Chenavari Toro Income Fund Limited (TORO.L) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. I'm glad to welcome you to the quarterly update of the Chenavari Toro Income Fund for Q2 2024. Firstly, I'd like to invite you to open our supporting slides, which are available on the company's website at www.chenavaritoroincomefund.com in the report section. The agenda for today's call is to provide an update on strategy and prospective returns to investors. I'd like to remind you that today's call is prerecorded and to that end, there will be no Q&A at the end. However, if you do have any questions, please do not hesitate to contact our Investor Relations team on [email protected], and we'll be more than happy to assist you. Before we start, as a matter of housekeeping, I'll read the following compliance statement. Certain statements made during this conference call may be forward-looking statements or projections and therefore, are subject to a variety of risks and uncertainties that could cause the company's actual results to differ from its expectations, estimates and projections. Consequently, you should not rely on these forward-looking statements as predictions of future events cannot be relied upon and when making investment decisions. Statements made during this conference call are made as at the 30th of June 2024, and the company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Let me hand over to Fred for an update on the performance of the Chenavari Toro Income Fund in the second quarter of 2024. Thank you, Fred.

Thank you, Ella, and thanks, everyone, for attending the call. I hope you are fine, and I'm glad to be with you for this quarterly update of the Chenavari Toro Income Fund. The purpose of this presentation is to update shareholders on the performance of the company in the second quarter and on its strategy and outlook for the foreseeable future. If we start with the presentation on Slide 2 and 3, to give you an update on Chenavari and also remind existing and prospective shareholder of our meaningful experience and excellent track record investing in ABS and CLO as well as managing CLOs. The Chenavari Toro Income Fund is our vehicle to capitalize on that experience and track record. Moving to Slide 4. We have defined 3 key pillars for the fund, a clear investment strategy, attractive return targets and maximizing shareholder value. So the purpose of this call is also to update the shareholder on each of these points. So let's start with the investment strategy. If you can move to Slide 5. So our investment strategy is to invest in European asset-backed securities and CLO across the capital structure. On that slide, we've slightly modified the labeling and bucketing of a different strategy to make it easier to understand for investors. So the ABS/CLO risk retention represent a direct origination without spreads, and now we have displayed spreads separately. So on that Slide 5, you can see that we have 49.7% of our allocation is to ABS/CLO risk retention and then 31.6% to Public ABS and CLO and finally, 11.6% in cash. As you can see from the allocation number, ABS/CLO risk retention is our largest investment strategy, followed by Public ABS and CLO, and we continue to reduce the exposure to spreads, which is now 7.2% of NAV. So as mentioned previously, we believe that the next 12 to 24 months will represent a very good investment opportunity for public ABS and CLO, and we have actually identified a number of them for the next quarter. And so we expect to continue to add to that strategy over the next few quarters. And so going forward, we will continue to invest in ABS/CLO's retention strategy and also in Public ABS and CLO while progressively exiting the exposure to SpRED.

Thanks, Fred. Could you provide an update on the performance this past quarter and the attribution across the various strategies?

Of course, if you move to Slide 6, you will see that the performance of the fund this quarter was 1.59%. That's a growth performance in the second quarter of 2024, and that this performance can be broken down as follows. So ABS/CLO's retention were almost unchanged, just up plus 0.09%. And so the bulk of the performance came from the Public ABS/CLO strategy, up 1.5% during the second quarter of 2024. Moving to Slide 7. You can see that the positive performance this quarter has brought the last 12 months net performance to 13.5%. That's above our annualized NAV return target. And during that time, we've continued to deliver on our enhanced dividend policy of 2.5% of NAV per quarter, which is leading to a last 12 months dividend yield on the share price of 13.2%. Moving to Slide 8 and 9. Slide 8 demonstrates the stability of the dividend yield for the past 3 years and also the magnitude of the cumulative distribution we have made since the IPO. On Slide 9, you can see that the company has outperformed both crossover and European High Yield since its exemption and also particularly for the last 3.5 years to reflect the post-COVID environment. On Slide 10, we give you the summary of the prospective growth returns by strategy in accordance with our base case assumption. So if we look at the invested portfolio, it's 9.9%. And then if we take into account the discount of the share price, we get to around 11.9%, showing that we are currently on track to continue to deliver on the second pillar of attractive return targets. If you want to look at the return -- the prospective returns in more detail, you can see from that slide that the ABS/CLO risk retention has a prospective IRR of 11.4%, while the ABS/CLO Strategy has a prospective IRR of 7.6%, both of those under our base case assumption. Yes, that's it.

