abrdn Income Credit Strategies Fund (ACP) Update - May 2025

Listen to Mike Taggart, Aberdeen's Head of Closed-end Fund Investor Relations, discuss the current marketplace with George Westervelt, Aberdeen's Head of Global High Yield and a Portfolio Manager for the Income Credit Strategies Fund (ACP). 

Transcript

abrdn Income Credit Strategy Fund (ACP)

Podcast Transcript 

May 2025 

Mike Taggart: Welcome to the latest podcast for the Aberdeen Income Credit Strategies Fund, ticker symbol ACP. I'm Mike Taggart, Aberdeen's Head of Closed-end Fund Investor Relations. With me is George Westervelt, Aberdeen's Head of Global High Yield and a portfolio manager for ACP. George, thank you for joining us today. 

George Westervelt: Thanks for having me, Mike. Always a pleasure. 

Mike Taggart:  We're recording this in early May. Markets were obviously driven by news of tariffs in April. It's been volatile. How are you and the team navigating the current market? 

George Westervelt: Look, it's been a bit of a rollercoaster over the past few months. Not just for high-yield, but for all investors. You know, across the world. But, it's a probably makes sense to quickly step back and zoom out so that we can just frame the context of where we are and how we got here.

So, if we go back to early March, you know, growth had been moderating. But really it was still in a pretty good place. And the hard data was supportive of a slowing, but a healthy economy. And the labor data, labor market was in decent shape. We did see, some uncertainty, represented in the soft data. So I'm talking about consumer confidence surveys that were flashing red at the time. And then, throughout the month of March, we did see investors begin to price in that uncertainty around the looming tariff announcements and spreads and high yield, drifted wider throughout the month of March. So, that was kind of the backdrop there. And then the reality is that, the vast majority of investors were surprised by the severity of what we saw on April 2nd, and that's clear.

You know, we all know that markets don't like uncertainty. And the immediate reaction by investors post April 2nd was to de-risk. So that meant seeking out safety and higher quality hiding spots. And in our market, that means portfolio managers, across the asset class were rotating out of Triple C's or low single B rated credits, especially in sectors such as cyclicals or those exposed to the tariff plan. As the administration outlined. 

And the reality is that, you know, that's somewhat duplicative in the cyclicals. And the tariff sectors were really one of the same. So, you know, the pain points were really in the sectors such as autos, chemicals, those retail, energy. These ended up being the worst, performing sectors during the month of April - credit spreads for us, high yield, during that first week were 100 basis points wider. And, that's definitely a noteworthy move, 100 basis point move within our market in one week is is rare.

Mike Taggart:  And, that's across all high yield or is that in one specific rating segment?

George Westervelt: That's U.S high yield, yeah. That's that's across us high yields. So the entire market the broad market. But if we compare that to what was going on in the equity market, it was actually pretty orderly. So you know, our market did did function well during that time. Then a week later, we got that 90 day pause announcement. And, I would say people's heads were were spinning at that point. You know, I think what that did, though, was it provided a clear indication that the administration was indeed sensitive to what financial markets were saying, and that itself provided a measure of stability for investors. And, and yet we we basically been rallying ever since, the reality is that markets like this are especially challenging. Right. Because the typical drivers of investing that we're used to, that investors across the globe are used to, they're basically thrown out the window and they're replaced by this, this hypersensitivity to whatever political headlines hit the tape that day.

But I guess the good news here is that, that when our market reacts to an unforeseen event, it often creates opportunities. And this time is no different. So, you know, we've been active during the month, we're having a lot of daily deep dives, deep dive conversations with our analysts, stressing credits, going through the credits in an effort to identify those opportunities. And we're finding a good amount of them at the moment. 

You know, we're talking about solid credits yielding anywhere from, say, 8 to 12%, that generate a substantial amount of free cash flow, have a decent equity cushion, and also have a balance sheet, frankly, that can withstand a stressed environment. So, yeah, a lot of good opportunities right now continue to be opportunistic when volatility presents itself.

