PR OFILE


Energy and ESG


Energy can include transition opportunities and strategic renewables, although renewables are not always the most attractive from a credit perspective: “Spreads are too tight on some renewable projects. We need to be selective around rules, pricing and industry dynamics for renewables, because the underlying volatility is not great for credit,” says Aylward. “Energy transition needs enormous investment and ignoring the traditional side creates challenges.”


Sona has an ESG policy but views ESG as being in something of a state of flux with potential for nuclear energy to be seen as more positive. Sona has identified some firms such as insulation makers as beneficiaries of ESG tailwinds and is also cognizant of ESG risks that could make it difficult to exit investments.


constructive outcomes. “We are certainly entering a higher volatility regime, but we are not convinced that spreads will widen further since there are scenarios, such as peace in Ukraine, which could be helpful. We are also mindful that if negative sentiment becomes more pervasive, asymmetry could fade.”


The liquid strategy can tactically shift its directional bias but Aylward is confident about even better security selection opportunities: “If central banks are no longer suppressing volatility we should see more broad dispersion in credit markets,” he says.


In mid-2022, the firm sees abundant windows of opportunity to deploy fresh capital in both strategies.


see credit could be still in a period of transition towards wider spreads going a lot further. We have been net short because we see spreads widening, with names hitherto bought by the ECB likely to be first. Some zombie companies may struggle to refinance, and others may not be able to cope with energy costs after their hedges roll off. A simple long energy producers and short energy consumers trade has worked well,” says Aylward. Sona is not directly trading macro variables such as inflation and interest rates but both are hugely important for credit markets and refinancing. “For some borrowers a 7% rate is the new 4%,” says Aylward. The Sona team’s long history in the credit markets makes them less surprised than some less seasoned participants. “The new normal is more normal than the old normal. The entire portfolio is adapting to the new paradigm of less central bank support, combined with soaring energy and input costs. Some businesses cannot pass on the costs and others can but ultimately may face demand destruction,” says Aylward. Credits with low margins and limited pricing power could be short candidates and others may become so when they


Fig.3 Capital Solutions – Three Verticals


refinance at higher rates or fail to do so: “Some business models are anchored to old credit market conditions,” adds Aylward.


The current environment is in some ways harder to underwrite credit risk in than Covid. “Though Covid was unique and broad in effect, we had confidence that many companies would ultimately normalize again. Now we are speculating whether parts of the European industrial base could become cashflow negative at some stage given the pressures such as energy and electricity prices. European industry faces enormous challenges: gas costing 15x as much as in the US, huge budget deficits, slowing economies, and withdrawal of ECB support,” points out Aylward. “The US also has different issues with spiking mortgage rates,” he adds. Market consensus has been slow to respond. “The consensus forecast is for near zero defaults, but we expect not only more defaults, but also lower recovery rates,” says Aylward.


Notwithstanding the net short stance, Aylward remains flexible enough to entertain more


Illiquid opportunities in capital solutions Sona’s illiquid capital solutions strategy has analytical, informational and deal sourcing synergies with its liquid strategy. The team’s strong 20-year networks will often secure preferential or exclusive access: “Over half of our deal flow has been on a preferred or exclusive basis. We are a leading hedge fund in European high yield and get the first call on bespoke deals. There is also some potential position overlap within the event driven vertical, which could make up 20-30% of the capital solutions portfolio, though only liquid positions would appear in both strategies,” says Aylward.


The Covid dislocation provided the genesis for a $150 million allocation to Sona’s capital solutions strategy in June 2020, which was then doubled in November 2020 and further increased in December 2021 with a leverage facility. The strategy net IRR is in the mid to high teens but realized returns can be higher when crashes, crises and other dislocations throw up exceptional opportunities. Returns overshot the target after the Covid crisis and recently in 2022 some individual investments have generated absolute returns as high as 60% in 6 weeks. (It does not make sense to annualize


Source: Sona Asset Management


Financing Solutions


We work alongside the company, its sponsors, and banks to help structure innovative tailored financing solutions with compelling yield premiums in attractive situations.


Liquidity Finance


Providing solutions for liquidity and broad capital structure improvement. We aim to be well compensated for risk, rather than to assume ownership, something that potential borrowers covet.


Event Driven Credit


Fundamental, catalyst driven investing based on identifying, financing and often facilitating a specific catalyst over a typically short (6-18 months) timeframe.


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