Thanks, Fred. Can you give us a bit more detail on the CLO risk retention performance in the second quarter?

Of course. So during the second quarter, ABS/CLO's retention strategy paid a combined total of EUR 4.3 million, which on an annualized NAV basis is a return of 45% over the market value of the position. After exercising our early redemption option on TCLO 4 in Q1, we continue to derisk in Q2 and similarly exercised our early redemption option on Bosphorus IV. On Slide 11, you can see a good summary of the horizontal and vertical retention held in Taurus and the different metrics. So if we start with the performance of the underlying loans, you can see also looking at Slide 12 that the price have continued to recover -- the price of underlying loans have continued to recover during the second quarter. And for instance, the portfolio NAV in Taurus has gone up to 97.1%, which is close to the 97.3% of the investment universe. And interestingly also, if you remember, last quarter was very -- was full of idiosyncratic stories with Altice dropping [indiscernible]. And so Q2 was a bit different, much more quiet and much healthier in terms of credit environment. And so we can see that in the percentage of loans trading below EUR 0.85, which is kind of the loans that have potential credit difficulty, the ones that are trading 85%, while the percentage of loans trading below that price has declined from 5.4% to 4.6% during the quarter. So this is good news, right? It seems that there is less idiosyncratic at the bottom of the capital structure with these idiosyncratic issues. But on our side, we still have a base case of a first deterioration in credit quality in the next 12 to 24 months with a mix of rating downgrades and stabilization of the default rate between 2%, which is historical average; and 3.5%, which was high, witnessed at the end of 2023. We've mentioned that before, but the main risk for the strategy is an increase in the default risk. And so that's why we are very focused on that, monitoring it and taking any preventive action we can to control and manage and minimize that risk. Thanks to that preventive action, we can see that we have [indiscernible] cushion in the Most Junior Coverage test in our portfolio of retention equity. So that's on Slide 13. You can see that the Cushion over the Most Junior Trigger sits between 2.6% and 4.9% across the different TCLO and Bosphorus vintages. And so that buffer should allow us to continue to distribute healthy cash flow in the upcoming quarters.

Thanks for the update, Fred. And what about the Public AB/ CLO strategy? Can you provide an update on that, please?

Of course. So as I mentioned previously, Public ABS/CLO was the main performer of the fund during the second quarter, being positive 1.5% during the second quarter. And the main reason is tightening of credit spreads. So we can see that on Slide 14, and you can see that spreads have tightened further this quarter. For example, AAA closed 20 basis points tighter at 120 basis points, BBB closed 55 basis points tighter at 325 and BB closed 75 basis points tighter at 600. So this is a quite strong tightening during the quarter. And despite that, if we look at relative value versus the rest of the credit market, CLO still exhibits a very attractive risk premium. And so we do believe CLO spreads remain very attractive in the medium term. On Slide 16, we give you an update of our expected return under a simple base and stress scenario for both the exposures through ABS/CLO risk retention and Public ABS CLO. This is with our updated base case for default rate for leveraged loan of 3% and our updated stress case of a peak default rate of 6%. So under the scenario, the forecasted return are 11.4% for ABS/CLO risk retention strategy and 7.6% for the Public ABS CLO strategy. And then if you look at the stress scenario, the peak default rate of 6%, then the return of the Public ABS CLO drops to 5.1% and so still positive -- a bit lower, but still positive. And then only slightly negative for the ABS/CLO risk retention strategy under the stress at minus 0.5% prospective IRR. On Slide 17, we update you on the current risk profile of the exposure in Toro. So both through the ABS/CLO risk retention, that dotted black line and the Public ABS CLO, which is a dotted red line. And so both of them sits between single B in equity. So this is, again, a testimony that the Chenavari Toro Income Fund provides CLO equity-like return with better than generic CLO equity risk. On Slide 18, we update you on our ESG investment journey. As you know, we have a strong ESG investment process that we started a number of years ago. And our latest development, which has been ongoing for a while now is a development of an internal software application.

Thanks, Fred. Very clear on that update. And finally, can you comment on SpRED, the Spanish real estate?

