We are pleased to report to our shareholders on the results of The New America High Income Fund (the "Fund") for the six month period ended June 30, 2021. The Fund's net asset value (the "NAV") was $10.01 as of June 30th. The market price for the Fund's shares ended the period at $9.23, representing a market price discount of 7.8%. The Fund paid dividends totaling $0.25 per share from earnings during the six month period. Based upon the current rate, the annualized dividend yield on a share of common stock purchased at the year-end 2020 price of $8.68 was 6.9%.
As of June 30th, the Fund's outstanding borrowing through its credit facility (the "Facility") with the Bank of Nova Scotia was $84 million, unchanged from borrowings at year-end. The borrowing represented approximately 26% 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. The interest rate on the Facility as of June 30th was 0.95%, an attractive spread relative to the portfolio's market value-weighted average current yield of 6.08% on June 30th. The average rate paid during the period on the borrowings was 0.97%, compared with the average rate paid during 2020 of 1.53%. The Fund's leverage contributed approximately 24% of the net income earned for the six month period ended June 30, 2021, an increase from the leverage contribution to income of approximately 21% for the year ended December 31, 2020.
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, such as the first six months of this year. Of course, the opposite is true in an unfavorable high yield market.
||Total Returns for the Periods Ending
June 30, 2021
||3 Years Cumulative
|New America High Income Fund, Inc.
(Stock Price and Dividends)*
|New America High Income Fund, Inc.
(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 returns are calculated by determining the percentage change in net asset value or market price (as applicable) and assumes the reinvestment of dividends. Investment return and principal value will fluctuate so that shares, when sold, may be worth more or less than their original cost. Performance is for the stated time period only; due to market volatility, the Fund's current performance may be lower or higher than quoted.
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 narrowing of the stock price discount to the NAV over the last year.
Commentary by T. Rowe Price Associates, Inc.
The high yield market returned 3.89% for the six month period ended June 30, 2021, according to the Credit Suisse High Yield Index (the "Index"). Early in the reporting period, new stimulus measures fueled higher expectations for growth and worries about potential inflation, driving a rise in U.S. Treasury yields. Longer-term yields on government bonds moved sharply higher during the period, with the yield on the benchmark 10-year note jumping from 0.93% to 1.74%, its highest level since late 2019. The accelerated rollout of the Covid-19 vaccine seemed to further boost investor confidence. By the end of March, nearly one-third of Americans had received their first dose of the vaccine. As the third wave of the corona virus abated, many states began to reopen. As they did, hiring resumed, particularly in the hospitality and leisure industries. The economic rebound and lingering supply chain disruptions led to price pressures in some sectors of the economy. In May the U.S. Department of Labor reported that core consumer prices (excluding food and energy) jumped by 0.9% in April, the most in nearly four decades and roughly triple consensus estimates. Core prices rose another 0.7% the following month, and the headline increase in consumer prices for the year ended May 31, 2021, hit 5%, the most since 2008. Market reaction to the inflation news was muted, as investors seemed reassured by repeated statements from the Federal Reserve (the "Fed") officials that inflationary pressures were likely transitory and primarily due to pandemic-related supply constraints. Fed Chair Jerome Powell revealed that Fed officials have begun to discuss slowing the central bank's monthly bond purchases, the first step toward eventually raising interest rates. The Fed's June Summary of Economic Projections showed that policymakers now expect two rate hikes by the end of 2023, indicating a faster pace of tightening than previously projected.
Technical conditions in the high yield market were mixed during the first quarter. Despite modest cash outflows from dedicated high yield mutual funds, strong demand for high yield bonds from multi-sector strategy funds and institutional investors helped to absorb a record $160 billion in new issuance between January and March. The majority of the cash raised by issuers in the first quarter was used to refinance existing debt, allowing companies to lower financing costs, extend maturities, bolster liquidity, and repair balance sheets. In May and June new issue proceeds were increasingly directed toward acquisition financing and leveraged buyout activity. High yield issuance moderated later in the period, although it was still quite high by historical standards; notably, the percentage of total issuance by CCC rated companies was the largest since 2008, driven, in part, by investors' reach for yield. The yield on the Index declined to a record low 4.19% in June and yield spreads compressed to 358 basis points as equities and Treasuries rallied amid growing confidence that recent inflationary pressures will prove transitory. The J.P. Morgan par-weighted default rate decreased to 1.63% from 6.17% in December 2020, and now sits well below the 2.63% seen in December 2019, before the onset of the global pandemic.
