LEI:
549300E9W63X1E5A3N24
M&G CREDIT
INCOME INVESTMENT TRUST PLC
ANNUAL
FINANCIAL REPORT FOR THE YEAR ENDED 31 DECEMBER 2023
AND
NOTICE OF
ANNUAL GENERAL MEETING
M&G Credit Income Investment
Trust plc announces its annual results for the year ended 31
December 2023 and the publication of its
annual report and accounts for the same period, which includes the
notice of Annual General Meeting.
Chairman’s
statement
Performance
I am pleased to report that your
Company achieved its benchmark of paying an annualised dividend
yield of SONIA plus 4% for 2023, while also increasing its NAV. It
is also gratifying that UK Investor Magazine gave the Company its
2023 award for the Best Debt Income Investment Trust.
The opening NAV on 1 January 2023
(adjusted for the last dividend for 2022) was 92.56p per Ordinary
Share and the NAV on 31 December 2023 (adjusted for the last
dividend for 2023) was 94.07p per Ordinary Share. Including
dividends paid, the NAV total return for the year to 31 December
2023 was 10.4%, compared to our benchmark return of 9.0%. The
outperformance of the NAV came from tightening credit spreads which
drove capital growth and from strong income returns supported by
higher yielding private assets. The portfolio was substantially
protected from interest rate rises and rate-driven volatility by
the use of interest rate hedges: these remain an integral part of
the Company’s investment strategy.
Your Company’s portfolio (including
irrevocable commitments) at the year end was 54% invested in
private (not listed) assets, with an additional amount of some 10%
in illiquid publicly listed assets which are intended to be held to
maturity. The latter part of the year saw a reduction in the
overall exposure to private assets as older positions matured;
sufficiently attractive new opportunities did not present
themselves.
Share buybacks
and discount management
Your board
remains committed to seeking to ensure that the Ordinary Shares
trade close to NAV in normal market conditions through buybacks and
issuance of Ordinary Shares. During the year, the Company bought
back 1,613,783 shares pursuant to the zero discount policy
initially announced on 30 April 2021. On 31 December 2023 the
Ordinary Share price was 92.2p, representing a 4.2% discount to NAV
as at that date.
I am
pleased that demand after the period end has enabled your Company
to begin to issue Ordinary Shares again. As at 27 March 2024, a
total of 300,000 Ordinary Shares had been re-issued from treasury
at a premium to NAV.
Amendment of
Articles of Association
The success
to date of our zero discount policy gave our shareholders the
confidence to defer the opportunity to realise the value of some or
all of their Ordinary Shares at NAV per Ordinary Share less costs
(the ‘Liquidity Opportunity’) in 2023 as set out in your Company’s
Articles of Association (the ‘Articles’). The Articles were duly
amended at a general meeting on 15 June 2023 and the next Liquidity
Opportunity will now occur at, or within the twelve months prior
to, the 2028 annual general meeting unless shareholders direct by
way of a special resolution not to offer such Liquidity
Opportunity. Our Investment Manager thus now has an extended window
in which to take account of the attractive opportunities it expects
to continue to occur in volatile markets.
Dividends
Your
Company paid four quarterly interim dividends in respect of the
year ended 31 December 2023 at an annual rate of SONIA plus 4%,
calculated by reference to the adjusted opening NAV as at 1 January
2023. These totalled 7.96p per Ordinary Share, which represented a
dividend yield of 8.6% on the Ordinary Share price at 31 December
2023. Your Company’s Investment Manager continues to believe that
an annual total return, and thus ultimately a dividend yield, of
SONIA plus 4% will continue to be achievable although there can be
no guarantee that this will occur in any individual
year.
Outlook
The technical backdrop in fixed
income markets remains strong: all-in bond yields continue to
compare favourably to other asset classes. Sterling Investment
Grade and High Yield credit spreads are (at time of writing) the
tightest they have been in close to two years which reflects the
strength of the technical tailwind and future optimism for the
‘soft landing’ narrative. Despite this creating a slightly more
challenging environment in which to deploy capital, your Company’s
board believes there is still attractive value to be found in
credit and that the current backdrop favours an active management
approach. As it has done since inception, the Investment Manager
will use capital gains from the portfolio to help achieve its
return and dividend objectives, as set out above in the section
entitled ‘Dividends’. The currently undrawn £25 million credit
facility is available to take advantage of investment opportunities
as they occur.
