2023 Interim Results

LEI: 549300E9W63X1E5A3N24

M&G Credit Income Investment Trust plc

Half Year Report and unaudited Condensed Financial Statements

for the six months ended 30 June 2023

The full version of the Half Year Report and unaudited Condensed Financial Statements can be obtained from the following website: www.mandg.co.uk/creditincomeinvestmenttrust

Chairman’s statement

Performance

Your Company delivered a positive NAV total return of 3.58% for the six months to 30 June 2023. This compared favourably with the performance of investment grade fixed income indices such as the ICE BofA Sterling Corporate and Collateralized Index (-0.97%) and the ICE BofA 1-3 Year BBB Sterling Corporate & Collateralized Index (+0.49%).

The first half of the year saw forward-looking policy rate expectations continue to drive pricing in risk assets. Combined with a highly uncertain economic outlook this has resulted in persistent and elevated market volatility, although lower than was the case in 2022. There have been some issuer specific instances of deterioration in credit quality in the portfolio as the effects of higher interest rates and tightening financial conditions have started to materialise. In particular, our investment in the bonds of the French supermarket group, Casino, has had to be written down to a nominal amount (prior to the write down it represented 0.5% of the portfolio). This has been an outlier: our Investment Manager has constructed a diversified portfolio which is designed to protect long-run performance against idiosyncratic risk and credit incidents since inception have been limited.

The year began with speculation that central banks might be approaching the end of their rate hiking cycles, which sparked a renewed appetite for risk and fuelled a strong market rally across bonds and equities. However, optimism over a possible reprieve from interest rate hikes faded as the quarter progressed, with central banks remaining resolute in their fight to curb inflation. This was evident as interest rates were raised again in March despite pronounced market volatility arising from fears about the health of the global banking system.

By comparison, the second quarter was relatively calm as the feared contagion in the banking sector failed to materialise: this led to diminished volatility in bonds and equities and a tightening in credit spreads even though interest rates continued to rise. Volatility in sovereign bond markets and rate weakness persisted although the Investment Manager continued to hedge interest rate risk and maintain low portfolio duration which mitigated the effect on your Company’s performance. The first half of the year closed on a positive note for financial markets as opinion began to shift to the view that a future economic downturn would be less severe than previously feared.

Share buybacks and discount management

Your board remains committed to seeking to ensure that the Ordinary Shares trade close to NAV in normal market conditions through buybacks and issuance of Ordinary Shares. During the half year, the Company bought back 100,000 shares pursuant to the ‘zero discount’ policy initially announced on 30 April 2021. The Company’s Ordinary Shares traded at an average discount to NAV of 0.83% during the period ended 30 June 2023. On 30 June 2023 the Ordinary Share price was 89.5p, representing a 4.9% discount to NAV as at that date. As at 30 June 2023, 2,612,749 shares were held in treasury with an additional 158,783 repurchased since the period end.

Amendment of Articles of Association

The success to date of our ‘zero discount’ policy gave our shareholders the confidence to defer the opportunity to realise the value of some or all of their Ordinary Shares at NAV per Ordinary Share less costs (the ‘Liquidity Opportunity’) in 2023 as set out in your Company’s Articles of Association (the ‘Articles’). The Articles were duly amended at a general meeting on 15 June and the next Liquidity Opportunity will now occur at, or within the twelve months prior to, the 2028 annual general meeting unless shareholders direct by way of a special resolution not to offer such Liquidity Opportunity. Our Investment Manager thus now has an extended window in which to take account of the attractive opportunities it expects to continue to occur in volatile markets.

Dividends

Your Company is currently paying four, quarterly interim dividends at an annual rate of SONIA plus 4%, calculated by reference to the adjusted opening NAV as at 1 January 2023. The Company paid dividends of 1.77p and 1.93p per Ordinary Share in respect of the quarters to 31 March 2023 and 30 June 2023 respectively. Together with the dividends of 1.14p and 2.43p per Ordinary Share paid by the Company in respect of the quarters to 30 September 2022 and 31 December 2022 respectively, the Company’s shares offer a yield (based on share price at the time of writing) of 8.1%. Your Company’s Investment Manager continues to believe that an annual total return, and thus ultimately a dividend yield, of SONIA plus 4% will continue to be achievable although there can be no guarantee that this will occur in any individual year.

