28 March 2023

FOR IMMEDIATE RELEASE

RELEASED BY BNP PARIBAS S.A., JERSEY BRANCH FINAL RESULTS ANNOUNCEMENT

THE BOARD OF DIRECTORS OF CVC INCOME & GROWTH LIMITED ANNOUNCE FINAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2022

WHY INVEST in CVC CREDIT partners European opportunities?

Generating income and growing your capital

CVC Income & Growth Limited (the "Company") aims to provide shareholders with income and capital upside from a diversified portfolio of predominantly sub-investment grade European corporate debt instruments. The Company's investment policy is to invest predominantly in debt instruments issued by companies domiciled in, or with material operations in Western Europe across various industries.

CVC Credit Partners Investment Management Limited (the "Investment Vehicle Manager") has a strong track record in investing in these asset classes, which provides the Company's investors with an opportunity to benefit from rising interest rates through the largely floating rate nature of the underlying investments. The key features of the Company are its ability to provide attractive, risk-adjusted returns which include a reliable income stream, with the opportunity for enhancement of capital. The Company also offers investors additional liquidity opportunities through its share tender mechanism.

What we offer

The Investment Vehicle utilises leverage in executing its investment strategy. As at 31 December 2022, the Investment Vehicle's borrowings as a percentage of its NAV stood at 35.01% (31 December 2021: 30.29%).

¹ From inception to 31 December 2022.

² All amounts as at 31 December 2022. Commitment figure used for pooled-closed end funds and separately managed accounts in ramping phase. Includes warehouse and drawn leverage facility figures for certain investment vehicles managed by CVC Credit entities. Underlying figures not in U.S. Dollars are converted using a spot rate as at 31 December 2022. Includes managed funds, securitization vehicles, listed vehicles, separately managed accounts and CLOs managed by CVC Credit Partners Investment Management Limited, CVC Credit Partners LLC, CVC Credit Partners European Investment Fund Management Limited, CVC Credit Partners European CLO Management LLP and CVC Credit Partners U.S. CLO Management LLC, on a discretionary and non-discretionary basis.

³ All amounts as at 31 December 2022 for both CVC Capital and CVC Credit entities.

SUMMARY

Key performance indicators summary

As at 31 December 2022, the Company's Euro and Sterling NAV per share was €0.8902 and £0.9796, respectively, and Euro and Sterling share price (bid price)¹ was €0.8200 and £0.9200, respectively, representing a 7.88% discount and 6.08% discount to NAV. The Company's ongoing charges ratio increased to 1.78% for the year ended 31 December 2022 since year ended 31 December 2021 (ongoing charges for the year ended 31 December 2021: 1.61%²). The Company paid total dividends during the year of €0.05250 per Euro Share and £0.05250 per Sterling Share, increasing the Company's dividend from 5p per annum to 6p per annum with effect from the Company's Q3 2022 dividend.

Further information in respect of the Company's key performance indicators, some of which the Board considers to be its alternative performance measures ("APMs"), can be found in the Financial Highlights and Performance Summary section below, within the Executive Report below and within the Useful Information for Shareholders below.

Significant events during the year ended 31 December 2022

·      New Director appointments

·      Changes to the structure of the tender mechanism

·      Change to the frequency of the Company's share conversions

·      Change to the name of the Company

·      Changes to the Company's investment policy

·      Amendments to the Company's Articles of Association

·      Granting of share issuance authority to the Board

Refer below for further details regarding the significant events summarised above.

Purpose

The Company is an investment company, and its scope is restricted to that activity. In that context, the Company's purpose is to provide investors with sustainable long-term returns by investing in a diversified portfolio of principally European corporate debt. In fulfilling the Company's purpose, the Board seeks to consider the views of all stakeholders and is mindful of the impact that the Company has on the society in which it operates.

Investment objective, policy and strategy

The Company's investment objective is to provide shareholders with regular income returns and capital appreciation from a diversified portfolio of predominantly sub-investment grade European corporate debt instruments. The Company's investment policy is to invest predominantly in debt instruments issued by companies domiciled in, or with material operations in Western Europe across various industries. The Company's investments are focused on the senior secured obligations of such companies, but investments are also made across the capital structure of such companies. Refer below for the Company's full investment objective, policy and strategy.

Going concern and viability

The Directors consider it appropriate to adopt the going concern basis in preparing the financial statements and have a reasonable expectation that the Company will continue to be viable for a period of at least three years from the date of this report. Refer below for further details.

Investment Vehicle Manager's Report

Refer below for the Investment Vehicle Manager's Report.

Directors' remuneration, Directors' Report and Report of the Audit Committee

Vanessa Neill, a specialist consultant on sustainability, joined the Board on 11 January 2022.

Esther Gilbert, a consultant specialising in product development and process enhancement for asset managers and asset owners, joined the Board on 23 September 2022.

Following Vanessa Neill's appointment on 11 January 2022, Ms Neill will receive £42,500 per annum, being the same base fee as the other Directors, and a fee of £5,000 per annum as the Chair of the Company's ESG Committee, established on 24 January 2022.  Following Ms Gilbert's appointment on 23 September 2022, Ms Gilbert will receive £42,500 per annum, being the same base fee as the other Directors.

On 29 June 2022, the Directors approved one-off payments of £10,000 per Director and £15,000 for the Chair, at the recommendation of the Nomination & Remuneration Committee, for the Directors' additional work in conjunction with the Company's Strategic Review.

Other than one-off payments above, there has been no other changes to Directors' remuneration since 1 July 2015.

As a self-managed company, the Company requires substantial time commitment from the Directors. This was taken into account when determining the Directors' fixed remuneration.

Financial statements

The Company's full financial results can be found in the accompanying financial statements below.

¹ Source: Bloomberg

² The Company's ongoing charges are considered to be APMs which are calculated according to the methodology outlined below and differ to the ongoing costs disclosed within the Company's Key Information Documents ("KID") which follows the methodology prescribed by EU rules. For example, the ongoing costs disclosed in the Company's KID include interest expense and are based on average ongoing charges over the past three years whereas the ongoing charges ratio disclosed in this report does not include interest expense and is based on ongoing charges incurred during the year ended 2022 only. The Company's most current KID and an accompanying explanatory note reconciling the two different ratios are available on the Company's website (https://ig.cvc.com/key-information-documents/).

financial highlights and PERFORMANCE SUMMARY

For the year under review, the NAV total return of 11.41% (Euro) and 12.17% (Sterling) compared favourably with the Company's medium term average annualised total return target of +8%.

For further information on the Company's dividend history and total return metrics, please refer to the supplementary financial information section below.

¹ NAV total return measures how the NAV per Euro Share and Sterling Share has performed over a period of time, taking into account both capital returns and dividends paid to shareholders. This is a Key Performance Indicator ("KPI"), refer below for further details on how NAV total return is calculated.

² Dividend yield expresses the return that dividends represent as a percentage of the Company's share price. Refer below for further details on how dividend yield is calculated.

