Annual Financial Report

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

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

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