2024 Interim Results

LEI: 549300E9W63X1E5A3N24

M&G Credit Income Investment Trust plc

Half Year Report and unaudited Condensed Financial Statements

for the six months ended 30 June 2024

The full version of the Half Year Report and unaudited Condensed Financial Statements can be obtained from the following website: www.mandg.co.uk/creditincomeinvestmenttrust

Chairman’s statement

Performance

I am pleased to report that your Company delivered a NAV total return of 4.59% for the six months to 30 June 2024. This was broadly in line with the benchmark of SONIA plus 4% (return of 4.69%) and compared favourably not only to the performance of investment grade fixed income indices such as the ICE BofA Sterling Corporate and Collateralized Index (-0.01%) and the ICE BofA 1-3 Year BBB Sterling Corporate & Collateralized Index (+2.40%), but also to high yield indices such the ICE BofA European Currency Non-Financial High Yield 2% Constrained Index (+3.03%).

Financial markets entered 2024 anticipating an aggressive path of interest rate cuts from central banks. However, economic data released during the period proved inconsistent with these expectations. The unravelling of the dovish pivot which had fuelled the late rally in 2023 actually saw all-in bond yields climb higher over the first half of 2024 with interest rate markets remaining vulnerable to data-driven volatility. That said, credit markets performed well, as spreads continued to tighten supported by a strong demand for the asset class. This scenario benefitted your Company’s portfolio, with returns driven by positive spread performance and earned income and protected by our strategy of hedging against interest rate sensitivity.

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. I am delighted to say that, although the Company’s Ordinary Share price traded at an average discount of 2.3% during the half year, there were extended periods during which the shares traded at a premium. The Company was able to undertake numerous share issuances without the need for buybacks, with 1,325,000 shares sold from treasury over the half year. These issuances help to improve liquidity in your Company’s shares as well as reducing the ongoing charges ratio.

On 30 June 2024 the Ordinary Share price was 97.0p, representing a 0.8% premium to NAV as at that date.

Dividends

Your Company is currently paying four, quarterly interim dividends at an annual rate of SONIA plus 4%, calculated by reference to the adjusted opening NAV as at 1 January 2024. The Company paid a dividend of 2.15p per Ordinary Share in respect of each quarter to 31 March 2024 and 30 June 2024. The Company’s shares offer a yield (based on share price at the time of writing) of 8.8%. 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

In public bond markets there has been a divergent performance between interest rates and credit spreads in the first half of the year. While interest rates have notably widened over the period, credit spreads have closed to historically tight levels which has helped to drive positive NAV performance. The current macroeconomic environment remains supportive for investment grade credit which is constructive for your Company’s portfolio. The pipeline of private asset opportunities looks healthy and our Investment Manager is negotiating on a number of new facilities which it hopes to transact in the coming months.

Your Company’s portfolio (including irrevocable commitments) is now 55% invested in private assets, with additional investments of approximately 10% in illiquid publicly listed assets which are intended to be held to maturity. The Investment Manager will continue to deploy capital into both public and private areas of the fixed income market, depending on where it sees the most attractive relative value. The currently undrawn £25 million credit facility together with an additional £10 million which is invested in a liquid, high grade ABS fund (held in lieu of cash) is available to take advantage of opportunities as they occur.

Since the period end, the Company has issued an additional 700,000 shares from treasury.

Your board believes that the Company remains well positioned to achieve its return and dividend objectives, as set out above in the section entitled ‘Dividends’.  

David Simpson

Chairman

17 September 2024

Financial highlights

Key data

Return and dividends per Ordinary Share

a Alternative performance measure. Please see pages 33 to 34 in the full Half Year Report for further information.

b The total dividends declared in respect of each period 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 approach since the start of the financial year. In particular we discuss the performance and composition of the portfolio.

The first half of 2024 saw further declines in inflation across most major economies, however during the first quarter progress was slower than expected. The wave of market exuberance which carried investors into the year was broken by a series of strong economic data releases, which suggested the assumptions for interest rate cuts underpinning December’s dovish pivot were incompatible with the inflation mandate of policymakers. Robust economic growth in the US showed little signs of abating and prompted a dramatic repricing of global interest rates. At the start of the year financial markets had anticipated six rate cuts from the US Federal Reserve (Fed), whilst the quarter closed with only two cuts fully priced in. As a result, sovereign bond yields climbed significantly higher, although this did little to dampen investor appetite for risk. The technical backdrop in fixed income remained strong, as all-in bond yields screened favourably to other asset classes and the continued supply/demand imbalance in corporate bond markets resulted in a significant tightening in credit spreads. Into this strength we sold down bonds where credit spreads had tightened significantly from where they were purchased to levels where, in our opinion, they looked expensive. These included some of our remaining European REIT exposure, dollar denominated blue chips and European energy hybrids. We reduced risk in the portfolio by redeploying proceeds into ABS funds of AAA and AA-rated credit quality which offered comparable returns to parts of the BBB-rated Euro and Sterling credit markets. During this time the portfolio performed well. By hedging interest rate risk and maintaining low duration we were able to negate the effect of rising risk-free rates on portfolio returns, allowing us to capture positive credit spread performance.