Outlook

So far in 2023, financial markets have been far less volatile than they were over the course of last year, which has been supportive for credit spreads. The Company’s positive performance has been driven by the portfolio’s low interest rate sensitivity as well as the additional income generated by higher yielding private assets. The pipeline of private asset opportunities looks healthy and our Investment Manager has been able to use its ability to invest across both public and private markets to improve the yield of the portfolio.

Your Company’s portfolio (including irrevocable commitments) is now 57% invested in private assets, with additional investments of approximately 9% in illiquid publicly listed assets which are intended to be held to maturity. The Investment Manager will continue to deploy capital into both public and private areas of the fixed income market, depending on where it sees the most attractive relative value. The Company’s revolving credit facility was fully repaid over the period and as at 30 June 2023 remained undrawn and ready to be utilised to take advantage of any future episodes of market volatility.

Your board believes that the Company remains well positioned to achieve its return and dividend objectives, as set out above in the section entitled ‘Dividends’.

David Simpson

Chairman

20 September 2023

Financial highlights

Key data

Return and dividends per Ordinary Share

a Alternative performance measure. Please see pages 31 to 32 in the full Half Year Report for further information.

b The total dividends declared in respect of each period equated to a dividend yield of SONIA plus 4% on the adjusted opening NAV of the relevant period.

Investment manager’s report

We are pleased to provide commentary on the factors that have had an impact on our investment approach since the start of the year. In particular we discuss the performance and composition of the portfolio.

In the first half of 2023 investors were forced to navigate volatile market conditions as central banks pressed ahead with the sharpest and most aggressive interest rate hiking cycles seen since the 1980s. The year started positively, with optimism about China’s reopening and hopes that inflation might be slowing fuelling a market rally. Into this strength, we sold investment grade bonds which had been purchased at significantly wider spreads, many in the wake of the mini-budget crisis. We redeployed proceeds into financial credits which priced with an attractive new issue premium and also paid down the outstanding loan balance on the Company’s credit facility as we looked to reduce portfolio risk. Share prices retreated and bond yields increased in February amid concerns that central banks would keep raising interest rates to tackle persistently high inflation. In March, volatility spiked as the collapse of Silicon Valley Bank in the US and the emergency rescue of Credit Suisse in Switzerland sparked turmoil in the global banking sector. The diversified nature of the portfolio and relatively low allocation to debt issued by banks mitigated the effects of this stress episode on the Company’s performance. We remained active in the private part of the fixed income market, reducing exposure to the M&G European Loan Fund and using redemption proceeds to fund a £2 million subscription in M&G Lion Credit Opportunity Fund IV (‘Lion IV’). This was a strategic decision to take advantage of wider spreads and attractive yields available in the mezzanine ABS space in which Lion IV invests. Additional private activity in the early part of the year saw us add to an existing senior secured loan holding on a luxury, business-to-business retail asset, whilst we also purchased the mezzanine loan in a commercial real estate transaction secured over a freehold office building. An additional £1.2 million of commitments to existing private loans was also funded over the first quarter.

The impact of inflation and higher interest rates on economic activity remained in focus in the second quarter of the year. Core inflation (excluding food and energy) continued to prove stubbornly persistent whilst labour markets remained at undesirably tight levels. The European banking sector showed no signs of contagion following events in March which meant market volatility reduced and paved the way for investor sentiment to improve. At this time we took the opportunity to exit positions in troubled issuers Intu SGS and Boporan, both of which had materially underperformed. In May, CPI data in the US and Europe provided a downside surprise as disinflationary trends began to materialise, however the UK remained an outlier as its headline CPI reading came in notably higher than expected at 8.7%. This sparked a fresh sell-off in UK government bonds which continued to underperform peers, although the portfolio’s duration hedge did its job and mitigated the drag on performance from the climb higher in risk-free rates. Portfolio activity increased as we rotated out of tighter yielding bonds, redeploying proceeds into comparable or higher rated asset backed securities (ABS) and collateralised loan obligations (CLOs) at new issue. This provided a significant spread pick-up and improved both the overall yield and credit quality of the portfolio. We continued to add attractively priced private assets into the portfolio as the pipeline of opportunities improved. Pleasingly, these included two secondary market loans in the infrastructure space, a sector where we are less active due to the lower returns typically on offer in primary market transactions. The first is an investment grade quality waste-to-energy (utility) asset, the second, a senior secured loan issued by a prominent player in the UK’s fibre broadband space which we purchased at a notable discount to par, meaning the loan will return significantly in excess of our target return over its term.

