FEBRUARY MONTHLY REPORT

 

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Guernsey, 18 March 2008 - Volta Finance Limited (the "Company" or "Volta Finance") has published its February 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 29 February 2008, Volta Finance Limited's Gross Asset Value (the "GAV") per share was €6.50, down €0.79 per share from 31 January 2008.

 

 

This further significant deterioration of the GAV in February affects mainly two asset classes: UK non-conforming residuals and European Leveraged Loan TRS. The expected cash flows on these two asset classes had already been revised by the Company as of end of January. The Company anticipates that this further deterioration in mark-to-market is likely to be reflected in a further reduction in expected cash flows from those assets.

 

 

Since the end of January, the financial environment has continued to deteriorate and to affect structured credit negatively. Loan prices have continued to decline, investment grade spreads have reached previously unseen levels, new prepayment data on certain UK non-conforming mortgage pools seems to confirm an increase in prepayments at reset for 2006 pools, and defaults have started to occur in the US broadly syndicated loan market.

 

From the end of January to the end of February, the spread of the 5y European iTraxx index (series 8) substantially widened from 78.6 bps to 127.37bps. Its Crossover counterpart (5y iTraxx European Crossover index series 8) also widened from 471.9 bps to 598.4 bps. The iTraxx LevX Senior Index stated that the average price for European liquid first lien loans fell from 93.4% to 90.6%.*

 

 

The overall GAV of Volta Finance decreased by €0.79 per share from the end of January 2008 to the end of February 2008, to €6.50 per share. The February mark-to-market variations** of Volta Finance's asset classes were: -32.6% for the leveraged loan TRS, -16.4% for the ABS investments, -4.2% for CDO investments and -1.1% for corporate credit investments.

 

As of today, part of the Company's portfolio (all CDO assets and Corporate Credit assets, as well as two ABS positions) accounting for 60% of the February GAV has continued to perform, in terms of cash flows, in line with or better than the assumptions employed at the time of their purchase. While the mark-to-market values of these assets have also declined due to market conditions, these assets do not experience any external financing difficulty due to their embedded leverage, which shields Volta Finance from forced sales of these positions.

 

 

The economic exposure of Volta Finance to the European loan market is gained through a TRS. As with most non-recourse TRS, the terms of the TRS require Volta Finance to either post more collateral or to sell assets when prices go down significantly in order to avoid termination and liquidation of this asset.

 

Since last summer, in order to mitigate the downside risk in a volatile loan market, Volta Finance had reduced its total TRS portfolio exposure to €336m by the end of year 2007, resulting in a reduction of the leverage, and had concentrated its exposure on senior secured loans. In January, in order to adapt to the ongoing downward trend of the mark-to-market value of the loan portfolio, Volta Finance took some actions to restructure the terms of its TRS. As announced in the January report, facing the possibility of a rapid and volatile decrease in loan prices, the Company decided to avoid posting more collateral and started to sell assets in the underlying TRS portfolio prior to the steep decline at the end of January. At the time of writing the January Report, sales by Volta Finance had generated €17m of losses. As of 14 March 2008, further sales have generated €27m in additional losses, bringing the total realised losses since the beginning of the year to €44m.

 

Considering that bearish market dynamics could push market prices even lower, the Company could decide to sell more assets in the coming weeks. The latest estimate of the marked-to-market value of this TRS, dated 14 March 2008, indicated a further decline of more than 30% relative to its end of February valuation.

 

 

In February, a pool of 2006 mortgages in which Volta Finance has invested showed in its report very high prepayment rates just after reset. This seems to confirm that the Libor Crisis (as evidenced by the spread between the Libor 3 Month and the 2Y Swap) creates an incentive for refinancing. It seems that some prime lenders favour the refinancing of previously "near-prime" borrowers from non-conforming pools who have been current on their mortgage payments for the past two years.

 

As explained in the January monthly report, we anticipated this phenomenon to some extent, despite a consensus view, at the time, saying that the tightening of lending criteria would maintain prepayments at low levels. Unfortunately, additional information received in March on some 2006 pools not owned by Volta Finance seems to confirm that refinancing at reset could be higher than what was anticipated in our end of January scenario.

 

As the evidence of this behaviour is limited to only one pool in which Volta Finance has invested and a few other pools monitored by the Investment Manager, and as the capacity and the willingness of lenders to extend mortgages changes almost daily in the current circumstances, one should be cautious when trying to extrapolate any kind of pattern for the coming months. Nevertheless, Volta Finance would like to point out to shareholders that the first post-reset results presented in this report confirm our view that prepayments could increase significantly. Such a trend, if persistent, would have a worse impact on expected cash flows than what was anticipated in our January monthly report on these 2006 assets.

 

 

Eleven of the 13 positions in the CDO portfolio are mainly collateralised by US leveraged loans. We expect defaults to increase for 2008. Nevertheless thanks to healthy corporate balance sheets (with the exceptions of the automotive, the paper industry and homebuilder sector) a rise in defaults that could significantly impact cash flows due to residual interest holders  in the CDO seems unlikely in the short term but cannot be ruled out at this point.

 

If the economic situation develops into a broad consumer recession caused by declining household wealth and over-leverage, a broader array of companies are likely to become stressed. Such an economic contagion is likely to have a material impact on US CLOs, potentially resulting in cash flows being diverted away from the equity-level tranches. At this stage, however, given that strong actions have been taken by the Fed and the US Government, this scenario is neither the consensus nor our main scenario.

 

 

The Company wishes to remind investors that it is fully committed in assessing the situation and taking the appropriate actions in these difficult market conditions. Specifically, the Company is contemplating various market opportunities to reinvest cash and take advantage of stressed market conditions in the best interests of its shareholders.

 

The Company's semi-annual report and accounts for the semi-annual period ended 31st of January 2008 are expected to be published on 4 April 2008.

 

 

(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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