Toro Limited Brexit Impact on Toro Limited (3978C)
27 Juin 2016 - 6:00PM
UK Regulatory
TIDMTORO
RNS Number : 3978C
Toro Limited
27 June 2016
Toro Limited
27 June 2016
Brexit impact on Toro Limited
The Portfolio Manager would like to share their first thoughts
with Toro Limited ("Toro" or the "Company") investors as to the
impact of the "Brexit" vote on the European ABS market and
performance of the Toro portfolio, as well as the potential
consequences of Brexit on the strategy.
Initial impact on the European ABS market and Toro
performance
Following an initial sharp sell-off in risky assets, the
European credit market rebounded as Friday morning progressed
(iTraxx Xover retraced 50bps from the intra-day wide levels of
450bps). The European ABS market was rather calm and orderly with
decent buying inquiries across the spectrum initially and no forced
sellers in sight. Indeed, bottom fishers emerged and bids across
the stack improved to clear on the following levels: UK
non-conforming senior RMBS at a discount margin of 210bps (+50bps),
BBB CLO 2.0 tranches traded at a discount margin of 475bps (+75bps)
and Spanish high beta senior RMBS at a discount margin of 475bps
(+100bps) just to name a few.
Therefore, benchmarking Toro's positions to these levels and
extrapolating for other sectors, we would expect the Company's
exposure to Public ABS to be marked down by 3% (gross estimate
subject to revisions). Public ABS represented 61.7% of the NAV as
at 31 May 2016.
On the Private Asset Backed Finance strategy, exposure to CLO
warehouse will also be marginally marked down although offers on
leveraged loans in performing high quality credits remained at or
above par as there were few forced sellers and ample cash positions
within recently printed CLOs.
Toro's large cash position (22%), low leverage ratio (78%) and
hedging policy reflected a defensive positioning that we have been
advocating for months, ahead of this binary event. Such mitigating
factors are likely to offset the mark-to-market losses and Toro's
NAV is expected to be marginally down month-to-date (-1% to
0%).
Consequences of Brexit on the strategy
Clearly, the capacity of the Portfolio Manager to assess the
impact of Brexit is limited until a post-Brexit trajectory is
agreed by the UK and the EU or at least proposed by the incoming
Prime Minister. There is a lot of uncertainty ahead, but also some
offsetting factors such as policy responses from central banks and
political bodies in the UK and abroad that would dampen expected
market volatility.
Brexit is likely to harm the UK economy first as both
investments and consumption wane. A mild recession could be
accompanied by falling real estate prices, increasing arrears and
default rates affecting directly UK consumer ABS transactions.
Exposure to UK assets in Toro (especially non-conforming and
buy-to-let RMBS) was reduced significantly in Q1 2016. The
Portfolio Manager has stress tested the remaining 6.5% of UK RMBS
exposure and expects no losses under such a scenario. Indirect
exposure to UK corporate through the CLOs is 2.2% and benefits from
limited exposure to domestic consumer risk.
The overall European economy is also expected to be impacted
and, although the current short term outlook remains benign and
technically supported by the ECB's accommodative stance, the UK
referendum could trigger further political instability in the EU.
Therefore, the Portfolio Manager expects to continue to manage
actively tail risk hedges. Both mortgage loan origination in Europe
and Leveraged loans CLO formation are also likely to slowdown,
potentially delaying the implementation of the origination
strategy.
The increase degree of risk aversion in the market is also
likely to last, as uncertainty from a Brexit should remain in place
for an extended period of time given the complexity and duration of
the process. A calm and opportunistic approach to investment, made
possible by Toro's capital structure, should create better entry
points both on liquid and illiquid assets as markets adjust to the
new reality.
Enquiries:
Kirstie McLaren
Chenavari Investment Managers
Email: tlir@chenavari.com
Telephone: +44 207 259 3600
This information is provided by RNS
The company news service from the London Stock Exchange
END
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June 27, 2016 12:00 ET (16:00 GMT)
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