David
Simpson
Chairman
27 March 2024
Financial
highlights
Key
data
|
|
|
|
As
at
31
December
2023
|
As
at
31
December
2022
|
Net assets
(£’000)
|
135,285
|
135,109
|
Net asset value
(NAV) per Ordinary Share
|
96.21p
|
94.99p
|
Ordinary Share price
(mid-market)
|
92.2p
|
92.1p
|
Discount to
NAVa
|
4.2%
|
3.0%
|
Ongoing charges
figurea
|
1.28%
|
1.22%
|
Return
and
dividends per Ordinary
Share
|
|
|
|
Year
ended
31
December
2023
|
Year
ended
31
December
2022
|
Capital
return
|
3.3p
|
(6.0)p
|
Revenue
return
|
6.0p
|
4.2p
|
NAV total
returna
|
10.4%
|
(1.7)%
|
Share price total
returna
|
9.5%
|
(2.8)%
|
Total dividends
declaredb
|
7.96p
|
5.35p
|
|
|
|
a
Alternative performance measure.
Further information can be found on pages 113 to 114 of the full
Annual Report and Accounts.
b
The total dividends declared in
respect of each financial year equated to a dividend yield of SONIA
plus 4% on the adjusted opening NAV.
Investment
manager’s report
We are pleased to provide
commentary on the factors that have had an impact on our investment
performance during 2023. In particular we discuss the performance
and composition of the portfolio.
In 2023 the course of financial
markets was dominated by interest rates and interest rate
expectations, as central banks pressed ahead with the sharpest and
most aggressive rate hikes seen since the 1980s. This saw
volatility persist throughout the year as economies grappled with
the impact of elevated inflation and the transition to a higher
interest rate regime. After a positive start, by the end of the
first quarter the collapse of Silicon Valley Bank in the US and the
emergency rescue of Credit Suisse in Switzerland had sparked
turmoil in the global banking sector. This resulted in a flight to
perceived ‘safe-haven’ assets which saw government bonds rally and
left investors contemplating whether central banks would be forced
to halt interest rate hikes in order to prevent a wider financial
collapse. However, widespread contagion in either Europe or the US
failed to materialise, leading market volatility to reduce and
paving the way for investor sentiment to improve. Having moved
notably wider during this episode, investment grade credit spreads
then tightened from Q2 onwards, signalling improved investor
confidence. Whilst investor capital was being reallocated to the
fixed income market to seek out attractive all-in yields, new
supply remained constrained with issuers having issued debt in
prior years in anticipation of increased financing costs. This
supply/demand imbalance kept credit spreads well-anchored despite
tightening financial conditions and a more challenging economic
backdrop. In view of this, portfolio activity in the first half of
the year focussed on reducing risk and increasing credit quality as
we rotated out of tighter yielding public bonds, redeploying
proceeds into comparable or higher rated asset backed securities
(ABS) and collateralised loan obligations (CLOs) at new issue. We
also paid down the outstanding loan balance on the Company’s credit
facility. Into the middle of the year we added attractively priced
private assets into the portfolio as the pipeline of opportunities
picked up. In selling down corporate bonds and reallocating capital
into private and alternative sectors of the fixed income market, we
were able to achieve a significant spread pick-up and improve both
the overall yield and credit quality of the portfolio.