³ Dividend cover ratio calculated as the PEC income per share divided by the dividend per Euro and Sterling Share expressed as a ratio.

⁴ Dividend cover ratio calculated as the coupon income received by the Investment Vehicle for the Series 4 and 5 of Compartment A per share divided by the dividend per Euro and Sterling Share expressed as a ratio.

⁵ The Company's discount or premium is calculated by expressing the difference between the share price (bid price) and its NAV per share as a percentage of its NAV per share. This is a KPI, refer below for further details on how the discount or premium is calculated.

⁶ Bid price

⁷ Source: Bloomberg

chairman's statement

Introduction

I am pleased to have the opportunity to report to you on the Company's performance and activities in respect of the year ended 31 December 2022, to look forward to 2023, and to provide some commentary on recent market events.

Performance

2022 was a difficult year for many risk asset classes as central banks entered a monetary policy tightening phase in response to accelerating and increasingly persistent inflation. The full year performance for the Euro and Sterling share classes showed net asset value per share declines of 11.41% and 13.29% respectively. The detailed background to those performance numbers is covered in great detail in the Investment Vehicle Manager's report, and I will not repeat that historic background here. The Company's shares responded accordingly, as shown in the below table:

Through February 2023, however, performance has been significantly positive, with year to date gains in net asset value per share at €0.0417 (4.68%) (EUR class) and £0.0404 (4.12%) (GBP class), with the Sterling share price discount to net asset value being largely eliminated. More on the reasons for this below.

Current Market Conditions and Outlook

As I indicated in my statement accompanying the semi-annual results to 30 June 2022, I believe the current market conditions are inherently attractive for the Company. I indicated that the combination of increased credit spreads, taken together with increasing risk free rates on offer by central banks, drive current yield on the underlying investment vehicle portfolio to levels not seen for many years. At 28^th February 2023, being the most recent published data available, yield to maturity of the underlying Investment Vehicle portfolio was 17.3% (€ hedged) / 19.0% (GBP hedged) and running cash yields of 11.5% (EUR hedged) / 13.1% (GBP hedged) are being achieved. These are very significant numbers. Floating rate instruments at that date comprised 83.2% of the portfolio. Current economic conditions and inflation data appear to indicate, both in Europe and the United States, a "higher for longer" expectation for risk free rates, thus indicating continual favourable conditions for the underlying portfolio as the Investment vehicle Manager continued to deploy capital to fresh positions with "built in" higher all-in rates.

Recent events in the banking sectors, both in the US and Europe, of course deserve special mention. The root causes of the failure of Silicon Valley Bank, and the difficulties faced by First Republic, are US centric, complex, technical and do not warrant comment here other than to note that we assess them as having no direct or indirect effect on the Investment Vehicle portfolio or our chosen asset class environment as a while. Credit Suisse's troubles are different, more driven by long terms problems in the senior management of the organisation, and whilst call into question the commercial viability of the organisation as a whole, do not call into question its solvency. So far so good. The difficulty, if there is one, is that banking sector stress generally drives tighter credit conditions. Tighter conditions are per se attractive for the Company, as they drive credit spreads higher, feeding through positively to the yield to maturity and running cash yields that I mentioned earlier.  The inverse of this is that central bank reactions are naturally to adopt an easing bias when considering the direction of future risk-free rates. Currently, and has been observed by many economic commentators, central banks will struggle to position this way given that they have arguably fallen behind the curve in seeking to tame inflation through increases in risk-free rates, and would need to keep such rates higher for longer in order to have the desired monetary policy effects. Chris Giles wrote in the Financial Times just before Christmas that central bankers will, in 2023, need "nerves of steel and the hides of rhinos". They face significantly greater difficulties now.

I mention all of this because I am sure that investors in the Company will want to understand how the Board sees the short to medium term future given recent events. Our base case, which is that relevant risk-free rates will remain at or around current levels through 2022, and credit spreads will remain elevated, remains unchanged.

When I say "relevant", I exclude UK rates, which are likely to show a materially softer performance than other developed markets due to the ongoing damage caused by the effects of Brexit and government missteps, because the underlying portfolio's geographical exposure to the UK is only 28% of the whole, and in practice is even less than that, given that both Doncasters and Wella, being both UK issuers and totalling together 8.75% of the portfolio at 28^th February 2023, are global businesses with only a small fraction of their revenues being earned in the UK.

A necessary caveat to our base case is that it would not be surprising to see further pockets of stress arising in other parts of the financial markets, particularly within more highly leveraged market participants, which could exacerbate the dilemmas facing central banks and upend markets again, with unforeseeable consequences. Investors should be alive to this and monitor markets carefully in order to ensure that their portfolios are properly positioned and nimble.

Corporate Activities & Liquidity

The Company's structural changes which were announced, voted on and implemented in the first half of 2022 have now bedded down and are operating as expected. No further material changes are envisaged, and no special business will be introduced at this year's Annual General Meeting

Distribution Policy

Shareholders will have seen a number of recent announcements by the Company in relation to distribution policy. The continued positive trends in the yield metrics that I mentioned above have enabled the Board to again raise the Company's quarterly dividend and also to pay a specially enhanced dividend in respect of the fourth quarter of 2022.

At the current nominal target dividend levels of 7.0c per Euro share and 7.5p per Sterling share for 2023, the Company's Euro and Sterling shares offer a cash yield of around 8% and 7.5% respectively. No changes to these levels are anticipated for at least the next 12 months.

Conclusion

These are very positive times for the Company, and the Board is excited by current prospects. That said, we are keeping a close eye on the financial system and its key actors. 

Beyond what I have set out above, the Company's directors have also been active, as always, in a number of key corporate areas, including enhancing the Company's approach to responsible investing, dealing with auditor tenders, and considering the current's Board's composition and tenure. I urge you to read the individual reports which cover these matters in more detail. I would like to take the opportunity to thank my co-directors, the portfolio management team at the Investment Vehicle Manager, our advisors and investment bankers for their wise counsel, hard work, diligence and support during the year.

I look forward to providing shareholders with further updates, and invite the expression of views and opinions about the Company, to be directed to the usual contact points.

Richard Boléat

Chairman

27 March 2023

INVESTMENT VEHICLE MANAGER'S REPORT

Summary

2022 was a tough year for most asset classes, with the S&P 500 recording its worst annual performance since 2008^a. The traditional 60/40 portfolio, with 60% equities and 40% bonds, recorded a loss of 17% in 2022, the worst performance since at least 1999. The inverse correlation between equities and bonds broke down as both asset classes had negative returns in 2022^b. There were a number of drivers behind this negative performance across the board.  First of all, central banks worldwide acknowledged early on in 2022 that inflation was more than just transitory. Most central banks globally, including the Federal Reserve, European Central Bank ("ECB") and Bank of England ("BoE") were all behind the curve and had to hike interest rates aggressively during 2022 to fight high single digit/low double digit inflation. Secondly, the Russian invasion of Ukraine caused, on top of the human tragedy, an economic fall-out which mainly impacted Europe and Emerging Markets. Many countries were quick to impose sanctions on Russia, but as a large exporter of commodities (mainly food and energy), the situation drove global inflation to new highs. As tensions between Russia and Europe/US rose, the gas flows from Russia to Europe stopped, resulting in a large spike in European natural gas prices and driving Europe into an energy crisis. Finally, in Q4, the mini-budget in the UK led to more volatility in financial markets and the BoE had to step in to avert a systemic risk from spreading.