We are currently seeing a healthy and diverse pipeline of private investment opportunities across a range of sectors. The funded private asset portion of the portfolio increased marginally over the period to 57.72% (versus 57.02% at 31 December 2022) as new private asset purchases were offset by repayments approximating 5% since the start of the year. We actively monitor the portfolio for signs of distress and currently have two assets, amounting to 0.2% of the latest NAV, which are either in technical default or at some stage of a restructuring process. This is after a notable deterioration in bonds issued by French supermarket retailer Casino (written down by approximately 0.5% of NAV since purchase), for which recovery prospects at this stage look bleak. The position is already marked to market within your Company’s latest NAV.

Outlook

Risk sentiment in markets remains fragile, driven by a number of economic indicators which are closely watched by central banks to inform decision making on the path of interest rates. Two competing market narratives have been established. A ‘hard landing’ – in tightening rates to curb inflation a recession is triggered, and a ‘soft landing’ – economic growth slows enough to control inflation but remains high enough to avoid a recession. At present, the pricing of risk assets is being driven by perceived changes in the probability of each outcome.

Early summer optimism from a swifter than expected deceleration in inflation has now given way to concerns over the length of time it will take to return to the two percent average targeted by central banks. This has led to a growing acceptance by the market that interest rates will remain higher for longer and pushed out investor expectations for rate cuts. Recent key data points to divergent economic performance between Europe and the US. The former showing signs of a worse than expected contraction in both goods and services, whilst the latter proves more resilient and better positioned to engineer the much fabled ‘soft landing’. The combination of deteriorating economic growth and expectations for a prolonged period of elevated interest rates has led to weakening macro sentiment as the third quarter has progressed.

Fundamentals in credit are generally supportive for now but look set to come under further pressure in the latter part of year as the effects of aggressive rate hiking cycles become more evident in the real economy and the capital structures of issuers are tested by the higher interest rate environment. Recent supply in investment grade has pushed credit spreads wider although they remain close to the tights of the year and the overall technical remains strong given the relative attractiveness of all-in bond yields.

Looking ahead, we anticipate interest rate volatility to continue as central banks struggle to return inflation to their desired two percent target in the face of a fundamental shift in price dynamics. We expect this to be driven by longer term structural trends including deglobalisation, a reduced labour supply, and decarbonisation which should support policy rates staying higher for longer. Ultimately, that would also see the Company’s dividend (which has risen in line with SONIA) remain higher, with the dividend yield (based on share price at the time of writing) currently 8.1%. Uncertainty over monetary policy looks set to persist with central bank decisions remaining data dependent and markets seeking clearer signalling on the economic outlook. Against this backdrop the portfolio is cautiously positioned as we approach the latter part of the year, however we remain poised to add risk selectively when either issuer specific or wider market volatility presents itself.

We believe that the Company’s investment strategy is well suited to the wider regime shift in financial conditions that we are witnessing. Sharp increases in interest rates retain the ability to hinder performance, hence we mitigate this risk by maintaining low portfolio duration. Furthermore, the additional yield that private assets have provided to our portfolio has boosted income returns. Prior to the onset of Covid-19, strong risk asset performance was driven by ultra- accommodative monetary policy, benefitting greatly from ‘a rising tide lifts all boats’ economic backdrop.

Waters are now far more choppy. Constructing bottom- up portfolios based on fundamental credit analysis is at the core of our investment philosophy. We see clear strategic advantages in this approach for navigating financial markets in the changing times ahead where there will be a far clearer demarcation between winners and losers within asset classes, sectors and regions. Maintaining flexibility to invest across both public and private markets whilst remaining sector agnostic will, in our opinion, be essential to pursuing the most attractive relative value opportunities.

M&G Alternatives Investment Management Limited

20 September 2023

Portfolio analysis

Top 20 holdings

a Including cash on deposit and derivatives.

Geographical exposure

a Excluding cash on deposit and derivatives.

Source: M&G and State Street as at 30 June 2023