Yes, of course. So on Slide 19 and 20, we update you on the situation on SpRED. First thing, importantly, the NAV is now only 7.2%. So we've continued to derisk on that front. As an example, during Q2, we distributed EUR 2 million to the fund, which is a percent of NAV. So if we look at Slide 19, you can see that we've sold 86% of the unit built since inception. So we're getting closer to having sold most of it. That's thanks to a pickup in activity again in the second quarter. After a good first quarter, this trend has continued. And so we have sold 8 flats and 6 parking space during Q2. And so we now have 33 flat left and 59 parking space left. More interestingly, in Barcelona, we only have 3 flat left to sell, and so we expect to be fully exited from the Barcelona exposure by the end of 2024. And so the main residual exposure is located in Girona. As you can see from Slide 19, we have 2 development there. And so one, we've already sold flat in it, and we have only 54% left to sell, which is 16 flat. And we are selling flat by flat and selling a few flat every quarter. So we should be able to be [ bring it ] out within the next 12 to 18 months. And then the second one, Girona-Bellmirall, we have 14 flat. We haven't sold any yet because we're trying to sell the building in bulk and maybe by the end of this year or next one. So for us, still to finalize the overall selling process within the next 12 to 18 months as per Slide 20 with a gross investment IRR projected to be 5% on the transaction -- gross investment IRR since inception, and this assumes an exit of the remaining units in the next 12 months with a price 10% below our current target sales price. So after successfully exiting the private asset-backed finance exposure in '22, we remain very focused and still remains a key priority for us to exit SpRED, which we believe should happen in the next 12 to 18 months.

And that was very interesting. So what about the third key pillar, maximizing shareholder value? Could you comment on that, please?

Yes. So to maximize shareholder value, we need to continue to deliver on the NAV performance target to pay the enhanced dividend and then lastly, but importantly, regarding shareholder -- maximizing shareholder value is monitor the evolution of the discount to NAV. So on Slide 21 and 22, we provide investors with an update on what has been happening to the discount to NAV. And so we can see that after a very strong reduction in the first quarter of 24, 'the discount has stabilized at the lower level, around 20%, 22%. And this kind of a reduction in Q1 and stabilization in Q2 has contributed to the very strong share price performance over the last 3 years. So this is good, but we still consider that the current discount to NAV is too elevated, and so we should try to capitalize on the recent strength to assess if there's anything we can do to further reduce the discount on top of our continuous focus on delivering performance, paying the dividend and actively marketing the strategy to investors.

Thanks very much, Fred. And we have some time for a conclusion. Is there anything you'd like to add?

Yes. So in conclusion, I want to stress that the positive performance this quarter brings the last 12 months net performance to 13.5%, which is above our 10% annualized return target. That under our revised default rate assumption, we believe the portfolio should continue to deliver positive returns, close to a return target of 10% of NAV in the base case and slightly positive in the stress case. We see in the current market, a very significant opportunity to invest in European ABS and CLO in the next few quarters. And as I mentioned earlier, we have identified several of them for Q3. So the cash that you see currently in the fund should be deployed in Q3 in attractive public ABS/CLO investments. And so that's why we still believe that the Chenavari Toro Income Fund represents an attractive investment opportunity in European ABS and CLO, including the attractive risk-adjusted return provided by the CLO retention and also the very interesting new strategy of theoretical risk retention financing. Let's not forget the dividend policy. We are paying a very nice 2.5% of NAV dividend every quarter, which given the discount to NAV, leads to a dividend yield of over 13% as of the 30th of June share price. One interesting slide information I always like investor to look at is on Slide 28, which is on the top left, the Q2 scenario IR sensitivity. And basically, here, it's showing our base case and stress case IRR. And according to what we call our portfolio discounts, of course, you can read that if you buy the share price at a discount, then you should get that either base or stress IRR. So if we look at a discount of 20%, right, so minus 20% means that the combination of the portfolio and the discount to NAV allow us to target a potential growth IRR between 10% and 21.3% between the stress and base case. Lastly, alignment of interest. As you all know, we have a large shareholding in the company, and we've kept increasing it since 2020. And so this ensures that we are fully aligned with these investors. And lastly, as I just mentioned before regarding maximizing shareholder value, we are always monitoring the discount. And if there's any action that we think can bring value, we will consider it.

Thanks very much, Fred, for this Q2 update. And that concludes our call today. I'd like to thank everyone for attending. And as mentioned at the beginning of our call, should you have any questions, please do not hesitate to contact our Investor Relations team on [email protected]. Thank you very much, and have a great summer ahead.

Thank you very much. Thank you, Ella, for doing this call. And thanks, everyone, for attending it. Thank you. Bye-bye.