If we focus on the performance of European credit in general, we can see that leveraged loans held up very well compared to other asset classes.  European investment grade returned (17.2)%^c for the year while High Yield returned (11.6)%^d. The European leveraged loan market returned (3.3)%^e as the lack of duration and increasing coupon income drove the relative outperformance for loans. When we dig deeper into the performance of the Credit Suisse Western European Leveraged Loan Index ("CS WELLI"), hedged to EUR, we note that BB rated loans actually returned 0.42% for the year, while single B rated loans returned (3.2)% and CCC rated loans returned (20.94)%. The average price on the index dropped from 98.71 at the end of 2021 to 91.56 at the end of 2022, having hit a low of 89.98 at the end of September.

The sell-off we saw in the sub-investment grade market was partially a result of the deteriorating macro outlook, as described above, but also due to market technicals. Over the year, we saw forced selling from two corners of the market.  On the back of 2021's significant mergers and acquisitions, banks came into 2022 with a large pipeline of underwritten bridge loans, which on internal estimates stood at €30-35bn at the time Russia invaded Ukraine. With collateralised loan obligations ("CLO") issuance grinding to a halt, and outflows from multi-asset funds occurring, demand for broadly syndicated loans dried up. Banks were forced to syndicate these bridge loans at material losses and this put pressure on secondary loan prices. Secondly, on the back of Kwasi Kwarteng's mini-budget in the UK, we saw forced selling from UK liability-driven investment ("LDI") pension funds of, amongst others, CLO liabilities, ranging all the way from AAAs to single B's. After a difficult few months on the back of the Russia-Ukraine conflict, the CLO market had found an equilibrium between supply and demand over the summer. However, this renewed volatility, driven by LDI sellers, yet again put a halt on CLO creation and hence loan buyers again backed away from the secondary market. To put this into context, pricing on AAA liabilities was in the 95-110 bps range at the end of January 2022, peaked at 225-275 bps just after the UK's mini-budget, and finished the year in the region of 180-210 bps^f.

On the fundamental side, we did see a marginal deterioration in credit quality, in particular for companies that struggled to pass on raw material/labour cost inflation. However, default rates remained very low with the CS WELLI recording 1.9% defaults at the end of 2022. With the index, hedged to EUR, showing an average cash price of 91.56 and a 3yr discount margin of 661 bps, the loan market has rarely been cheaper. Moreover, the increase in base rates we saw during 2022 provides investors with additional buffer in case defaults were to pick up in 2023. In July, 3 month Euribor went positive for the first time since early 2015, making the 0% floor, that most loans have, irrelevant for the first time in 7 years.

Portfolio

As at 31 December 2022, the Investment Vehicle portfolio was invested in accordance with the investment policy, was diversified with 91 issuers¹ (31 December 2021: 107) across 26 (31 December 2021: 29) different industries and 14 (31 December 2021: 17) different countries, and had exposure of no more than 5.8% (31 December 2021: 5.3%) to any single issuer.

Portfolio Statistics²

¹ Excludes 41 (31 December 2021: 18) structured finance positions.

² Note: all metrics exclude cash unless otherwise stated.

³ Average market price of the portfolio weighted against the size of each position.

⁴ Limited interest rate differential between Euribor and SONIA in 2021, therefore no separate computation made for the GBP share class.

Performance

The Euro Shares and Sterling Shares NAV total returns for 2022 were (8.31)% (31 December 2021: 11.41%) and (6.75)% (31 December 2021: 12.17%), respectively.

The performing credit segment of the portfolio returned (6.64)% gross⁵ during 2022 (31 December 2021: 6.23%), while the credit opportunities segment returned (7.05)% gross during 2022 (31 December 2021: 22.21%). Based on an average allocation of 49% (31 December 2021: 47%) to performing credit and 51% (31 December 2021: 53%) to credit opportunities, this resulted in a gross contribution of (3.09)% (31 Dec 2021: 2.85%) from the performing credit segment and (3.61)% (31 Dec 2021: 11.79%) from the credit opportunities segment.

The CS WELLI, hedged to EUR, was down (3.28)% for 2022, as compared to being up 4.63% for the year ended 31 December 2021. The Credit Suisse Western European High Yield Index ("CS WEHYI"), hedged to EUR, was down (11.64)% for 2022, as compared to being up 4.04% for the year ended 31 December 2021.

⁵ Excluding management and performance fees.

Market Review

The loan market experienced, similar to most other asset classes, heightened volatility during 2022. There were a number of drivers behind this volatility.  In the early stages of 2022, central banks worldwide started turning more hawkish and guided towards considerable interest rate hikes during the year. This resulted in some risk reduction in the European High Yield market and some CLO managers saw this as an opportunity to sell loans and buy high yield bonds.

Towards the end of February, when Russia invaded Ukraine, the global macro outlook took a turn for the worse and the repercussions of the war were initially difficult to estimate, which resulted in loan managers selling some lower rated loans to switch into higher rated loans. At the time of the invasion, banks had a large underwritten pipeline of deals that they were planning to bring to market. While initially banks held this risk on their balance sheet, we started seeing some forced selling from banks as their risk departments forced them to reduce some of this risk ahead of their H1 2022 reporting. The same banks forced their loan market traders to reduce overall exposure to the European loan market, which resulted in further forced selling.

Finally, the CLO market also saw increased volatility across all parts of the capital structure as per the table below.  This volatility came from a combination of fears around rising defaults in Europe, but also from forced selling from UK pension funds on the back of the UK's mini budget in September 2022. With the CLO vehicles still accounting for the large majority of the buyer base in the European broadly syndicated loan market, the volatility in the liabilities meant CLO managers put their buying of loans on hold.

Spreads tracker (Morgan Stanley Trading Desk Source)

Morgan Stanley EU Leveraged Loan Review - End of Year 2022 Commentary - January 2023

The combination of rates-driven volatility in the European and US High Yield markets, a worsening macro environment, forced selling from banks (both on the primary and secondary side) and a lack of buyers due to volatility in the CLO market, meant that European loans had a much more volatile year than most investors had expected at the start of 2022.

However, actual default rates remained fairly benign in 2022. With yields on European loans having only been higher during the global financial crisis and briefly during the Covid sell-off of 2020, and an improving macro outlook, the Investment Vehicle Manager believes that European loans are attractive at the moment.

Portfolio Overview

The performance for 2022 was obviously disappointing with the first negative return since inception of the strategy in 2009.  However, very few asset classes generated positive returns in 2022 given the heightened volatility described above.

