (HY) bonds and equities, which have all registered double-digit losses for the year-to-date (YTD) period.

Market technical factors reversed the healthy dynamics seen in 1Q22, as new loan supply was muted in the last two months and totaled just $56 billion for the quarter, a 50% reduction from 1Q22. On a YTD basis, total issuance volumes amounted to $168.3 billion, which is tracking only half of last year’s pace for the comparable period. Average clearing yields in the primary market increased well above 7% for the quarter due to wider original issue discounts amid the challenging conditions for new-issue, as well as a function of rising base rates. Dissecting new-issue volume by financing needs for issuers, merger and acquisition-related paper represented the bulk of transactions during the quarter, followed by refinancing activity, while dividend recapitalizations were largely sporadic. On the investor demand front, collateralized loan obligation issuance remained active given prevalence of opportunistic “print-and-sprint” deals, which are priced with only partially ramped portfolios and typically have short-dated or static (non-reinvestment) terms. Total formation in 2Q22 was $38.3 billion, reflective of a 25% increase from the first quarter. YTD formation through June has amounted to $71.4 billion, a respectable figure considering the macro developments. In contrast, the retail base redeemed an aggregate $3.8 billion from loan funds and ETFs, while YTD flows still remain positive at $18.2 billion.

There were two defaults in the index during the quarter (Talen Energy Supply and Revlon Consumer Products). As a result, the trailing 12-month default rate by principal amount experienced a small uptick of 9 bp and closed out the quarter at 0.28%, which is well below the long-term historical average for the asset class.

As we look ahead, we expect the macro backdrop to remain the main source of uncertainty and any broad market volatility. Recession risk has risen globally, as inflation and tightening monetary policy have led to a deceleration in economic growth. Higher food and commodity prices will remain a headwind for consumers and a challenge to policy makers, although impact will vary globally with Europe most at-risk, given higher reliance on foreign energy. May CPI print amplified Federal Reserve’s hawkish stance and raised terminal rate projections to 3.25-3.5% by yearend 2022. Policy outlook reflects a strong commitment to lowering inflation, but path to soft landing has narrowed considerably. Specific to loans, the outlook in the medium term will continue to be driven by both technical factors, primarily, and fundamentals, secondarily, given the still supportive backdrop going into 2Q22 earnings season. Beyond the visible forward calendar (which is relatively concentrated), near term new issue activity is expected to remain sporadic until the backdrop improves. General expectation, assuming no meaningful improvement in macro over the summer, is for spreads to reflect higher risk premiums; however, no significant pick-up in corporate defaults is anticipated over the next 12 months from the current low levels. Downgrade activity is likely to be a bigger concern for the loan market over the medium term, as compared to elevated defaults. Given the uncertain backdrop, we continue to closely monitor our credit selection and positioning given the prospects of sector and rating dispersion as we head into the typical pockets of summer illiquidity amidst macro uncertainty and a likely weaker earnings environment.

 

Portfolio Review

Class I shares of the Fund underperformed the index return, which reflects no leverage, cash allocation or fees and expenses.* From a rating perspective, the top relative detractor was selection within single-B- and BB-rated loans, selection and overweight among CCC-rated loans and an underweight in BBB-rated loans. By industry, the Fund was primarily weighed down by selection in electronics and electrical, and to a lesser extent, selection in all telecommunication, radio and television, business equipment and services and forest products. Looking at individual loan drivers, top relative laggards included overweights to Riverbed Technology, Inc., Envision Healthcare Corporation, Avaya Inc. (across two loan facilities), Yak Mat and Diamond Sports Group, LLC. Riverbed Technology, Inc. experienced some pricing pressure after announcing quarterly results that were below market expectations, while negative factors related to wage pressure and a distressed debt exchange weighed on the performance of Envision Healthcare Corporation. Meanwhile, Avaya Inc. traded lower after the company reduced guidance related to cash flow from operations and free cash flow burn, stemming from accelerated progress in moving to a recurring revenue model, which is resulting in higher working capital requirements. Trading levels in the second-lien loan of Diamond Sports Group, LLC and first-lien of Yak Mat moved disproportionately lower to the rest of the market, as CCC-rated loans’ price performance across the entire loan market was weak during the quarter, given ongoing risk-off sentiment and broader market volatility. Conversely, the Fund was helped by selection in leisure goods, activities and Movies and oil and gas. At an issuer-level, an overweight to Global Tel*Link Corporation (D/B/A Viapath Technologies) helped boost relative returns, as the company continues to see call volume and minutes of use grow and tablet coverage expanding, helping drive additional future opportunity. An overweight to two-loan facilities from 24 Hour Fitness Worldwide, Inc. contributed to performance as the company benefited from an improved outlook in the fitness center space. Away from asset-level performance, the Fund’s use of leverage was a headwind to returns given the notable decrease in average loan prices experienced during the period.

The Fund did not experience any defaults during the quarter, as compared to two defaults within the index. Diversification measures in the portfolio remain robust with 57 industries and 419 individual issuers represented at the end of the period.