The second half of the year began
on a positive footing as a notable deceleration in inflation in
Europe and the US saw ‘soft landing’ expectations drive a strong
rally in risk assets, supported by good news all round from an
economic standpoint. However, early summer optimism lost momentum
as concerns grew that central banks’ determination to bring
inflation under control with restrictive policies would keep
interest rates elevated for a prolonged period. Portfolio activity
remained quiet in the third quarter as we continued to favour the
up-in- quality trade, selectively adding public and private new
issues and taking exposure in an attractively priced secondary
market securitisation. Private asset repayments saw cash returned
to the portfolio which we invested into the daily dealing M&G
Senior Asset Backed Credit Fund as we waited for suitably priced
public and private opportunities to arise. October saw a dramatic
escalation in geopolitical tensions in the Middle East after an
attack by Hamas militants led Israel to declare war on the group,
adding another layer of complexity to an already uncertain economic
outlook. The initial aftermath saw a flight to quality and
perceived ‘safe- haven’ assets, with government bonds then
whipsawing as macro and geopolitics vied for pole position in
driving markets. Corporate earnings continued to show companies
performing more robustly than many expected and economies remained
resilient, with a wider global recession failing to materialise,
although the UK did slip into a technical recession in the final
quarter of the year. As we moved into November, the lack of a wider
regional escalation in the Israel-Hamas conflict assuaged
investors’ concerns substantially. Sentiment was bolstered by the
easing of inflationary pressures, optimism about forthcoming rate
cuts by central banks and a potential economic ‘soft landing’. The
year ended with a powerful two-month rally in bond and equity
markets which saw credit spreads compress, driving strong portfolio
returns into the close of the year.
Consequently, this also created a
more challenging environment in which to add assets to the
portfolio that, in our opinion, would provide attractive
risk-adjusted returns. We concluded that the most attractive
relative value was in both public and private ABS new issues, which
offered a significant spread pick-up versus equivalently rated
corporate bonds. Into the market strength we also took the
opportunity to sell holdings in issuers that had tightened too far
relative to their credit fundamentals.
Whilst we continue to be shown a
high number of private investment opportunities, those we have
found attractive reduced into the close of the year, largely on
credit quality or pricing grounds. The funded private asset portion
of the portfolio decreased over the period to 53.8% (versus 57.0%
at 31 December 2022), largely in the second half of the year as
repayments outweighed new activity. We actively monitor the
portfolio for signs of distress and currently have exposure to
three issuers amounting to 0.82% of the latest NAV, which are
either in technical default or at some stage of a restructuring
process. These positions are already marked-to-market within your
Company’s latest NAV. The increase in exposure since the first half
of the year (0.2%) is due to two private assets (from the same
issuer) having a ‘Defaulted’ rating assigned internally. This
decision was taken following a cash flow crunch at the issuer
during which the coupon payment for December was missed. M&G is
working with the issuer toward a solution that should see coupon
payments resume in Q2 2024, at which point our expectation would be
for ratings to be reinstated. It should be noted that the position
is over- collateralised and no loss on principal is expected,
whilst any missed interest is expected to be capitalised and
therefore remain to the portfolio’s benefit. As at 31 December
2023, the average overall credit quality of the portfolio remains
comfortably investment grade at BBB.
Outlook
The early part of 2024 has seen
corporate bonds and equities continue to rally on expectations for
rate cuts and the successful navigation of a ‘soft landing’.
Conversely, government bonds have sold off since the start of the
year, completely reversing the significant tightening seen in the
wake of December’s dovish pivot. The has come amidst concerns about
the pace of disinflation and the implication for the timing and
depth of cuts from the Fed, which have been heightened by the
release of two consecutive stronger than expected US CPI reports.
This has, however, done little to dampen investor enthusiasm for
risk and the technical backdrop in fixed income remains strong,
with all-in bond yields still screening favourably to other asset
classes. The general risk-on tone and supply/demand imbalance in
corporate bond markets has resulted in a significant tightening in
credit spreads. There is also a lot of capital currently invested
in money market funds which looks likely to make its way into
corporate bond funds once overnight interest rates reduce,
providing an additional tailwind which should keep credit spreads
anchored. It is in such market conditions, when corporate bond
spreads are looking expensive, that our flexibility in being able
to invest across a diverse range of alternative asset classes and
private credit has the potential to offer an attractive return
premium to public markets.