The Investment Vehicle Manager focused mainly on higher quality businesses. The average EBITDA of the portfolio was €294m as the Investment Vehicle Manager believes that default rates amongst larger businesses should be lower than for smaller businesses. Larger businesses have more diversified sources of funding (banks, syndicated loans, high yield bond market both in Europe and the US), they tend to attract better management teams, are more geographically diversified and often have private equity owners with considerable dry powder to invest.

The split between performing credit and credit opportunities was around 50/50 for most of the year. With exceptionally wide spreads in performing credit and considerable macro uncertainty, there was no real need to increase exposure to credit opportunities materially. However, on the back of the UK's mini-budget, we saw some forced selling of CLO liabilities mainly from UK pension funds and used that market technical to increase exposure to this asset class from 4% at the end of 2021 to 9% at the end of 2022.

Across the entire portfolio, as of December month end, the weighted average market price was 83.6, trading at a YTM of 18.5% on the EUR share class and 20.2% on the GBP share class. This compares to a weighted average market price of 96.5 at the end of December 2021. Floating rate assets comprised 85.6% of the portfolio, and hence the YTM on both the EUR and GBP share class should continue to increase if, as anticipated, the ECB and BoE hike base rates further in 2023. At the end of December 2022, the fund had a cash position of (0.3)% with leverage (being market value of assets plus cash divided by the market value of assets plus cash less borrowings) of 1.38x, up from 1.30x at the end of 2021, reflecting that the Investment Vehicle Manager marginally added some leverage given the positive outlook for loans into the end of 2022.

Environmental, Social and Governance ("ESG") Considerations

ESG remains a key focus for the Investment Vehicle Manager. CVC Group published its 2022 annual ESG report (www.cvc.com/responsibility/esg-reporting), thereby providing greater insight into how ESG is managed within the overall CVC group. The report looks at CVC's view on themes that are core to the evolving approach to sustainability and provides an update on progress over the last 12 months.

The Investment Vehicle Manager introduced its proprietary ESG scorecards in 2022. These ESG scorecards allow the Investment Vehicle Manager to better compare ESG metrics and characteristics across its investments.

The Investment Vehicle Manager also partnered with Sustainable Fitch. As of 31 December 2022, over half⁶ of the Investment Vehicle's underlying investments were covered by Sustainable Fitch.

⁶ Excludes CLO positions and restructured equity and preferred equity.

Conclusion and Outlook

2022 was one of the worst years for credit markets since the global financial crisis. Rampant inflation, geopolitical tensions and an energy crisis created high levels of uncertainty in financial markets and volatility spiked. Traditional correlations broke down and a considerable number of asset classes experienced their worst performance in many years.

With rising base rates, the Investment Vehicle Manager was well positioned with 78.1% of the portfolio in floating rate instruments at the start of 2022. However, when on 24 February 2022 Russian tanks crossed the Ukrainian border, both equities and credit were up for sale as uncertainty spiked. A full-blown war in such close proximity to Europe created several new unknowns that many investors had never had to contend with before.    

There was significant volatility in European loans as investors repositioned their portfolios to move up in quality.  However, actual default rates in Europe remained low at 1.90%^e of the market.

At the time of writing, in February 2023, there remains a great deal of uncertainty. However, there are some green shoots. Inflation appears to have peaked in most developed countries. The pace of interest rate hikes has slowed in the last few months and Europe appears to have ample gas reserves to see through the winter. The combination of a relatively mild winter, new sources of gas supply (mainly liquefied natural gas), but additionally structural drivers such as demand curbs and large investments in renewable energy means that the outlook for Europe is likely better than a large number of people may have feared when Russia shut down gas supply to Germany.

European loans started 2023 at attractive valuations. The average cash price on the CS WELLI, hedged to EUR, was at 91.56, the 3yr discount margin was 661 bps and base rates were well into positive territory for the first time since 2015. In the last 10 years, the average cash price has only been lower during the global financial crisis and briefly during Covid in 2020, and hence the market is already discounting a material spike in default rates. In S&P's annual study, it found that recovery rates on first lien senior secured loans over the 2003-2021 period were 72.5%, while in 2021 the three-year rolling average recovery was about 70%^g.  This implies that the downside for first lien senior secured loans is fairly low even if there is an event of default.  As a result, the Investment Vehicle Manager believes that leveraged loans are well positioned for a recovery in 2023.

Sources

^a Bloomberg

^b Financial Times - 11 January 2023

^c Bloomberg EuroAgg Index

^d Credit Suisse Western European High Yield Index

^e Credit Suisse Western European Leveraged Loan Index

^f Morgan Stanley EU Leveraged Loan Review - End of Year 2022 Commentary - January 2023

^g S&P Global - European Corporate Recoveries 2003-2021: Stability prevails despite the pandemic - 31 May 2022

CVC Credit Partners Investment Management Limited

Investment Vehicle Manager

Pieter Staelens

Managing Director, Portfolio Manager

27 March 2023

Past performance is not indicative of future results. There can be no assurance that the Investment Vehicle will be able to implement its investment strategy, achieve its investment objective or avoid substantial losses.

The indices referred to herein (including the Credit Suisse Western European High Yield Index hedged to Euro and the Credit Suisse Western European Leveraged Loan Index hedged to Euro) are widely recognised, unmanaged indices of market activity and have been included as general indicators of market performance. The Credit Suisse Western European High Yield Index is a market cap weighted benchmark index designed as an objective proxy for the investable universe of the Western European high yield debt market. The Credit Suisse Western European Leveraged Loan indices are designed to mirror the investable universe of the Western European leveraged loan market. There are significant differences between the types of investments made or expected to be made by the Investment Vehicle and the investments covered by the indices, and the methodology for calculating returns. For example, the Credit Suisse Western European High Yield Index does not take transaction costs (bid-offer spreads) into account and for the month during which a coupon is paid, the cash flow is reinvested at a fixed money-market rate until the end of the month. Additionally, the Credit Suisse Western European Leveraged Loan Index assumes that coupon payments are reinvested into an index at the beginning of each period. In contrast, the Investment Vehicle Manager may have discretion whether to reinvest such payments during any relevant investment period. It should not be assumed that the Investment Vehicle will invest in any specific equity or debt investments, such as those that comprise the indices, nor should it be understood that there will be a correlation between the Investment Vehicle's returns and those of the indices. It should not be assumed that correlations to the indices based on historical returns will persist in the future. No representation is made that the Investment Vehicle will replicate the performance of any of the indices. The indices are included for general, background informational purposes only and recipients should use their own judgment to appropriately weight or discount their relevance to the Investment Vehicle.

Executive REPORT

This Executive Report is designed to provide information about the Company's business and results for the year ended 31 December 2022. It should be read in conjunction with the Chairman's Statement and the Investment Vehicle Manager's report which gives a detailed review of investment activities for the year and an outlook for the future. 

