Victory Park Capital Specialty Lending (VSL) has updated the valuation of its portfolio to reflect the likelihood of a “severe and sustained recession similar to the 2008 financial crisis.”
A first-quarter update from the alternative finance-focused investment trust highlighted that it has not yet sustained any permanent losses of capital and all interest payments are being met, but it is remaining cautious.
It has increased its expected credit losses on balance sheet investments by 2.55 per cent to 4.33 per cent of its balance sheet portfolio.
“Given the high levels of credit support we have in the portfolio, historically in most cases we have not carried a loss reserve against most performing positions as the structural protections would be expected to absorb any foreseeable losses, even in times of stress,” VSL said.
“Given the current circumstances and ensuing uncertainty over what the next 12 months might look like, we have revised our modelling assumptions to reflect a 100 per cent likelihood of a stress scenario, which assumes a significant level of incremental stress beyond the amounts witnessed thus far and comparable to loss rates on similar asset performance during the 2008 financial crisis.
“Our updated reserves reflect the possibility that some of these portfolio companies may default in the future under such adverse scenarios, hopefully this is not the case, and there is some probability we may not fully recover on the investment.”
The investment trust has stopped new lending for now so it can build up more cash and said its portfolio companies are focusing on supporting borrowers, where between two and 12 per cent of its consumer portfolio have asked for payment relief.
VSL said this represents a decrease in the credit quality of the portfolios but added that current trend levels suggest a less severe impact than many predicted.
It reported that its net asset value (NAV) was down 2.62 per cent for the quarter.
Read more: VPC Specialty Lending posts record returns
“While we will never be happy with a negative NAV return during a quarter, given the circumstances of the past two months we feel our conservative approach to credit makes our portfolio reasonably resilient to the extreme economic shock caused by the COVID-19 crisis,” VSL said.
“We view our updated expectations of credit losses to be conservative and we do not expect them to be recurring in this magnitude, although we will continue to update them based on new information and data we receive over time.
“Our revenue meanwhile has remained strong as our portfolio companies continue to make timely interest payments. As cash builds in the portfolio from de-risking we expect to be able to reinvest at very attractive risk adjusted yields.”
Analysts at Numis said VSL was showing a positive tone.
“We do not expect a wholesale shift in sentiment towards the fund until there is better clarity on the economic outlook, but we believe that if it can continue to deliver reasonable performance from the portfolio that it continues to offer value,” a Numis analyst note said.