Given the positive mood music, the
first few months of the year have seen a deluge of new issuance as
companies look to lock in financing costs which are the lowest they
have been since mid-2022. We’ve previously highlighted the sizeable
debt maturity wall due in 2024, however this now looks less ominous
with refinancing risk reduced given how far spreads have moved and
indices of high-yield bonds and speculative-grade loans showing
signs of growing investor confidence. This has improved the outlook
for market liquidity and indicators of volatility have returned to
pre-pandemic levels. Despite the loosening in financial conditions,
debt burdens and refinancing schedules of issuers remain a key
component of our credit analysis process. Overall, we see the
general outlook for investment grade sterling credit as a positive
one, with recent upwardly revised UK economic growth forecasts and
the progress on disinflation providing an improved backdrop for
corporate fundamentals.
In a year full of electoral events
across the globe, both domestic and foreign politics are poised to
play a central role in financial markets in 2024. In the UK, a
general election is expected in the second half of the year and
recent events have shown how sensitive market participants can be
to surprises in fiscal policy. In the US, the outcome of November’s
election has the potential to cause ripples on a global scale
regarding issues such as trade, climate, and defence policy.
Geopolitical tensions are as heightened as they have been for
decades as the Russia-Ukraine war moves into its third year, whilst
the ongoing conflict between Israel and Hamas threatens to engulf
the Middle East. We have already seen the impact to commercial
shipping and should tensions between Palestinian backers and
Israel’s Western allies spill over further, the threat to global
trade and oil prices could significantly impact an already
precariously positioned global economy.
At current spread levels we
continue to favour moving up in credit quality when investing in
public markets. In addition, where opportunities permit we will
look to sell existing public bond holdings, realising capital gains
and reinvesting proceeds into new private investments. This
rotation into higher yielding private assets with stronger
structural protections would further improve the credit quality of
the portfolio. Pricing in private credit markets remains
competitive and we are happy to remain disciplined in adding assets
into the portfolio only where we feel we are compensated
appropriately for the level of risk taken. In such a well bid
market, M&G’s track record and scale is a competitive advantage
that allows us to negotiate attractive terms and security packages
with borrowers. We also have the experience and expertise to
provide bespoke solutions in response to borrower requirements,
with the added complexity of such deals allowing us to attract a
higher return premium. We have entered the year with the portfolio
cautiously positioned, with access to a £25 million credit facility
and a further £10 million invested in a AAA-rated, daily dealing
ABS fund, ready to be reallocated should market volatility present
us with attractive opportunities.
M&G
Alternatives
Investment
Management
Limited
27 March 2024
Portfolio
analysis
Top 20 holdings
|
Percentage of
portfolio
of
investmentsa
|
|
As at 31
December
|
2023
|
2022
|
|
|
|
M&G European Loan
Fund
|
11.48
|
11.73
|
M&G Senior Asset Backed Credit
Fund
|
4.89
|
-
|
Delamare Finance FRN 1.279% 19 Feb
2029
|
1.76
|
1.65
|
M&G Lion Credit Opportunity
Fund IV
|
1.57
|
-
|
Hammond Var. Rate 28 Oct
2025
|
1.42
|
1.37
|
Millshaw SAMS No. 1 Var. Rate 15
Jun 2054
|
1.33
|
1.40
|
Atlas 2020 1 Trust Var. Rate 30 Sep
2050
|
1.32
|
1.34
|
Signet Excipients Var. Rate 20 Oct
2025
|
1.29
|
1.25
|
RIN II FRN 1.778% 10 Sep
2030
|
1.27
|
1.45
|
Regenter Myatt Field North Var.
Rate 31 Mar 2036
|
1.23
|
1.27
|
Grover Group Var. Rate 30 Aug
2027
|
1.21
|
-
|
Gongga 5.6849% 2 Aug
2025
|
1.17
|
1.19
|
Income Contingent Student Loans 1
2002-2006 FRN 2.76% 24 Jul 2056
|
1.17
|
1.09
|
Aria International Var. Rate 23 Jun
2025
|
1.16
|
-
|
Citibank FRN 0.01% 25 Dec
2029
|
1.15
|
1.17
|
STCHB 7 A Var. Rate 25 Apr
2031
|
1.15
|
1.20
|
Finance for Residential Social
Housing 8.569% 04 Oct 2058
|
1.13
|
1.13
|
Whistler Finco 1% 30 Nov
2028
|
1.12
|
-
|
Project Grey 1% 30 Apr
2025
|
1.11
|
-
|
DCC Treasury 2014 Limited 1% 21 May
2024
|
1.03
|
-
|
Total
|
38.96
|
|
|
|
|
|
a
Including cash on deposit and
derivatives.