The second quarter of the year got off to a shaky start as US CPI for March showed a third straight month of higher-than-expected inflation which pushed back the probability of rate cuts from the Fed as well as other central banks. April saw a softening in investment grade credit spreads driven by an escalation in geopolitical tensions in the Middle East, higher for longer rate concerns and the first real signs of indigestion from the high volume of new issuance. Economic data released in May and June evidenced slowing US inflation and a cooling labour market which lent support to Fed rate cuts. In the UK, headline CPI also notably fell to 2.0% year-on-year in May, returning to the Bank of England’s inflation target for the first time since July 2021. The ECB became the first major central bank to deliver an initial interest rate cut but warned against the expectation that this would be the beginning of a sustained easing cycle. Amidst the more sanguine backdrop for policy easing, central bankers struck a hawkish tone, emphasising a cautious approach to cutting interest rates would be adopted and accordingly, market pricing shifted to predict a shallower path for rates ahead. Whilst geopolitical tensions arising from the ongoing conflicts in Ukraine and the Middle East remained a lingering concern during the period, it was political events closer to home in Europe, which had the greater bearing on financial markets. Major gains by far-right parties in the European parliamentary elections also saw Marine Le Pen’s National Rally party dominate the French polls, prompting the surprise decision by French President Macron to call a snap legislative election. The raised spectre of future disruption to the Euro-market status quo spooked financial markets and led to a sizeable bond and equity sell-off across Europe with France at the epicentre. During the second quarter, we added bonds selectively, continuing to favour the up-in-quality trade and in particular the additional return that could be earned by rotating from BBB corporate bonds into A-rated CLO tranches. As part of this rotation, we sold down banking and insurance paper that had tightened significantly since initial purchase. We also sold our remaining exposure from defaulted issuer Intu at a level in line with book value. A notable pick up in private market activity saw us take additional exposure to existing issuers in the portfolio whilst also lending to new borrowers in niche sectors, which provided a nice diversification benefit.

The funded private asset portion of the portfolio increased over the period to 54.7% (versus 53.8% at 31 December 2023), as the improved pipeline of private opportunities saw new facilities outweigh repayments. We actively monitor the portfolio for signs of distress and currently have exposure to two issuers amounting to 0.99% of the latest published NAV, which are either in technical default or at some stage of a restructuring process. These positions are already marked-to-market or otherwise reserved against in respect of non-public markets instruments in your Company’s latest published NAV. The increase in exposure since the end of the last financial year (0.60%) is due to the addition of two private assets (from the same issuer) being downgraded and which at this stage look likely to be impaired.  

Outlook

We remain positive on the outlook for investment grade credit, and given its yield benefits and defensive characteristics, it is, in our opinion, an attractive asset class to be invested in at this point in the economic cycle. In fact, contained within the short episode seen in early August was a rather compelling endorsement of credit markets, as the small move wider in spreads remained relatively contained despite wider market tumult. The technical backdrop in fixed income remains strong, with all-in bond yields still screening favourably to other asset classes and the supply/demand imbalance in corporate bond markets keeping credit spreads well anchored. Although credit spreads in public bond markets remain at historically tight levels, our flexibility in being able to invest across a diverse range of alternative asset classes and private credit can help continue to deliver a particularly attractive return premium to public markets. We are currently seeing a strong pipeline of private investment opportunities, a number of which are moving through to late stage and which we hope to hope to transact on in the coming months. 

Current market pricing is implying approximately five interest rate cuts by June 2025 which would take the Bank of England base rate (tracked by SONIA) to 3.7%. Even if this does transpire, the Company’s SONIA +4% dividend target would remain in the high single digits for the foreseeable future. We believe this is an attractive return for a strongly diversified portfolio with an average credit rating profile of BBB (considered firmly investment grade). Indeed, on a year-to-date basis to the end of August, the NAV total return (+5.9%) has outperformed the ICE BofA European Currency Non-Financial High Yield 2% Constrained Index (+5.8%) whilst carrying inherently less volatility and risk.

M&G Alternatives Investment Management Limited

17 September 2024

Portfolio analysis

Top 20 holdings

a Including cash on deposit and derivatives.

Source: State Street

Geographical exposure

a Excluding cash on deposit and derivatives.

Source: M&G and State Street

Portfolio overview