But we are reserving some dry powder, in terms of our risk budget just in case valuations do cheapen up further. And finally, I guess the last thing I'd say on that is, you know, our view is that you do need to get paid for uncertainty. Clearly, there's more uncertainty in the world and in our market. And there was, even three months ago at this point.

And that's the world we're living in, and likely the world we're going to live in for a while here. So, you know, yes, economic growth is likely to come under pressure. But we do foresee growth slowing as opposed to an outright recession. And, yes, inflation. It's likely to increase as a result of the tariffs with companies passing on increased costs to the consumers. But ultimately the economy, corporates and the consumer, they're coming from a position of strength. And they all have the ability to navigate continued turbulence, overcoming loss. And that's pretty much, that's regardless of what we see from the administration. 

Mike Taggart:   So it's not I mean, it sounds like despite the volatility and the uncertainty, you know, you and the team are still focused on the fundamental processes that have always driven the portfolio. 

And that's what's enabling you to find and identify these, opportunities amidst kind of the carnage in the market. But with the volatility and uncertainty, it might be a little early for this, but have you seen a rise in delinquencies or defaults, in the market or in the portfolio at all? 

George Westervelt: So, the short answer is is no, we have not. But to be fair, you know, you typically wouldn't see an immediate response, in defaults as it would take some time to kind of filter through the market. A better short term indicator, is the distressed ratio. And that has been rising. So we're talking about the ratio of bonds, within the index that created a spread of over a thousand basis points.

It's often a good indicator of coming defaults, but that that does remain low levels in historical context. Although it has been drifting higher, however, you know, I think it's a really good question, Mike, because, our new issue market has basically been put on hold since early April, we have seen very, very little. Just the odd deal here and there, in our market, which if that were to continue, you know, that typically would be an indicator of some stress in the market and they wouldn't be able to refinance, deals that were coming due.

But, you know, we don't think that last we think this is temporary. We basically think we're just trying to get some clarity out of the administration, and then the market will be open. And to be frank, I think the market would be open right now if deals would come. There's just not a lot of deals on the calendar. But that's that's actually a good technical for our market and it's keeping it supported. 

But, you know, back to your question on defaults, I think there's there's three reasons that we're not seeing trouble on the horizon, even if we look out further in terms of defaults. And and first is that the High-yield market in its current state, it's a higher quality market than it has been historically.

There's been a lot of balance sheet repair over recent years. There's, a lot of lower quality credits. That typically would have been funded in our market, have sought out alternative funding. So a lot of LBOs, a lot of, Triple C's, have gone to either the leveraged loan market or to the private credit market over recent years. And what that's done is it's left us with a higher quality cohort and, and just not a lot of, a lower quality names. 

Second, the mini default cycles of 2016 and 2020. So 2016 being energy, 2020 being the consumer wash out from the pandemic, that's purged our market of a lot of the lowest quality credit. So we've had these kind of mini default cycles, and there's just not a meaningful amount of problem credits in our market at this point. 

And then finally, what I would say is the record amount of refi activity, if you think back to 2021 and 2022, it was just deal after deal and often at very low coupons. And then we can also include the liability management exercises that we saw on the distressed universe last year.

You know, all that has served to clear the runway in terms of upcoming maturities, which means that the debt maturity wall that you'll often hear investors talk about, it's just it's just not existent at this point. So, you know, even in the draconian scenario where we do enter a recession, which is not our base case, by the way, we would expect the defaults in our market remain contained for the reasons that I just mentioned.

Mike Taggart: Well, that sounds like good news. You know, ACP’ss primary investment objective is to seek a high level of current income. And it's secondary objective is capital appreciation. So a two part question here to kind of keep things fair and balanced. First, where have you been facing the strongest headwinds? You've you kind of mentioned some sectors earlier.

And second, where are you finding the most attractive opportunities? Is there a certain sector or a certain rating quality area, that sort of thing.

George Westervelt: So, if it's okay, I'll just flip the order and start with the most attractive opportunities first. So if we look going into this, we were we resisted relatively conservatively, you know, for this fund.