Source: State Street
Geographical
exposure
Percentage of
portfolio of investments
as at 31 December
2023 (2022)*
|
Percentage of
portfolio of investments
|
United Kingdom
|
53.60% (54.44%)
|
Europe
|
35.55% (30.61%)
|
United States
|
6.31% (8.46%)
|
Global
|
2.28% (2.36%)
|
Australasia
|
2.26% (4.13%)
|
|
|
|
|
|
|
*
Excluding cash on deposit and
derivatives.
Source: M&G and State
Street
Portfolio
overview
As at 31
December
|
2023
%
|
2022
%
|
Cash on
deposit
|
0.90
|
0.36
|
Public
|
45.59
|
42.01
|
Asset-backed securities
|
17.50
|
15.34
|
Bonds
|
23.20
|
26.67
|
Investment funds
|
4.89
|
-
|
Private
|
53.80
|
57.01
|
Asset-backed securities
|
5.08
|
5.22
|
Bonds
|
2.35
|
2.30
|
Investment funds
|
13.05
|
11.73
|
Loans
|
18.89
|
22.62
|
Private placements
|
2.28
|
2.14
|
Other
|
12.15
|
13.00
|
Derivatives
|
(0.29)
|
0.62
|
Debt derivatives
|
(0.33)
|
0.72
|
Forwards
|
0.04
|
(0.10)
|
Total
|
100.00
|
100.00
|
|
|
|
|
|
|
Source: State Street
Credit rating
breakdown
As at 31
December
|
2023
%
|
2022
%
|
Unrated
|
(0.29)
|
0.62
|
Cash and investment
grade
|
81.48
|
75.90
|
Sub-investment grade
|
18.81
|
23.48
|
Total
|
100.00
|
100.00
|
Source: State Street.
For the detailed breakdown of the
credit ratings of the investment portfolio, please refer to page
101 of the full Annual Report and Accounts in note 13 to the
Financial Statements.
Top 20 holdings
%
as at 31 December
2023
|
Company
description
|
M&G European
Loan Fund
11.48%
|
Open-ended fund managed by M&G
which invests in leveraged loans issued by, generally, substantial
private companies located in the UK and Continental Europe. The
fund’s objective is to create attractive levels of current income
for investors while maintaining relatively low volatility of NAV.
(Private)
|
M&G Senior
Asset Backed Credit Fund
4.89%
|
Open-ended fund managed by M&G
investing in a diversified pool of investment grade ABS. In usual
market conditions, the fund will invest predominantly in senior
traches of ABS, with 80% expected to be of a credit rating of at
least AA– or higher. The latest average credit rating of the
underlying portfolio is AAA. The daily dealing fund is used by the
Investment Manager as an alternative to holding cash.
(Public)
|
Delamare Finance
FRN 1.279% 19 Feb 2029
1.76%
|
Floating-rate, senior tranche of a
CMBS secured by the sale and leaseback of 33 Tesco superstores and
2 distribution centres. (Public)
|
M&G Lion
Credit Opportunity Fund IV
1.57%
|
Open-ended fund managed by M&G
which invests primarily in high grade European ABS with on average
AA risk. The fund seeks to find value in credits which offer an
attractive structure or price for their risk profile.
(Private)
|
Hammond Var. Rate
28 Oct 2025
1.42%
|
Secured, bilateral real estate
development loan backed by a combined portfolio of 2 office assets
leased to an underlying roster of global corporate tenants.
(Private)
|
Millshaw SAMS No.