Corporate summary

The Company is a closed-ended investment company limited by shares, registered and incorporated in Jersey under the Companies (Jersey) Law 1991 on 20 March 2013, with registration number 112635. The Company's share capital consists of Euro Shares and Sterling Shares which are denominated in Euro and Sterling respectively. The Company's Euro Shares and Sterling Shares are listed on the Official List of the UK Listing Authority and admitted to trading on the Main Market of the London Stock Exchange. The Company also has two Management Shares in issue, which are unlisted. Details of the shares in issue are detailed below.

The Company's assets are managed by its own Directors, thus self-managed. The Directors of the Company have invested the net proceeds from share issues into Compartment A of an existing European credit opportunities investment vehicle, CVC European Credit Opportunities S.à r.l. (the "Investment Vehicle"), managed by the Investment Vehicle Manager.

The Company is a member of the Association of Investment Companies ("AIC") and the European Leverage Finance Association ("ELFA"). The Company is regulated by the Jersey Financial Services Commission ("JFSC)".

Significant events during the year ended 31 December 2022

Director appointments

On 11 January 2022, Vanessa Neill was appointed as a Non-Executive Director of the Company.  Ms Neill has since been appointed as Chair of the Company's ESG Committee established on 24 January 2022.

On 23 September 2022, Esther Gilbert was appointed as a Non-Executive Director of the Company.

Ms Neill's and Ms Gilbert's biographies can be found below.

AGM and strategic review update

On 9 March 2022, the Company announced that the Board was considering making certain changes that the Board believed would increase the Company's appeal to both existing shareholders and new investors, and that it intended to consult with shareholders through its advisers.

On 22 April 2022, the Company announced that following consultation with shareholders representing a significant proportion of the Company's shares, the Board had included the following proposals for the consideration and approval of shareholders at its AGM on 18 May 2022:

•                              Tender mechanism: changing the structure of the tender mechanism, moving from a quarterly to a semi-annual structure with a 25.00% annual limit and a 15.00% semi-annual limit, instead of a 50.00% annual limit and 24.99% quarterly limit as in previous years;

•              Share conversions: changing the frequency of the Company's share conversions from monthly to semi-annual;

•              Company name: changing the name of the Company to CVC Income & Growth Limited from CVC Credit Partners European Opportunities Limited;

•              Investment policy: amending the Company's investment policy to increase the restriction on allocation to collateralised loan obligation securities from 7.50% to 20.00%;

•              Articles of Association (the "Articles"): making certain amendments to the Company's Articles relating to Board composition; and

•              Share issuance authorities: seeking authority to issue an additional 300 million shares, conditional on the launch of a share issuance programme, in addition to the usual authorities previously obtained.

On 18 May 2022, all of the resolutions proposed at the Company's AGM were duly passed.  The change to the Company's name came into effect on 13 June 2022, as announced by the Company on this date.

Extraordinary General Meeting ("EGM")

On 19 August 2022 the Company published notice of an EGM that was to be held on 7 September 2022, together with an accompanying circular and new Articles being proposed for the approval of shareholders. The proposed new Articles primarily included amendments to, or the removal of, existing provisions within the Articles which were inconsistent with an amendment to the Articles approved at the AGM. The aforementioned amendment removed the prohibition on having a majority of UK tax resident Directors so as to enable the Company and its shareholders to appoint the most suitable candidates as Directors. The new Articles had been drafted to ensure that the Company is not unnecessarily restricted in circumstances where a majority of the Directors are resident in the UK and the Company holds meetings in the UK.

Tender mechanism

The Company completed the following tenders under its contractual tender mechanism during the period. All of the shares tendered were transferred into the Company's name and held in treasury.

At the Company's Annual General Meeting ("AGM") on 18 May 2022, shareholders approved a revised tender circular; refer to the 'AGM and Strategic Review Update' section above which details the primary changes made.

A description of the current tender mechanism can be found below.

Share conversions

Following requests made by shareholders, the Company converted a total of 5,660,302 Euro Shares into 5,692,752 Sterling Shares and 295,233 Sterling Shares into 298,964 Euro Shares under the conversion facility during the year ended 31 December 2022.

Dividends

On 21 September 2022 the Board announced that the Company had increased its annual dividend by 20% to 6 pence per Sterling Share and 6 cents per Euro Share, with effect from the dividend payments for the quarter ended 30 September 2022. On 7 March 2023, the Board announced that the Company's annual dividend targets are being increased to 7.5p per ordinary Sterling Share and 7c per ordinary Euro Share with immediate effect. The Company's distribution policy is reviewed on an ongoing basis.

The Company paid four dividends totalling €0.0525 and £0.0525 per Euro share and Sterling share, respectively, during the year ended 31 December 2022.  Refer to note 12 for full details of each quarterly dividend (31 December 2021: €0.0475 and £0.0475).

Purpose

The Company is an investment company, and its scope is restricted to that activity. In that context, the Company's purpose is to provide investors with sustainable long-term returns by investing in a diversified portfolio of principally European corporate debt. In fulfilling the Company's purpose, the Board seeks to consider the views of all stakeholders and is mindful of the impact that the Company has on wider society.

Investment Objective

The Company's investment objective is to provide shareholders with regular income returns and capital appreciation from a diversified portfolio of predominantly sub-investment grade European corporate debt instruments.

Investment Policy

The Company's investment policy is to invest predominantly in debt instruments issued by companies domiciled, or with material operations, in Western Europe across various industries.

The Company's investments are focused on the senior secured obligations of such companies, but investments are also made across the capital structure of such companies.

The Company pursues its investment policy by investing all of its assets, save for a working capital balance, in the Investment Vehicle. The investment policy of the Investment Vehicle is subject to the following limits (the "Investment Limits"):

·      A minimum of 50% of the Investment Vehicle's gross assets will be invested in senior secured obligations (which, for the purpose of this Investment limits will include cash and cash equivalents);

·      A minimum of 60% of the Investment Vehicle's gross assets will be invested in obligations of companies/borrowers domiciled, or with material operations, in Western Europe;

·      A maximum of 7.5% of the Investment Vehicle's gross assets will be invested at any given time in obligations of a single borrower subject to a single exception at any one time permitting investment of up to 15% in order to participate in a loan to a single borrower, provided the exposure is sold down to a maximum of 7.5% within 12 months of acquisition;

·      A maximum of 20% of the Investment Vehicle's gross assets will be invested in collateralised loan obligation securities; and

·      A maximum of 25% of the Investment Vehicle's gross assets will be invested in CVC Capital Portfolio Company³ debt obligations calculated as invested cost as a percentage of the Investment Vehicle's gross assets.

The Investment Vehicle is permitted to borrow up to an amount equal to 100% of the NAV of the Investment Vehicle at the time of borrowing. The Investment Vehicle's borrowings as a percentage of the Investment Vehicle's NAV1 as at 31 December 2022 stood at 35.01% (31 December 2021: 30.29%).

