We are pleased to report to our shareholders on the results of The New America High Income Fund (the "Fund") for the period ended June 30, 2020. The Fund's net asset value (the "NAV") was $9.01 as of June 30th. The market price for the Fund's shares ended the period at $7.79, representing a market price discount of 13.5%. The Fund paid dividends totaling $0.26 per share from earnings during the six month period. The monthly dividend was reduced from $0.055 per share per month to $0.05 per share per month in April. Based upon the current rate, the annualized dividend yield on a share of common stock purchased at the year-end 2019 price of $9.13 was 6.6%.
During the first six months of the year, the Fund reduced the amount of its leverage in response to sharply deteriorating financial market conditions. From mid-February through mid-March, securities markets experienced significant price declines as investors reacted to the far-reaching, negative effects of the novel coronavirus disease ("COVID-19") pandemic on economies world-wide. As discussed more fully below by the Fund's investment adviser, prices of risky assets, including high yield bonds, collapsed as investors sought the safe havens of cash and U.S. government securities.
As of June 30th, the Fund's outstanding borrowing through its credit facility (the "Facility") with the Bank of Nova Scotia was $78 million, representing a $13 million reduction in borrowing since the end of 2019. The borrowing represented approximately 27% of the Fund's total assets. Amounts borrowed under the Facility bear interest at an adjustable rate based on a margin above the London Inter-bank Offered Rate ("LIBOR"). The interest rate on the Facility as of June 30th was 1.03%, an attractive spread relative to the portfolio's market value-weighted average current yield of 6.71% on June 30th. The Fund's leverage contributed approximately 20% of the net income earned in the period, an increase from the leverage contribution to income of approximately 15% in 2019.
We remind our shareholders that there is no certainty that the dividend will remain at the current level. The dividend can be affected by portfolio results, the cost and amount of leverage, market conditions, the extent to which the portfolio is fully invested and operating expenses, among other factors. Leverage magnifies the effect of price movements on the Fund's NAV per share. The Fund's leverage increases the Fund's total return in periods of positive high yield market performance. Of course, the opposite is true in an unfavorable high yield market, such as the first six months of this year.
||Total Returns for the Periods Ending
June 30, 2020
||3 Years Cumulative
|New America High Income Fund
(Stock Price and Dividends)*
|New America High Income Fund
(NAV and Dividends)*
|Credit Suisse High Yield Index
Sources: Credit Suisse and The New America High Income Fund, Inc.
Past performance is no guarantee of future results. Total return assumes the reinvestment of dividends.
The Credit Suisse High Yield Index is an unmanaged index. Unlike the Fund, the Index has no trading activity, expenses or leverage.
*Returns are historical and are calculated by determining the percentage change in NAV or market value with all distributions reinvested. Distributions are assumed to be reinvested at prices obtained under the Fund's dividend reinvestment plan. Because the Fund’s shares may trade at either a discount or premium to the Fund's NAV per share, returns based upon the stock price and dividends will tend to differ from those derived from the underlying change in NAV and dividends. The variance between the Fund's total return based on stock price and dividends and the total return based on the Fund’s NAV and dividends is due to the widening of the stock price discount to the NAV over the last year.
Commentary by T. Rowe Price Associates, Inc.
The high yield market returned -5.27% for the six months ended June 30, 2020 according to the Credit Suisse High Yield Index (the "Index"). The year began on a positive note as waning trade tensions appeared ready to spur a rebound in global growth in 2020. Domestic economic signals were particularly encouraging as evidenced by nonfarm payrolls that jumped well above estimates in January and a rise in personal incomes. While reports of COVID-19 in China periodically unsettled markets throughout January and early February, the disease later took on global pandemic status with unparalleled economic impacts to world economies and completely derailed all risk assets, including high yield bonds. The sheer velocity and severity of market declines was unprecedented, particularly through mid-March, and illiquid conditions played a major role during the worst of the selloff. Energy and industries which are vulnerable to business disruptions caused by COVID-19, such as transportation, entertainment and leisure, were challenged fundamentally. As demand for cash spiraled higher, indiscriminate selling was evidenced by no dispersion of returns by credit quality; at one point, prices of B and C rated bonds were both down approximately 20%.
Longer-term U.S. Treasury yields fell to record lows during March as the continued spread of COVID-19 led to strong demand for U.S. government debt. After starting the year at 1.92%, the yield of the 10-year Treasury note, which is a benchmark for mortgages and other consumer lending rates, fell to an all-time closing low of 0.57% on March 9th and finished the period at 0.65%. As March progressed into April, investors began separating the good credits from the poor, and BB rated bonds significantly outperformed CCC rated issues by period-end.
In response to the rapid contraction in economic activity, nearly all major global central banks took firmly accommodative steps. Investors welcomed continued efforts by the Federal Reserve (the "Fed") and the federal government to support the U.S. economy. In early April, the central bank promised up to $2.3 trillion in loans to smaller businesses and municipalities and announced that it would include eligible fallen angels and high yield exchange-traded funds ("ETFs") as part of its Term Asset-Backed Securities Lending Facility ("TALF") and other emergency lending programs. In mid-June, the Fed decided to augment its purchases by starting to buy a broad portfolio of U.S. corporate bonds.
Technical conditions in the high yield bond market were broadly supportive during the second quarter after primary markets came to a complete standstill in March. The asset class experienced a record inflow of $47.3 billion and received additional support from multi-sector, investment grade, and equity investors, which helped offset robust new issuance. Specifically, the volume of gross and net issuance in the second quarter reached all-time highs of $145.5 billion and $75.5 billion, respectively. The majority of the quarter's issuance was concentrated in energy and other market segments significantly impacted by the pandemic, such as gaming and automotive.