1 Var. Rate 15 Jun 2054
1.33%
|
Floating-rate, single tranche of an
RMBS backed by shared-appreciation mortgages. (Public)
|
Atlas 2020 1
Trust Var. Rate 30 Sep 2050
1.32%
|
Floating-rate, senior tranche of a
bilateral RMBS transaction backed by a pool of Australian equity
release mortgages. (Private)
|
Signet Excipients
Var. Rate 20 Oct 2025
1.29%
|
Fixed-rate loan
secured against 2 large commercial premises in London, currently
leased to 2 FTSE listed UK corporations. (Public)
|
RIN II FRN 1.778%
10 Sep 2030
1.27%
|
Mixed CLO (AAA). Consists primarily
of senior secured infrastructure finance loans managed by RREEF
America L.L.C. (Public)
|
Regenter Myatt
Field North Var. Rate 31 Mar 2036
1.23%
|
PFI (Private
Finance Initiative) floating-rate, amortising term loan relating to
the already completed refurbishment and ongoing maintenance of
residential dwellings and communal infrastructure in the London
borough of Lambeth. (Private)
|
Grover Group Var.
Rate 30 Aug 2027
1.21%
|
Floating-rate,
senior tranche of a securitisation of receivables originated by a
leading European technology subscription platform.
(Private)
|
Gongga 5.6849% 2
Aug 2025
1.17%
|
Structured Credit
trade by Standard Chartered referencing a US$2bn portfolio of loans
to companies domiciled in 36 countries. (Private)
|
Income
Contingent Student Loans 1 2002-2006 FRN 2.76% 24 Jul 2056
1.17%
|
Floating-rate,
mezzanine tranche of a portfolio comprised of income- contingent
repayment student loans originally advanced by the UK Secretary of
State for Education. (Public)
|
|
|
Aria
International Var. Rate 23 Jun 2025
1.16%
|
Floating-rate,
senior tranche of a securitisation of invoice receivables
originated by a specialist digital recruitment platform.
(Private)
|
Citibank FRN 0.01% 25 Dec 2029
1.15%
|
Floating-rate,
mezzanine tranche of a regulatory capital transaction backed by a
portfolio of loans to large global corporates, predominantly in
North America. (Private)
|
STCHB 7 A Var.
Rate 25 Apr 2031
1.15%
|
Floating-rate,
mezzanine tranche in a regulated capital securitisation where the
portfolio consists of 36 loans, secured on the undrawn Limited
Partner (LP) investor capital commitments. (Private)
|
Finance
for Residential Social Housing 8.569% 04 Oct 2058
1.13%
|
High grade
(AA/Aa3), fixed-rate bond backed by cash flows from housing
association loans. (Public)
|
Whistler Finco 1%
30 Nov 2028
1.12%
|
Floating-rate,
senior secured term loan lending to an outdoor media infrastructure
owner which invests and manages a large billboard portfolio in the
UK, Netherlands, Spain, Ireland and Germany. (Private)
|
Project
Grey 1% 30 Apr 2025
1.11%
|
Floating-rate, senior secured
position in a bilateral real estate loan to fund the acquisition
and refurbishment of an office block in the London CBD.
(Private)
|
DCC
Treasury 2014 Limited 1% 21 May 2024
1.03%
|
Fixed coupon, private placement
note. DCC is Ireland’s largest publicly traded business support
services company. It operates across four divisions: LPG, Retail
& Oil, Technology and Healthcare, in 20 countries.
(Private)
|
Annual General
Meeting
The Company's Annual
General Meeting will be held at the offices of M&G Alternatives
Investment Management Limited, 10 Fenchurch Avenue, London EC3M 5AG
at 10:00 am on Tuesday, 21 May 2024. The formal Notice of AGM can
be found within the Annual Report.
Further
Information
The full Annual
Report and Accounts can be obtained from the Company's website
at www.mandg.co.uk/creditincomeinvestmenttrust
or by contacting
the Company Secretary at
mandgcredit@linkgroup.co.uk.
A
copy of the Annual Report and Accounts will be submitted shortly to
the National Storage Mechanism ("NSM") and will be available for
inspection at the NSM, which is situated at: https://data.fca.org.uk/#/nsm/nationalstoragemechanism, in
accordance with DTR 6.3.5(1A) of the Financial Conduct Authority's
Disclosure Guidance and Transparency Rules.
ENDS
Neither the contents
of the Company's website nor the contents of any website accessible
from hyperlinks on this announcement (or any other website) is
incorporated into, or forms part of, this announcement.