August Monthly Report

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Guernsey, 17 September 2007 - Volta Finance Limited has published its August 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 August 2007, Volta Finance Limited's Gross Asset Value per share stood at €8.53, down 3% from 31 July 2007.

Volta Finance Limited (the "Company", "Volta Finance") wishes to take the opportunity of the publication of the August monthly report to comment on the current market conditions and their impact on the gross asset value (GAV) of the Company. This is also an opportunity to emphasize the absence of impairment at the end of August on any of the assets held by Volta Finance on the basis of our current knowledge, allowing the Company to firmly maintain its initially anticipated dividend, to be announced in the third week of October and paid in the fourth week of November.

 

 

In August, corporate credit markets have recovered slightly, while the structured credit market has continued to deteriorate.

 

Over the month, this was reflected in a tightening of 70 bps to 331 bps of the 5y iTraxx European Crossover index, while the 5y European iTraxx index tightened about 6 bps to 45 bps. In the US, the 5y CDX Crossover index tightened 108 bps to 243 bps, while the 5y CDX index tightened 10 bps to 72 bps.

 

In spite of this slight improvement, corporate credit markets remain quite volatile. While not going back to end-of-July levels, investment grade indices (iTraxx and CDX) have widened in the first week of September. Non-investment grade indices (iTraxx Crossover and CDX Crossover) also widened, albeit to a lesser extent.

 

The situation did not improve for leveraged loans. The leveraged loans European benchmark LevX index (senior series 1 - 5 y), which hovered around 95.5 points throughout August, has continued to trade around the same level in the first week of September.

 

However, and in spite of a show of confidence in corporate credit on the back of strong credit fundamentals, structured credit investors have not returned en masse to the market. This has caused mark-to-market valuation of structured finance assets such as CDOs and ABS to continue suffering from large price discounts due to weak liquidity.

 

 

Due to this market environment, the mark-to-market value of Volta Finance assets, which is reflected in its gross asset value (GAV) of €8.53 as at 31 August 2007, is down 3% month-to-month.

 

We believe such a mark-to-market change in the gross asset value of the Company is not a guide to the expected cash flows from the Company's assets, which determine the Company's target dividends, but rather reflection of the present scare with everything structured credit related. Volta Finance firmly maintains its target dividend for its first financial year given that all its assets' cash flows have been in line or higher than the initial expected cash flows.  

 

The whole portfolio also benefits from a term financing and over three-quarters of the portfolio have an imbedded leverage that is not directly sensitive to mark-to-market valuation.

 

 

While the mark-to-market value of the Company's investments in corporate credit was the first to suffer from wider spreads July, they were the first to recover from the August corporate credit spread tightening: the gross asset value of the bespoke ARIA II CDO and the equity tranches of the Jazz III CDO are up 3.9% over the month.

 

While the volatility of the recent months has caused the mark-to-market value of Volta Finance's corporate credit investments to fluctuate, it is also creating trading opportunities for the investment manager. Trading gains creations have permitted to lift the ARIA II tranche's attachment point by one basis point to 1.61% in July.

 

As of the end of August, the ARIA II bespoke tranche and the Jazz III CDO equity tranche keep their full capacity to distribute their expected cash flows.

 

 

As at the end of August, the gross asset value of the leveraged loans Total Return Swap (TRS) was down 10.9% on July.

 

There is no defaulted credit and the investment manager has not witnessed any meaningful credit deterioration in any of the assets it holds. Meanwhile, the market default rate remains at an historically low level, pointing to strong economic fundamentals. Nonetheless, the investment manager believes that the market will likely remain volatile and nervous for the several months to come on the back of the lack of liquidity as well as uncertainties regarding the amount of loans currently on the balance sheet of banks.

 

As part of Volta Finance's financing strategy, the leveraged loan exposure is gained through a Total Return Swap. This leverage, which is based on 5-year term financing with locked in financing level, is the only one in Volta Finance that is sensitive to mark-to-market variations.

 

The purpose of the TRS is to provide exposure on a leveraged basis to a diversified pool of leveraged loans including senior secured, second lien and mezzanine loans from mainly European issuers selected and actively managed by the investment manager. The investment manager has continued to sell mezzanine and second lien loans held in the reference portfolio and to buy senior secured loans. The expected cash flows of the TRS are unchanged.

 

 

The mark-to-market value of Volta Finance's ABS investments is slightly down 0.7% in August.  The discount to which ABS are currently trading is to be explained mainly by a weak liquidity on all financial markets and especially on structured credit markets.

 

Regarding assets backed by UK non-conforming residential mortgage loans, which accounts for 6 out of the seven ABS held by Volta Finance, the performance has so far been in line with our expectations. Higher interest rates coupled to a stricter lending policy from UK-based mortgage originators could have a significant downward effect on UK property price. This would affect the capacity of UK borrowers to refinance their homes. Under such a scenario, the credit performance of UK non conforming assets could be negatively affected. The investment manager will continue to monitor closely this situation. As of the end of August, we believe that the risk of increasing delinquencies and defaults is mitigated by lower expected prepayments. In turn, we maintain the assumptions regarding the expected cash flows modelled for the UK non-conforming assets held by Volta Finance.

 

 

In spite of strong economic fundamentals, the mark-to-market value of Volta Finance's third-party CDOs continued to decline in August with a 7.7% decrease on July.

 

All those residual tranches of CLOs have been acquired on the primary market during the ramp-up period and before the spreads start to widen, hence locking in cheap liabilities compared to post-July 2007 market conditions. More importantly, the return modelled at the CLOs purchase is not based on a liquidation of the assets in the near future and is rather based on five years or more of reinvestment. CLOs that will reinvest their prepayment proceeds will likely benefit from higher returns on newly invested assets.

 

We continue to believe that those mark-to-market variations are not reflective of the credit quality of those assets. All CDOs in this bucket are backed by US (predominantly) and European leveraged loans of good quality. Indeed, on all of those transactions, the key parameters (rating of the underlying obligations, current spread of the portfolio) are unchanged as at the end of August and the amount of realised losses is not significant, i.e. below what was modelled.

 

 

 

The Company reiterates what was said upon the publication of the July monthly report. The Company is currently closing the accounts for its first financial year that ended on July 31st, 2007 and restates its target of a dividend of at least 3.5% of the IPO price of €10 for the period from December 20, 2006 to July 31, 2007, while maintaining its target dividend of 9.5% of the IPO share price for the second financial year. The dividend that will be actually paid to investors is dependent on the Company's distributable income, as defined in the prospectus of the Company and subject to the Company's auditors' validation.

 

The dividend will be announced upon the publication of the Company's annual report in the third week of October. The payment of the dividend will follow the Annual Shareholder Meeting in the fourth week of November. The financial calendar of the Company is available on the Company's website.

 

(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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