General

The investment objective and investment policy of the Investment Vehicle are consistent with the investment objective and investment policy of the Company. In the event that changes are made to the investment objective or investment policy of the Company or of the Investment Vehicle (including the "Investment Limit" and/or the "Borrowing Limit"), the Directors will seek shareholder approval for changes which are either (a) material in their own right or, (b) when viewed as a whole, together with previous non-material changes, constitute a material change from the published investment objective or policy of the Company.  This action was completed with the proposed change to the investment policy which received approval at the Company's AGM on 18 May 2022, as outlined above.

Company borrowing limit

The Company may borrow up to 15% of the NAV of the Company for the sole purpose of purchasing or redeeming its own shares otherwise than pursuant to its tender mechanism. As at 31 December 2022, the Company did not have any borrowings (31 December 2021: no borrowings).

Investment strategy and approach

The Company has given effect to its investment policy by subscribing for Preferred Equity Certificates, (the "PECs"), Series 4 and 5, issued by the Investment Vehicle. Series 4 and 5 PECs are denominated in Euro and Sterling, respectively, and are income distributing.

The Investment Vehicle Manager's investment strategy for the Investment Vehicle is to make investments across approximately 40 to 60 companies based on detailed fundamental analysis of the operations and market position of each company and its capital structure.

The Investment Vehicle Manager invests in the debt of larger companies and invests in companies with a minimum EBITDA of €50 million or currency equivalent at the time of investment. The Investment Vehicle Manager believes that the debt of larger companies offers a number of differentiating characteristics relative to the broader market, including:

(i)         larger, more defensive market positions;

(ii)        access to broader management talent;

(iii)       multinational operations which may reduce individual customer, sector or geographic risk and provide diverse cashflow;

(iv)       levers such as working capital and capital expenditure which can be managed in the event of a slowdown in economic growth; and

(v)        wider access to both debt and equity capital markets.

Based on the market opportunity, the Investment Vehicle Manager invests in a range of different credit instruments across the capital structure of target companies (including, but not limited to, senior secured, second lien and mezzanine loans and senior secured, unsecured and subordinated bonds). Assets are sourced in both the new issue and secondary markets, using the sourcing networks of the Investment Vehicle Manager and in certain circumstances the CVC Group² more broadly. The Investment Vehicle Manager's access to deals is supported by the network of contacts and relationships of its leadership team and investment professionals, as well as the strong positioning of the CVC Group in the European leveraged finance markets. CVC Capital Portfolio Companies are some of the largest sponsor-led issuers of leveraged loan deals in Europe⁴.

Each investment considered by the Investment Vehicle Manager is built around an investment thesis and generally falls into one of two categories:

1. Performing Credit⁵; and

2. Credit Opportunities⁶.

The Investment Vehicle Manager analyses the risk of credit loss for each investment on the basis it will be held to maturity but takes an active approach to the sale of investments once the investment thesis has been realised.

Further information in respect of the Investment Vehicle portfolio and performance as at 31 December 2022 can be found in the Investment Vehicle Manager's report above.

KPIs

The Board meets regularly to review performance and risk against a number of key measures. With the exception of dividends, the Company considers the below KPIs to be Alternative Performance Measures. Further details of these can be found below.

NAV total return

The Board regularly reviews and compares the NAV and share price of the Company. The Directors regard the Company's NAV total return as being the overall measure of value delivered to shareholders over the long-term.

Total return reflects both NAV growth of the Company and also dividends paid to shareholders.

The NAV total return for Euro Shares and Sterling Shares has increased by 40.26% (31 December 2021 52.97%) and 51.88% (31 December 2021 62.87%), respectively, from IPO. The Euro Shares and Sterling Shares NAV total return for the year ended 31 December 2022 was (8.31)% (31 December 2021: 11.41%) and (6.75)% (31 December 2021: 12.17%), respectively. Please refer to the Financial Highlights and Performance Summary above for the Euro Shares and Sterling Shares NAV total return analysis. The divergence in NAV per share performance between share classes principally derives from the risk-free rate differential between Euro and Sterling.

Dividends

The Company's annual dividend level at the year-end was €0.06000 and £0.06000 per Euro Share and Sterling Share, respectively. This Company's annual dividend targets have since been increased to £0.07500 per Sterling Share and €0.07000 per Euro Share with effect from 7 March 2023.  During 2022, Shareholders received total dividends of €0.05250 and £0.0525 (2021: €0.04750 and £0.04750) per Euro Share and Sterling Share, respectively. Please refer below for the Company's dividend history from inception.

Ongoing charges

The Board reviews and compares the Company's operating expenses against budget on a monthly basis and performs an analysis of deviations.

The Company's ongoing charges for the year ended 31 December 2022 were 1.78% (ongoing charges 31 December 2021: 1.61%). The above ongoing charges figure includes the Company's pro-rata share of the Investment Vehicle management fee, custodian and administration expenses and other general expenses, but excludes interest costs and performance fees. The ongoing charges for the Company's Euro and Sterling share classes individually are approximate to each other and therefore the Company has chosen to disclose one ongoing charges figure.

In line with the recommended methodology for the calculation of an ongoing charges figure published by the AIC (and most recently updated in April 2022), the Board has also chosen to disclose an ongoing charges figure inclusive of the Investment Vehicle's performance fee. However, for the year ended 31 December 2022, there was no accrued performance fee. Additionally, the Company announced on 17 February 2023 that it was notified by the Investment Vehicle that the Investment Vehicle Manager had waived its future right to receive an Investment Vehicle performance fee with effect from 1 January 2023.

 For the year ended 31 December 2022, the ongoing charges ratio was 1.80% for the Company's Euro Shares (31 December 2021: 2.86%) and 1.76% for the Company's Sterling Shares (31 December 2021: 2.72%).

Premium/discount

The Directors review the trading prices of the Company's Euro Shares and Sterling Shares and compare them against their respective NAVs to assess volatility in the discount or premium of the share prices to their NAVs. As at 31 December 2022, the Company's discount to NAV per Euro Share was 7.88% (2021: 7.46% discount) and discount to NAV per Sterling Share was 6.08% (2021: 5.95% discount), respectively. Please refer to the Financial Highlights and Performance Summary above for NAV and share price analysis.

Please refer below for further information on the calculation methodology applied to these KPIs.

Other measures

In addition to the above KPIs, the Board meets regularly to review the performance and risk against the below other measures:

Diversification

The Directors review the geographical, industry, asset and currency diversification of the underlying Investment Vehicle to ensure that holdings are in line with the prospectus and also to monitor the diversification risk of the underlying portfolio. Please refer to the Investment Vehicle Manager's Report above for analysis of the Investment Vehicle portfolio and note 8 for further details regarding the Investment Vehicle's risk diversification policies.

Default rates in Europe and US

The Directors regularly discuss historic and emerging default risk in Europe and the US with the Investment Vehicle Manager to help assess and understand the performance and prospective performance of the Company. Performance of the Company may be affected by the default or perceived credit impairment of investments held by the Investment Vehicle. A withdrawal of investment capital, an economic downturn and/or rising interest rates could severely disrupt the European and US markets which could impact the ability of issuers to repay principal and interest and could adversely affect the value of the Company's investment in the Investment Vehicle and by extension, the Company's NAV and/or the market price of the Company's shares. As indicated in the Investment Vehicle Manager's report above, actual default rates in Europe remained low at 1.90% of the market. The Directors hold monthly discussions with representatives of the Investment Vehicle Manager to assist in monitoring the above indicator.