And by that, I mean that leverage was lower than usual. Our exposure to triple credit credits was low versus where it's been historically. So that was a good thing that provided us with some flexibility to to add to credits that we like on weakness. And I mentioned it before, but there really is there's just us, a lot of solid companies that are yielding high single or low double digits at the moment. We've kind of been waiting for something like this, so it makes it an exciting time to invest in high yield space, and especially for a fund like, like ACP. 

At the end of the day, our goal as portfolio managers is really the same as, that of the end client. And that's to capture income from a diversified portfolio of performing credits. And currently, we're finding that we have a much broader opportunity set, than we did even a couple months ago. In order to accomplish that output.

I guess, on the headwinds, which was your first question. Really, it just comes down to clarity and clarity is, is the biggest headwind that we face right now. At the end of the day, investors, corporate C-suite, executives, consumers, we all need some form of clarity in order to make, informed decisions. And that cloud of uncertainty that's hanging over markets right now, it makes it it makes it difficult

For us, as fundamentally driven investors, we can always rely on the analysis and the valuations, when we make investment decisions. But, you know, let's be honest, we're clearly operating with imperfect information on a on a forward looking basis. And I think our hope and the hope of many is that we can get some clarity around the direction of travel sooner rather than later, so that we can all better understand the ultimate intent of the administration.

Mike Taggart: What are your views as to where the high yield market goes from here? In other words, why should investors be putting money to work in the high yield market?

George Westervelt: Well, let me just first put a disclaimer out there that, you know, we're not in the business of making market predictions for long term investors, and we tend to look through the short-term noise, which there's plenty of right now, with a focus on a longer-term time horizon. But, you know, all that being said, we are we are constructive on the high yield market here.

What could could spreads go wider? Of course they could. And actually, our base case is that we remain we respect we remain rangebound in a somewhat volatile and a headline driven range that sees spreads looking wider over the course of the year. As we get details in the plans of the administration, the impact on the economy, and we'll have a close eye on the hard data and the corporate guidance as it emerges. But, you know, if we think even shorter term, it does seem like we're going to be at a holding period here because the data is just so skewed. 

You know, March data was skewed. April data is going to be skewed until we get clarity on the eventual outline of how things are going to function, and it's going to be a lack of meaningful data. So you probably getting into to May or June before we get some actual data that's that's kind of clean and representative of where we are.

So there's this time period where we should most likely be trading sideways and just waiting. In the meantime, high yield return proposition is is very attractive. You know, it's an income generating asset class. You're getting paid right now. If you compare it for alternative investment options, that may not have the same level of downside protection as high yield. We think it looks especially attractive. 

And, you know, as you know, Mike, when you deconstruct total returns, if you're if you take total returns and you break them into the drivers, you know, you have, you have income, you have capital appreciation and counter that you have default losses. So, income is the primary determinant of those returns. Like the vast majority of total returns are determined by income and by capturing a high level of income, which is what we aim to do in ACP and the form of compound interest. We can actually provide a smoother, more consistent experience for, for the end client and with an equity like return of in the form of an 8% yield, that makes the asset class really attractive to to a variety of clients, to tell you the truth.

So, yeah, I mean, finally, last thing I'll say is that, while we don't feel like the fed will be in a rush to act anytime soon, we do feel like if we get into a situation where growth becomes increasingly challenged, we do like the duration of exposure or the asset class. Kind of a bonus there, as the fed would be spurred to action and cutting rates. And that in itself would, would also protect total returns if spreads were to go wider. So, yeah, I mean, admittedly a bit biased. But we do like the total return proposition for the asset class in both absolute and relative terms here. 

Mike Taggart: Excellent. Well, thank you, George, for that informative update. 

George Westervelt: Of course. Anytime, Mike. Thanks for having me. 

Mike Taggart: There are three convenient ways to learn more about ACP visit our website Aberdeen investments.com. Second, you can email us at Investor Relations at Aberdeen PL Qcom or give us a call at 1-800-522-5465. I'm Mike Taggart of Aberdeen. Thank you for listening.

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