Holdings Detail

Companies mentioned in this report – percentage of Fund investments, as of 6/30/22: Riverbed Technology, Inc. 0.18%, Envision Healthcare Corporation 0.21%, Avaya Inc. 1.48%, Yak Mat 0.39%, Diamond Sports Group, LLC 0.26%, 24 Hour Fitness Worldwide, Inc. 0.34% and Global Tel*Link Corporation (D/B/A Viapath Technologies) 1.16%; 0% indicates that the security is no longer in the portfolio. Portfolio holdings are subject to daily change.

 

*As of June 30, 2022, the Fund's strategy, benchmark and portfolio management team have changed. The Fund was renamed to Voya Credit Income Fund and the benchmark to 50% S&P 500/LSTA Leveraged Loan index / 50% Bloomberg 2% High Yield Issuer Cap index. Additionally, the new portfolio management team is Jeffrey Bakalar, Kelly Byrne, Robert Wilson and Rick Cumberledge. Please see the Fund’s prospectus for additional information. This commentary reflects the management of the Fund under its previous investment strategy and its performance relative to the S&P/LSTA Leveraged Loan index.

IM2299700

The S&P/LSTA Leveraged Loan Index is an unmanaged total return index that captures accrued interest, repayments, and market value changes. The Index does not reflect fees, brokerage commissions, taxes or other expenses of investing. Investors cannot invest directly in an index.

Principal Risks: All investing involves risks of fluctuating prices and the uncertainties of rates of return and yield. Investment Risks: The Fund invests primarily in below investment grade, floating rate senior loans (also known as “high yield” or “junk” instruments), which are subject to greater levels of liquidity, credit, and other risks than are investment grade instruments. There is a limited secondary market for floating rate loans, which may limit the Fund’s ability to sell a loan in a timely fashion or at a favorable price. If a loan is illiquid, the value of the loan may be negatively impacted and the manager may not be able to sell the loan in order to meet redemption needs or other portfolio cash requirements. The value of loans in the Fund could be negatively impacted by adverse economic or market conditions and by the failure of borrowers to repay principal or interest. A decrease in demand for loans may adversely affect the value of the Fund’s investments, causing the Fund’s net asset value to fall. Because of the limited market for floating rate senior loans, it may be difficult to value loans in the Fund on a daily basis. The actual price the Fund receives upon the sale of a loan could differ significantly from the value assigned to it in the Fund. The Fund may invest in foreign instruments, which may present increased market, liquidity, currency, interest rate, political, information, and other risks. These risks may be greater in the case of emerging market loans. Although interest rates for floating rate senior loans typically reset periodically, changes in market interest rates may impact the valuation of loans in the portfolio. In the case of early prepayment of loans in the Fund, the Fund may realize proceeds from the repayment that are less than the valuation assigned to the loan by the Fund. In the case of extensions of payment periods by borrowers on loans in the Fund, the valuation of the loans may be reduced. The Fund may also invest in other investment companies and will pay a proportional share of the expenses of the other investment company. Derivative Instruments: Derivative instruments are subject to a number of risks, including the risk of changes in the market price of the underlying securities, credit risk with respect to the counterparty, risk of loss due to changes in interest rates and liquidity risk. The use of certain derivatives may also have a leveraging effect which may increase the volatility of the Fund and reduce its returns. Other investment risks of the Fund include, but are not limited to: Equity Securities, Foreign Investments, High-Yield Securities, Leverage, Liquidity, Prepayment and Extension. Investors should consult the Fund’s prospectus and statement of additional information for a more detailed discussion of the Fund’s risks. An investment in the Fund is not a bank deposit and is not insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency.

 

This commentary has been prepared by Voya Investment Management for informational purposes. Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Any opinions expressed herein reflect our judgment and are subject to change. Certain of the statements contained herein are statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) interest rate levels, (4) increasing levels of loan defaults (5) changes in laws and regulations and (6) changes in the policies of governments and/or regulatory authorities. Past performance is no guarantee of future results.

The opinions, views and information expressed in this commentary regarding holdings are subject to change without notice. The information provided regarding holdings is not a recommendation to buy or sell any security. Portfolio holdings are fluid and are subject to daily change based on market conditions and other factors.

The Fund discussed may be available to you as part of your employer sponsored retirement plan. There may be additional plan level fees resulting in personal performance to vary from stated performance. Please call your benefits office for more information.

Performance Attribution: During the period from January 1, 2017 to July 31, 2020, an unaffiliated data provider, which is used by the Funds to identify individual senior loans and groups of senior loans that detracted from or contributed to portfolio performance on an absolute or relative basis (commonly known as “attribution analysis”), provided the Funds with inaccurate data. As a result, the attribution analysis used to explain and analyze a portfolio’s performance against a particular benchmark was inaccurate in some instances during the period. Importantly, the Funds’ actual performance information and performance comparison to their respective benchmark which appeared in various Fund commentaries during this period were correct and were not impacted by the inaccurate data. The data provider has identified and corrected the issue that caused the transmission of inaccurate information, and correct information is reflected in attribution analysis used in commentaries prepared after September 30, 2020.performance. Please call your benefits office for more information.

The Standard & Poor’s rating scale is as follows, from excellent (high grade) to poor (including default): AAA to D, with intermediate ratings offered at each level between AA and CCC. Anything lower than a BBB- rating is considered a non-investment grade or junk bond. Any security that is not rated by Standard & Poor’s is placed in the NR (Not Rated) category.

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