Life of the Company

The Company has an indefinite life. In accordance with the Articles of Association, the Directors are required to propose an Ordinary Resolution that the Company continues its business as a closed-ended investment company (the "Continuation Resolution") if the following occur:

(i)    the Company NAV falls below €75 million; or

(ii)   the Directors are required to convene "class closure meetings" for all classes of shares in issue. A class closure meeting is required if a share class is delisted for any reason, or, if in any rolling 12-month period, the average daily closing market price (as derived from the market data published by Bloomberg or any successor market data service thereto) of any class of shares during such 12-month period is 10% or more below the average NAV per share (calculated inclusive of current year income).

If a Continuation Resolution is not passed, the Directors are required to put forward proposals within six months for the reconstruction or reorganisation of the Company to the shareholders for their approval.

These proposals may or may not involve winding up the Company and, accordingly, failure to pass the Continuation Resolution will not necessarily result in the winding up of the Company. A failure to pass a Continuation Resolution may result in the redemption by the Company of its entire holding of PECs.

Going concern

Under the Listing Rules, the AIC Code of Corporate Governance ("AIC Code") and applicable regulations, the Directors are required to satisfy themselves that it is reasonable to assume that the Company is a going concern as at the date of approval of the financial statements.

In making this assessment, the Directors have reviewed the Company's budget and cash flow forecast for the next 12 months from the date of approval of the financial statements and also considered information regarding climate-related matters in conjunction with other uncertainties. On the basis of this review, and after making due enquiries, the Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the period to 27 March 2024, a period of twelve months form the date of approval of the financial statements. The Directors are also satisfied that no material climate-related matters or uncertainties exist that cast significant doubt over the Company's ability to continue as a going concern. In making this assessment, the Board have considered the impact that Covid-19 and the Russian invasion of Ukraine may have on the Company. Accordingly, they continue to adopt the going concern basis in preparing the interim condensed financial statements.

Viability Statement

Under the AIC Code, the Directors are required to make a Viability Statement which explains how they have assessed the prospects of the Company, over what period they have done so and why they consider that period to be appropriate, taking into account the Company's current financial position and principal risks. The principal risks faced by the Company are described below.

The prospects of the Company are driven by its investment objectives, investment policy and investment strategy as summarised above, and also by the conditions existing in the markets in which the Company's ordinary shares trade and in which the Investment Vehicle invests and financial markets generally.

In assessing the prospects of the Company, the Directors have, in addition to taking into account the principal and emerging risks facing the Company, taken into account the Company's current financial position. Their assessment has included a robust process encompassing an examination of the:

(i)         Investment Vehicle Manager's view of the investment opportunity and the conditions existing in the markets in which the Investment Vehicle is exposed and financial markets generally, including scenario analysis, stress tests and volatility and return comparisons;

(ii)        liquidity and fundamental prospects of the underlying positions of the Investment Vehicle;

(iii)       extent to which the Company directly or indirectly uses gearing;

(iv)       liquidity of the PECs in which the Company invests; and

(v)        impact on the Company's viability under scenarios stemming from the application of the tender mechanism.

Based on the results of their assessment of the above processes, and in the absence of any unforeseen circumstances, the Directors have concluded that a period of three years from the date of this statement is an appropriate period over which to assess the prospects of the Company as the principal risks, mitigating controls and investment strategy and policy are not expected to materially change over this period. This period reflects the effect of significant redemption requests received from shareholders under the tender mechanism, coupled with no further issuances of ordinary shares by the Company, before a Continuation Resolution would be proposed as a result of the NAV falling below €75 million. 

The Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due within at least this period of assessment. The Directors are also of the opinion that given the information available to them at the date of these financial statements, the Company will be able to continue to conduct its commercial activities in a manner consistent with its investment objectives for the foreseeable future.

Social and environmental responsibility

The Board acknowledges that the Company, in addition to utilising financial capital, is also a user of social capital, particularly in Jersey, the jurisdiction in which the Company operates. The Board further acknowledges that the Company has an environmental footprint that is in addition to and distinct from that of the Investment Vehicle and its portfolio companies. The Directors have considered the Company's use of social capital and the environmental impact of the operation of the Company upon wider society and in response has commenced a programme of support in favour of the Jersey National Park as further described below. The Board has also established an ESG Committee chaired by Vanessa Neill, details of which can be found below.

Investment Vehicle Manager stewardship

Whilst the Investment Vehicle Manager does not formally commit to all 12 Principles of the FRC's Stewardship Code, certain aspects of the Code are crucial to its business activity.

Environmental, Social and Governance ("ESG") Approach

The Company has identified the growing importance of responsible investment and integrating ESG into the investment process. The Company recognises the importance of ESG and therefore engages with the Investment Vehicle Manager in order to better understand and monitor ESG-related risks and opportunities and to keep under review the Investment Vehicle Manager's ESG policies and practices.

Aware of evolving sustainability initiatives from European and UK regulators, legislation, industry associations and the harmonisation of frameworks; the Company has prioritised the continued progress in the development of its approach to ESG.

Governance

With effect from 24 January 2022 the Company established an ESG Committee, chaired by Ms Neill who joined the Board with effect from 11 January 2022.  Guided by its Terms of Reference, the ESG Committee oversees the Company's ESG disclosures and the ESG policies and processes adopted by the Investment Vehicle Manager to enable the integration of ESG factors into the investment process.

The Company has integrated ESG risks into its governance structure and continues to:

·      promote ESG as an item for Directors' continued professional development in-line with the Board's belief that ESG risks and opportunities are key developments in the credit industry that the Directors should keep up-to-date with;

·      include ESG factors as a priority agenda topic in regular discussions with the Investment Vehicle Manager at each quarterly Board meeting;

·      receive ESG policy and regulation updates from its legal advisors with a view to continually ensuring best practice.

ESG Strategy

The Investment Vehicle Manager's ESG and investment policies mandate that the investment management team includes material ESG considerations when reviewing an investment opportunity and throughout the lifecycle of an investment.

The following issues are examples of potential material ESG considerations the Investment Vehicle Manager takes into account throughout the investment process:  environmental factors, including climate change risk, biodiversity risk and water use; social factors, including Diversity, Equity & Inclusion ("DEI"), health and safety practices, supply chain transparency and human rights; and governance factors, including transparency and disclosure, compliance with applicable laws and oversight bodies such as the FCA and European Commission. ESG and responsible investing factors are considered at the following stages:

·      Investment selection - Consider high level and material ESG and responsible investing issues as part of the overall due diligence process.

