Results analysis: NB Global Monthly Income

• NB Global Monthly Income (NBMI) has reported half-year results for the period ending 30 June, during which time it delivered a 4.7% NAV total return per share and a 9.9% share price total return. The discount on the shares to NAV narrowed from 13.1% to 9.2% as of 30/06/2021, and has since narrowed further to 6.4% as of 13/09/2021.
  
  
• NBMI paid monthly dividends in line with the amount fixed by the board at the start of the year. Six payments of £0.0039 were more than covered by interest income received from the portfolio. On the 13/09/2021 share price, the dividend yield is 5.2%.
  
  
• NBMI has a highly flexible mandate, allowing it to allocate across public and private debt markets. During the period, the exposure to floating rate loans fell markedly, with the managers rotating into private debt and CLOs, as well as global high yield bonds. However, the exposure to floating rate assets remains high, at 66%, and the portfolio’s duration is low at 1.05 years.
  
  
• The managers also increased the exposure to lower rated issuers during the period, with the allocation to CCC and below rated names rising to 28.6% from 23.1% at the end of December.
  
  
• The chairman comments that the board expects the reduction of accommodative monetary policy in the remainder of the years, and that this will produce, “A favourable environment for much lower duration, higher yielding fixed income sectors such as non-investment grade credit, especially as the majority of issuers continue to report better-than-expected operating results, have been able to refinance at lower yields and have ample liquidity on balance sheets.”

Kepler View

NB Global Monthly Income (NBMI) has reported solid half-year results. The success of the new strategy in generating a higher income and positive NAV returns has been rewarded by a narrower discount. NBMI offers a high yield, paid monthly from a portfolio split between conventional and alternative credit. The management team benefit from access to Neuberger Berman’s extensive resources in US and global fixed income, which includes a private debt team and thereby offers a broad investor base access to sectors typically restricted to institutional investors.

The highly flexible mandate was implemented in September 2020. Some indication of the benefits can be seen in the high gross portfolio yield of 6.2% as of 30/06/2021, up substantially from the 4.6% of one year earlier, under the previous, floating rate loan mandate. The portfolio has also generated positive price returns which have been felt in a rising NAV. The previous mandate was largely restricted to loans, which limited the scope for capital uplift.

It is positive to see the allocations to alternative credit – private credit and CLOs – rising over the period, as these are the areas which really set NBMI apart from most of the options available to the UK mass market. Both areas should be able to offer higher yields thanks to the complexity involved in analysing, pricing and implementing a deal, as well as the illiquidity of the assets.

A crucial exposure for NBMI is credit risk. The managers invest in high yield bonds, and are willing to invest in the lowest rated bonds if they believe the risk-adjusted returns are good enough. Along with the potential for higher yield, this brings exposure to the business cycle. We note the managers are optimistic on the near future, and state that they would view any volatility as monetary policy is tightened as an opportunity to buy attractive credits. The high exposure to floating rate instruments – 66% as of 30/06/2021 – will limit the trust’s exposure to interest rate hikes, or expectations of them being felt in the market. We therefore believe that in a benign hiking cycle, in which rate rises are being used to throttle back demand for credit as the economy grows fast, NBMI is poised to do particularly well.

While the discount narrowing is positive for existing shareholders, we note that there is also a 20% tender offer due in June 2022 and each year thereafter, with the board stating it will call a meeting to discuss the wind up of the company if net assets fall below £150m from the end of 2022. This means there is an unusual amount of support for the discount on the downside, and should mean investors can invest with a good degree of confidence that a widening discount is limited in how much damage it can do and they will be able to exit if demand for the shares slumps.

In our view NBMI is an attractive source of high yield for income-seekers which offers valuable diversification into hard-to-access sectors. It does bring with it credit risk as well as the risks of investing in specialist, more illiquid markets, but the team is exceptionally well resourced to manage those risks.

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