Actively managed, ultra-short duration floating-rate income strategy that invests primarily in privately syndicated, below investment-grade senior secured corporate loans.
Key Takeaways
- Both the loan and the high yield (HY) market benefitted from an improved macro backdrop, although HY outperformed given the decline in government bond yields.
- The Fund underperformed its benchmark, the 50% Bloomberg High Yield Bond —2% Issuer Constrained Composite Index/ 50% Morningstar LSTA US Leveraged Loan Index (the benchmark) during the quarter on a net asset value (NAV) basis.
- We believe 2023 has many of the same issues in store that affected markets in 2022, but we also hope to see some resolution as the cycle matures.
Portfolio Review
Yields continued to zig-zag in 4Q22, with the bond market influenced by inflation and the US Federal Reserve actions. The start of 4Q22 saw a continued rise in interest rates, driven primarily by additional upside surprises in inflation and payroll reports. The Fed hiked rates an additional 75 basis points (bp) in November but then laid the groundwork for smaller hikes going forward. The more dovish comments fueled a rally across rates and credit markets which was extended when November Consumer Price Index data came in better than expected adding to the optimism that inflation may have finally peaked.
Both the loan and the HY market benefitted from this macroeconomic news, although HY outperformed given the decline in government bond yields. Starting with the loan market, the Morningstar® LSTA ® US Leveraged Loan Index (loan Index) returned 2.74% during the quarter. The average loan index bid price increased by 24 bp to 92.44, primarily attributable to firmer trading levels in the first two month of the quarter, as December experienced some modest price declines. In line with the prior two quarters, a continued flight to quality theme was evident, with returns for BB, B and CCC rated loans coming in at 3.93%, 2.80%, and –2.05%, respectively. In HY, the Bloomberg U.S. High Yield 2% Issuer Constrained Index (high yield Index) returned 4.17% for the period. Spreads narrowed meaningfully, ending the quarter 93 bp tighter with an option-adjusted spread (OAS) of 469 bp. By ratings, the HY market produced positive returns across the credit stack, with BB rated bonds returning 4.30%, B rated bonds returning 4.93% and CCC rated bonds returning 0.51%.
New-issue supply remained muted in both markets given difficult backdrop for new issuance along with a touch of seasonality, while investor demand was stronger in the loan market given persistent collateralized loan obligation (CLO) bid. Leveraged Commentary & Data reported institutional loan volume of $35.7 billion during the quarter, while HY bond issuance was just $15.4 billion in aggregate across both secured and unsecured volumes. CLO issuance totaled $22 billion in 4Q22, while measurable retail fund flows were negative in loans and positive in HY.
Class I shares of the Fund underperformed the benchmark on a NAV basis. As of June 30, 2022, the Fund’s strategy, benchmark and portfolio management team have changed, and the Fund was renamed to Voya Credit Income Fund. Since the effective date of those changes, we have been transitioning the portfolio of investments from the former Senior Income Fund Strategy to the new Credit Income Fund Strategy. Over the quarter, a decision was made to underweight in HY bonds, relative to the 50/50 benchmark, given the current interest rate environment. The Fund’s underweight in HY bonds and overweight to senior loans was a slight negative to relative returns, given the outperformance of HY bonds versus loans over the quarter. Within the individual allocations, the loan allocation was negatively impacted by technical trading pressures on smaller, less illiquid term loans in the distressed portion of the loan market, namely 24 Hour Fitness Worldwide, Inc, GTT Communications, Inc. and Yak Mat. The drag created by these exposures was only partially offset by not owning a position in Cineworld, a movie theater operator that continues to struggle following the Covid shutdown. In the HY allocation, sector level outperformance was driven by credit selection in retailers (offset somewhat by allocation), metals and mining, as well as chemicals. Our positioning in gaming and media and entertainment detracted from performance, with the former due to an underweight in Macau-based casinos, which rallied on news of changes in China’s Covid policy. On a ratings basis, our CCC and BB rated issuer names outperformed their respective HY cohorts, while our B rated issuer positions underperformed. Away from investment-level performance, the Fund’s use of leverage helped boost returns given the increase in average loan and bond prices experienced during the period.
Current Strategy and Outlook
We believe 2023 has many of the same issues in store that affected markets in 2022, but we also hope to see some resolution as the cycle matures. In this report, we highlight our main views for the new year and identify the various risks and opportunities in leveraged credit markets today. Notable macro themes for 2023 include slower global growth with a heightened possibility of a recession, deceleration from peak inflation levels, less aggressive and less synchronized central bank policy, lower rate volatility, and continued geopolitical risks. While macro news will have an impact on technical factors, fundamental factors will likely be a bigger story given weaker earnings environment, prospect of elevated downgrades and defaults and continued ratings and sectoral dispersion among weaker credit profiles (particularly in loans). However, some of the downside is already reflected in current valuations (loans prices in low-90s and HY OAS at roughly 470 bp) and combined with high starting all-in yields, we believe leveraged credit still offers fairly attractive relative value but acknowledge the need for credit selection and careful monitoring given the late-cycle backdrop.
Holdings Detail
Companies mentioned in this report – percentage of Fund investments, as of 12/31/22: 24 Hour Fitness Worldwide, Inc. 0.33%, GTT Communications, Inc. 0.16%, Yak Mat 0.27% and Cineworld 0%; 0% indicates that the security is no longer in the portfolio. Portfolio holdings are subject to daily change.
Voya Credit Income Fund Quarterly Commentary - 4Q22