·      Investment Committee Process - ESG Considerations that are sufficiently material are referenced in the investment committee memo. Such memos may also include a review of environmental and social reports, of the issuers' ESG policy and website disclosures, site visits, management interviews, and discussions with key stakeholders noted during the diligence process when appropriate. Material ESG Considerations are reviewed internally by the respective Investment Committee, and as needed, the appropriate course of action related to a material ESG Consideration will be cooperatively determined by such Committee.

ESG Disclosure and Metrics

The EU Sustainable Finance Disclosures Regulation ("SFDR") requires managers to assess and disclose how sustainability risks are considered in their investment processes, and how they consider investment decisions that might result in negative effects on sustainability factors, known as Principal Adverse Impacts ("PAIs"). The EU SFDR does not have a direct impact in the UK due to Brexit, however, it applies to third-country products marketed in the EU. Whilst CVC Income & Growth Limited is a self-managed alternative investment fund ("AIF"), it is marketed in the EU by CVC Credit Partners and therefore; the following disclosures have been provided to comply with the high-level requirements of SFDR.

The Company continues to work toward reporting and disclosing the proportional operational (Scope 1 and 2) greenhouse gas emissions of the investee companies that comprise the Investment Vehicle investment portfolio along with metrics that evidence an intention to reduce these emissions. The Company recognises the importance of value chain (Scope 3) emissions; however due to the higher complexity of quantifying Scope 3, the Company will initially prioritise Scope 1 and 2.

The Company has been a formal supporter of the TCFD recommendations since 2018 and expects the companies in which the Investment Vehicle Manager invests to consider TCFD disclosures in jurisdictions where it is mandatory and to make improvements overtime where required. 

Given the type and structure of the Company, the Company's own impact is minimal. However, the ESG Committee monitors the Company's carbon footprint, including travel.

Looking forward

The approach described above covers the assets of the Investment Vehicle. The Company recognises that enhancements to this approach will be needed in areas where the data to conduct the necessary analysis is currently limited, or where the tools available remain in a nascent stage of development. These are challenges that the Company is working in collaboration with the Investment Vehicle Manager to resolve and will continue to report on progress relating to ESG in the Company's Annual Report.

In response to these challenges, the Company has laid out the following steps to take its commitment further:

·      The Company has identified investors' initiatives, such as the PRI's Transition Pathway Initiative, Sustainability Fitch ESG Scores and ELFA's Industry ESG initiatives, to be important avenues to increase its understanding and deepen its risk mitigation strategy.

·      The Company will continue to work with its external advisors as needed to continuously develop its ESG strategy. 

The Board continues to believe that the investment strategy and policy adopted by the Investment Vehicle is appropriate for and is capable of meeting the Company's current objectives.  

It is the Board's assessment that the Investment Vehicle Manager's resources are appropriate to properly manage the

Investment Vehicle's portfolio in the current and anticipated investment environment.

This Strategic Report was approved by the Board of Directors on 27 March 2023 and signed on its behalf by:

Richard Boléat                                                                                                                                                          Mark Tucker

Chairman                                                                                                                                           Audit Committee Chairman

¹ Pro-rated for the Company's interest in the net assets of the Investment Vehicle of 52.04% as at 31 December 2022 (31 December 2021: 58.54%).

² CVC Group being the Investment Vehicle Manager and CVC Credit Partners Group Holding Foundation, together with its direct and indirect subsidiaries and their respective affiliates and excluding any funds managed and/or advised by the CVC Group

³ CVC Capital Portfolio Company means a company in which one or more CVC Capital Partners Funds: (i) has board representation; (ii) holds more than 25 per cent of the share capital; or (iii) has an economic interest in excess of €100 million. CVC Capital Partners Fund means private equity funds that acquire controlling or significant minority interests in European, Asian and North American companies which CVC Capital Partners provides investment advisory and/or investment management services to

⁴ Source: Morningstar LCD European Loan Pipeline, for the period between January 2017 and March 2022

⁵ Performing Credit generally refers to senior secured loans and senior secured high yield bonds sourced in both the primary and secondary markets. The investment decision is primarily driven by a portfolio decision around liquidity, cash yield and volatility

⁶ Credit Opportunities refers to investments where the Investment Vehicle Manager anticipates an event in a specific credit situation is likely to have a positive impact on the value of its investment. This may include events such as a repayment event before maturity, a deleveraging event, a change to the economics of the instrument such as increased margin and/or fees or fundamental or sentiment-driven change in the value. The Investment Vehicle Manager seeks relative value opportunities, which involve situations where market technicals have diverged from credit fundamentals often driven by selling by mandate-constrained investors, CLO managers or hedge funds rebalancing their portfolios, macro views affecting different credit instrument types or sales by banks. The Investment Vehicle Manager has additional flexibility compared to mandate-constrained capital and believes these assets have potential for capital gains and early cash flow generation based on the acquisition prices

Principal risks and uncertainties

When considering the distribution policy and total return of the Company, the Directors take account of the risks which have been taken in order to achieve that return. The Directors have carried out a robust assessment of the principal and emerging risks facing the Company including those which would threaten its business model, future performance, solvency or liquidity. An overview of the principal and emerging risks and uncertainties is set out below:

Since the publication of the Company's Annual Financial Report for the year ended 31 December 2021, the key changes to the Company's principal risks and uncertainties are as follows:

-       the removal of "Covid-19" as a principal risk, together with the removal of "Brexit", which the Company had included under the principal risk "Geopolitical factors"; and

-       the reclassification of "Default risk", previously included as interest rate risk, and "ESG matters" as principal risks, both of which were previously classified as emerging risks.

The Company may be exposed to additional risks not disclosed above or within the Annual Financial Report as they are not considered by the Board to be principal or emerging risks. The Company assesses risks, and the mitigation thereof, on an ongoing basis and as part of its formal business risk assessment process. 

Section 172(1) Statement

Through adopting the AIC Code, the Board acknowledges its duty to comply with section 172 of the UK Companies Act 2006 to act in a way that promotes the success of the Company for the benefit of its members as a whole, having regard to (amongst other things):

a)    the consequences of any decision in the long-term;

b)    the interests of the Company's employees;

c)     the need to foster business relationships with suppliers, customers and others;

d)    the impact on community and environment;

e)     the maintaining of reputation for high standards of business conduct; and

f)     acting fairly as between members of the Company

The Board considers this duty to be inherent within the culture the Company and a part of its decision-making process.

Information on how the Board has engaged with its stakeholders and promoted the success of the Company, through the decisions it has taken during the year, whilst having regard to the above, is outlined below.

The principal decisions section below outlines decisions taken during the year which the Board believes has the greatest impact on the Company's long-term success. The Board considers the factors outlined under section 172 and the wider interests of stakeholders as a whole in all decisions it takes on behalf of the Company.

Principal decisions

Employee engagement

The Company has no employees.

Business relationships

The Board considers its business relationships with stakeholders to be important to the ongoing success of the Company and is proactive in fostering these relationships. For details on the nature of these relationships and how the Company fosters relationships with its stakeholders, refer to the "Stakeholder engagement" section above. The Board also considers the impact principal decisions have on its stakeholders, which is detailed in the "Principal decisions" section above.