The direct lending sector fund, KKV Secured Loan (KKVL), formerly SQN Asset Finance Income), has released its annual results for the period ending June 30, 2020. In NAV total return terms, the ordinary actions delivered -56.1% and C shares -25.0%. The closing haircuts for common and C shares are 11.9% and 16.4%.
We note that KKVL announced plans for a full liquidation of the fund last September. You can access our story on this by clicking here, and a review update story we posted last November by clicking here.
Market Context – âWe expect coupon the obligations to be put under pressure and the abstention from being the watchword
for the next 9-12 months’
The director of KKVL noted the following in his review: âVery volatile pricing of all assets across the risk spectrum and volatility surges have been facets of all fixed income sectors during the review period. All fixed income products fell sharply from March onwards and this was particularly severe for high yielding assets, even though the US Treasury obligations were briefly affected by a liquidity press. Since the introduction of emergency market support measures by central banks, these markets have stabilized but the economic situation remains very uncertain. As developed markets in the US, UK and Europe began to ease foreclosure measures, market commentators expected a so-called ‘V-shaped’ recovery as companies began to exit. their forced hibernation. Our assessment was more cautious and despite the tightening of spreads during the summer months for investment grade credits, as companies consolidated their balance sheets with additional borrowing, we focused particularly on data relating to investment grade credits. SME performance and securitized products such as Collateralised Loan Obligations (CLOs) and lower sub-investment grade markets where the greatest pain was observed. We expect coupon bonds to come under pressure and forbearance to be the watchword
for the next 9 to 12 months.
Business confidence in SMEs has fallen sharply and the decline in turnover due to COVID-19 has caused serious cash flow difficulties for many businesses, increasing demand for current assets minus current liabilities.
As well as cash, it includes stock (inventory) and products that they have started to make but aren't yet available for sale (work in progress), amounts owed to the company payable in less than a year and amounts the company is due to pay within a year." class="glossary_term">working capital finance. This has been accompanied by a sharp increase in demand for loans and the adoption of government-backed programs encouraging commercial banks to lend in the sector. The relaxation of the criteria for granting loans by these banks has a second derivative weakening capital adequacy and we expect that once market conditions start to normalize, lending structures will revert to more conventional levels, allowing alternative lenders to pick up the slack.
The speed of recovery is however unclear at this time. As a striking illustration, unemployment in the United States rose by 14 million in six weeks at the height of the COVID-19 emergency, as the total number of people lost their jobs during the recession between June 2008 and June 2009 was 3.5 million, then It took four years for employment to return to pre-recession levels. Reversing lost jobs takes time for an economy to absorb and so we expect this to have an impact on consumption and consumer confidence. For lenders and borrowers alike, the surest route to standardization is to keep sustainable businesses alive with backing and forbearance, including term extensions and interest or amortization âPublic holidaysâ, to enable them to resume their commercial activities and the service of their loans as quickly as possible. When we have identified a specific COVID-19 impact, this is the approach we have taken in our portfolios and which is relevant for KKVL / X since our appointment in June 2020. â
“In the process of orderly liquidation, but perhaps the most difficult period is yet to come”
KKVL President Peter Niven said the following: “The Read our guide to Boards and Directors" class="glossary_term">plank and the manager has now started to work on an orderly liquidation of the portfolios and hopes to return capital to investors quickly, avoiding capital erosion to the extent possible. In anticipation of this, the board of directors had asked the manager to end all new underwriting commitments from June 2020. We have also looked at costs over the past few months and have taken steps to reduce expenses. common in the future. Market conditions have been and continue to be very difficult.
The last time I wrote to you, in early April 2020, the UK was locked in due to the COVID-19 pandemic and the way forward for global economies was very blurry. We now know that the consequences have been very serious and prolonged. It is encouraging that there is a silver lining that a medical solution will be available in 2021, but it has had an effect on a number of borrowers. It has also made it more difficult to engage with borrowers face to face and worsen the environment in which we all work. However, the manager considers that the most difficult period may still be ahead of us, with Q1 and Q2 2021 presenting continued risks for our borrowers. “
KKVL: KKV Secured Loan Says The Toughest Times May Be Yet To Come For Its Borrowers
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