Yield spreads of the Index compared to U.S. Treasuries had widened by over 1,000 basis points from the end of 2019 when they peaked on March 23rd at 1,417 basis points. Index spreads ended the period at 711 basis points, still roughly 300 basis points wider than at year-end, with a yield-to-worst of 7.45%. These levels compare with the long-term averages of approximately 607 basis points and 8.70%, respectively. The J.P. Morgan par-weighted default rate tracked higher, ending the period at 6.19% - an increase from 2.63% at the end of 2019 and the highest level since March 2010. For the last twelve months, the energy sector accounted for 46% of default volume, affecting $40.7 billion of outstanding debt.
Macroeconomic uncertainty and significant volatility following the emergence of COVID-19 created a challenging performance environment and caused risk assets to retrace the solid gains generated in 2019 and early this year. However, unprecedented stimulus measures, growing optimism around therapeutic treatments for the disease, and the gradual reopening of economies helped financial markets rebound into the end of our reporting period. Our risk-aware and defensive positioning aided the Fund's relative performance compared to the Index in April as the high yield market rebounded from March volatility. This recovery was led by issuers and sectors that exhibited strong fundamentals, such as higher-quality credits and defensive sectors within the high yield bond universe like cable operators and utilities. In contrast, the impressive gains in May and June were led by the high yield market's more speculative credits, many of which recovered from severely stressed levels after having sold off in March due to their exposure to COVID-19 or commodity prices. Therefore, the portfolio’s defensive and higher-quality positioning was a headwind to relative performance late in the period as lower-quality and more speculative credits drove performance.
Issuers in cable operators and wireless communications, which are generally considered defensive market segments, were among the Fund's top performers for the 6-month period. Netflix, the world's largest internet entertainment service, is one of the rare companies that benefited cyclically from the lockdown, as its subscriber base increased dramatically, essentially pulling forward future subscriptions. An enduring challenge for Netflix is that the creation of new content has been a drain on free cash flow. However, the global health crisis stalled the film production industry, which helped the company's free cash flow approach the break-even level. Additionally, the larger subscriber base means that Netflix will earn more revenue while spending less on content creation. These are meaningful credit-positive developments because the company's path toward an investment-grade rating is largely dependent on its business generating positive free cash flow.
European cable and mobile services provider Altice Europe N.V. was another notable contributor in the cable operators space. The company's subscription business model fosters customer loyalty, its credit fundamentals are improving, and management has made operational adjustments that have led to favorable outcomes. For instance, subscriber metrics in France-where the company's regional performance had historically lagged—showed significant improvement over the past year.
Credit selection in energy was a top contributor to relative performance. Within the industry, we generally avoided distressed names in favor of issuers with larger asset bases and more durable business models. Additionally, we maintain an overweight to large, diversified, and well-capitalized midstream companies that tend to have contractual-based revenue models and to high-quality exploration and production ("E&P") names.
Credit selection in the entertainment and leisure space weighed on relative results, partly due to AMC Entertainment Holdings, Inc. ("AMC"), the world's largest movie theater chain. Its business was secularly challenged before the coronavirus outbreak as attendance has slowly declined over the last several years. The company was overleveraged, and the pandemic significantly disrupted its operations due to the mandated shutdown of crowded public venues including movie theaters. While we were underweight in the entertainment and leisure segment versus the benchmark, our higher relative weight in AMC was a drag on performance.
In the broadcasting segment, iHeartMedia, Inc. ("iHeart"), a leading global media and entertainment company that emerged from bankruptcy in May 2019, detracted from performance. We were a member of the bondholder group leading up to, and throughout, iHeart's recent restructuring process. Upon iHeart’s exit from bankruptcy, the Fund received a package of securities across the new capital structure, and the portfolio's overweight position traded lower amid broad market weakness.
History tells us that, at today's yield spread levels, forward returns have typically been rewarding for high yield investors. Robust positive flows to the asset class have provided technical support, buoyed secondary market prices, and created strong interest in new issues. The higher-quality portions of the high yield market have recovered quickly, and spreads have nearly returned to pre-virus levels. However, the recovery has yet to gain traction market wide, and spreads remain elevated in some segments, such as low-quality energy, where we believe there may be increased default activity.
As the fallout from COVID-19 and the impact of business disruptions begin to be reflected in corporate earnings, there could be another round of volatility, which could provide further opportunities to invest at attractive prices. We believe potential gains that can be captured on a yield spread basis still exist, although overall uncertainty in the economic environment and the trajectory of the global health crisis throughout the rest of the year and beyond remain important considerations.
As always, we aim to deliver high current income while seeking to contain the volatility inherent in this market. Our team maintains a commitment to credit research and risk-conscious investing that has led to favorable returns for our high yield clients over various market cycles.
|Ellen E. Terry
The New America High Income Fund, Inc.
|Rodney M. Rayburn
T. Rowe Price Associates, Inc.
Past performance is no guarantee of future results. The views expressed in this update are as of the date of this letter. These views and any portfolio holdings discussed in the update are subject to change at any time based on market or other conditions. The Fund and T. Rowe Price Associates, Inc. disclaim any duty to update these views, which may not be relied upon as investment advice. In addition, references to specific companies' securities should not be regarded as investment recommendations or indicative of the Fund’s portfolio as a whole.