VOLTA FINANCE - DECEMBER MONTHLY REPORT

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Guernsey, 15 January 2008 - Volta Finance Limited (the "Company" or "Volta Finance") has published its December monthly report. The full report is attached to this release and is available on Volta Finance Limited's financial website (www.voltafinance.com). As of 31 December 2007, Volta Finance Limited's Gross Asset Value per share was €8.19, down €0.08 per share from 30 November 2007.

 

Have central banks and market players finally grasped the seriousness of the current situation? Even if the US economy might avoid zero-growth in the fourth quarter 2007, the economic weakness is going to last longer than previously anticipated. Strong coordinated actions by central banks have done little to do away with the interbanking crisis, which has only faded so far. On top of it, the US housing crisis has started to affect negatively the retail sector. Needless to say, the sentiment that growth will be below trend for some quarters has settled in.

Volta Finance keeps its medium-term view that the various actions taken by central banks will have a positive effect on the financial markets, but not in the short term. We expect losses on mortgages to continue rising in the US, with home prices decelerating almost everywhere over the coming months due to the ongoing credit tightening. This crisis situation seems to be already mostly priced in by the markets, except perhaps in equity markets, where earnings revisions are still modest outside the financial and housing industries. At that time, some central banks seem reluctant to take further accommodative actions given growing inflationary pressure. Such a situation could lengthen the timing period of rate cuts, which we believe should be deep given that the banking sector, which funnels the effects of monetary actions to the economy at large, is particularly affected by the current crisis.

 

The fact that the Bank of England refrained from cutting rates in January is not particularly encouraging. Exiting the Libor crisis will probably take more time than we initially thought. It might as well impact the refinancing rate of UK mortgages ending the 2-year teaser fixed period, with their payment jumping to the variable Libor rate plus margin thereafter. In short, the larger the Libor 3-month or 1-month relative to the 2-year interest rate swap, the higher is the incentive for a borrower to refinance.

 

In the corporate credit* sphere, from the end of November to the end of December, the spread of the 5y European iTraxx index (series 8) somewhat contracted from 52.12 to 50.610, but subsequently brutally widened by over 10 points at the beginning of January. The spread on its Crossover counterpart (5y iTraxx European Crossover index series 8) followed a similar path, tightening slightly from 348.940 at the end of November to 339.485 at the end of December, only to jump by over 50 points after New Year's Eve. The scenario was similar in the US, with the 5y CDX index (series 9) ending December at 77.890, not far from its November-end level of 76.045. In the meantime, the 5y CDX Crossover index (series 9) increased marginally from 256 to 257.165. The spread on both indices widened substantially in the first week of 2008. 

 

The leveraged loans** European 5y LevX index (senior series 1) which ended November at a mid-price of 97.30, finished the year at 96.91. This discount relatively to the par value of loan seems to already price in a deterioration of the economic conditions, which would eventually lead to an increase in defaults more in line with historical rates from current low rates.

 

The mark-to-market value of structured finance assets such as CLOs and ABS has continued to remain under pressure. CLOs have continued to fare better as the market takes into account the fact that CLOs issued prior to the crisis benefit from a very low cost of funding and from higher re-investment spread, but that they would probably suffer from an increase in default rates later on, as would the rest of the market.

 

The overall GAV of Volta Finance decreased by €0.08 per share from the end of November to the end of December 2007, mainly due to the mark-to-market variation of the ABS bucket.

 

With regard to residuals of ABS backed by UK non-conforming mortgages, the current situation is creating uncertainty in a context of restriction of funding, interest rate softening and house price slowdown.

 

Generally speaking, residuals of ABS benefit from prepayments before reset and are affected negatively by prepayments after reset due to the substantial decline in prepayment penalties. Our mortgage pools are still in the pre-reset period and have been behaving heterogeneously with regard to prepayment rates, with some sub-pools experiencing a decrease in their prepayment rate. The general market view is that the current lending tightening will make that such situation may prevail after reset as well, which would benefit residual holders and help to offset a moderate increase in defaults that may come. On the other hand, the interest rate situation, and notably a historically low 2-year swap compared to Libor, may create opportunities for more aggressive lending that would ultimately lead to higher post-reset prepayment rates.

 

At the time of publishing this report, given that the pools of mortgages held by Volta Finance are still too young, we cannot conclude as to how prepayment rates will behave after reset. We expect to be able to do so in the coming months, when significant assets will start entering into the resetting period.

With respect to Volta Finance's corporate credit and loan assets, their actual low default rates are significantly below our initial long-term assumptions. However, given the consequences of the current US subprime crisis, we are expecting a deterioration of default rates over 2008 and 2009, which would bring them almost in line with historical rates. On an aggregate basis, we expect corporate credit and loan assets to keep meeting their long-term stated IRR, with periods of low default rates offsetting periods of higher default rates over a full credit cycle.

 

 

The mark-to-market variation*** of Volta Finance's corporate credit investments has been +0.9% in December.

 

 

The mark-to-market variation*** of Volta Finance's leveraged loan TRS has been -0.6% in December.

 

 

The mark-to-market variation*** of Volta Finance's ABS investments has been -3.9% in December.

 

 

The mark-to-market variation*** of Volta Finance's CDO investments has been +1.1% in December.

 

(Full monthly report in attachment or on www.voltafinance.com)

 

Volta Finance Limited is incorporated in Guernsey under the Companies (Guernsey) Laws, 1994 to 1996 (as amended) and listed on Euronext Amsterdam. Its investment objectives are to preserve capital and to provide a stable stream of income to its shareholders through dividends. For this purpose, it pursues a multi-asset investment strategy targeting various underlying assets. Volta Finance's basic approach to its underlying assets is through vehicles and arrangements that provide leveraged exposure. The exposure to those underlying assets is gained through direct and indirect investment in five principal asset classes: corporate credits, CDOs, ABS, leveraged loans, and infrastructure assets.

 

Volta Finance has appointed AXA Investment Managers Paris, an investment management company with a division specialised in structured credit, for the investment management of all its assets.

 

AXA Investment Managers (AXA IM) is a multi-expert asset management company within the AXA Group, a global leader in financial protection and wealth management. AXA IM is one of the largest European-based asset managers with €550 billion in assets under management as of the end of March 2007. AXA IM employs approximately 2,800 people around the world and operates out of 19 countries.

Mourant Guernsey Limited

volta.finance@mourant.com

+44 (0) 1481 715601

Deutsche Bank

voltaadmin@list.db.com 

AXA Investment Managers Paris

Julien Laplante

julien.laplante@axa-im.com

+33 (0) 1 44 45 94 92

 

 

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