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 end of period haircuts for common and C shares were 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 subject by clicking on here, and a valuation update story that we posted last November by clicking here.
Market Context – “ We expect coupon the obligations to be put under pressure and the tolerance to be the watchword
for the next 9 to 12 months ”
The head of KKVL noted the following in his review: “Very volatile pricing of all assets across the risk spectrum and intermittent volatility surges have been facets of all fixed income sectors during the review period. All fixed income products fell sharply from March, which was particularly bad for high yielding assets, even though the US Treasury obligations were briefly affected by a liquidity press. Since the introduction of emergency market support programs from 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’ recovery as companies began to emerge from hibernation. forced. Our assessment has been more cautious and despite the tightening of spreads during the summer months for investment grade credits, with companies strengthening their balance sheets with additional borrowings, we have focused particularly on data relating to investment grade credits. SME performance products and securitized products such as secured loan bonds (CLOs) and lower quality sub-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 credit criteria for loans from these banks has a second derivative effect of weakening capital adequacy and we expect that once market conditions start to normalize, lending patterns will revert to more conventional levels, allowing alternative lenders to pick up the torch .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 those who lost their jobs during the recession between June 2008 and June 2009 was 3.5 million. 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 it to impact consumption and consumer confidence. For lenders and borrowers alike, the surest route to normalization is to keep sustainable businesses alive with support and tolerance, including term extensions and interest or amortization “Public holidays”, to allow them to resume their commercial activities and repay their loans as quickly as possible. Where we have identified a specific COVID-19 impact is the approach we have taken in all of our portfolios and has been relevant to KKVL / X since our appointment in June 2020. ”
“ 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">advice 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 had asked the manager to end all new underwriting commitments from June 2020. We have also reviewed costs in recent months and have taken steps to reduce current expenses in the past. ‘to come up. Market conditions have been and continue to be very difficult.When I last wrote to you in early April 2020, the UK was on lockdown 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 heartwarming to see the 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 dialogue with borrowers face to face and worsened 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 persistent risks for our borrowers.
KKVL: KKV Secured Loan Says Toughest Times May Be Yet To Come For Its Borrowers