As the high yield market struggled with historically expensive valuations, our higher-quality energy positioning and select investments in convertible bonds of some of our highest conviction names supported the portfolio's relative performance. Overall, we maintained our disciplined, risk-aware positioning with overweight allocations to the cable operators and utilities segments. Within the energy industry, we broadly avoided distressed names in favor of issuers with larger asset bases and more durable business models. We maintained an overweight to large, diversified, and well-capitalized midstream companies that tend to have contractual-based revenue models as well as an overweight to relatively high-quality exploration and production ("E&P") names.
Security selection within the BB rating tier added to performance, in large part, due to the portfolio's overweight positions in fallen angels Occidental Petroleum and Continental Resources. These E&P companies benefited from a surge in oil prices during the period and improved fundamentals, as both management teams remained focused on executing their debt reduction plans. Additionally, our positioning in the longer-dated issues within these capital structures enabled the portfolio to benefit from the rally in rates.
Credit selection in the health care segment aided relative performance. Avantor is a leading provider of product and service solutions to laboratory and production companies. Increasing demand for its products supported the company's performance, and management has continued to execute on its deleveraging strategy. The strength of the company's balance sheet should enable Avantor to move forward with its strategic plans for vertically integrated merger and acquisition transactions.
Credit selection in the satellites industry contributed to relative performance, partly due to Intelsat, which operates the world's first globalized network. The secured debt traded higher after the company reached an agreement with some of its creditors and filed a financial reorganization plan that could significantly reduce debt and enable Intelsat to pay down secured bonds and loans owned by the Fund upon exit from bankruptcy. The reorganization plan positions the company to potentially emerge from bankruptcy in the second half of 2021. Our investment team has closely followed developments in this credit story for several years. When the company filed for bankruptcy in May 2020 we saw an excellent risk/reward opportunity in the secured part of the capital structure based on our fundamental view that the value of the core business covers the company's secured debt.
Security selection within the CCC rating tier was a relative performance detractor, largely because we did not own many of the lower-quality, and in our view, more fundamentally-challenged names that continued to drive performance against a backdrop of easy access to capital and rising commodity prices. With a total return of 7.84% in the first half of the year, CCCs outperformed the 3.49% total return of B rated issues and 2.37% total return of BB rated issues. Our investment team continued to execute our investment process by maintaining a risk-aware, disciplined approach, which meant we did not chase gains seen in the more speculative areas of the market.
Credit selection within the financials segment detracted from performance largely due to the portfolio's underweight in diversified holding company Icahn Enterprises. The company's portfolio, which has large public equity holdings, performed well alongside the rally seen in the broad equity market during the first half of 2021. We underweighted the position because during the market volatility of 2020, the company's portfolio experienced a decline in value of more than 65%. In our view, this type of volatility in the portfolio's NAV is unacceptable for a BB rated credit.
We remain constructive on credit risk overall. Companies that were among the hardest hit by the pandemic shutdown are likely to experience significant recoveries as the economy continues to reopen. Many issuers in the entertainment and leisure industries could move from near-zero earnings to having a meaningful boost in revenues, which should create a supportive environment for taking credit risk. Nevertheless, we are mindful of valuations and remain committed to controlling risk exposures despite our benign default expectations for the year ahead.
After a period in which a record number of downgrades of formerly investment grade rated issues entered the high yield asset class, the market could be on the verge of a sea change. Given the rebound in earnings, balance sheet repair, and the liquidity that has been afforded the broad market, we believe rising stars could be a prominent theme in the high yield asset class over the medium term. Identifying upgrade candidates among the relatively higher-quality high yield bond rating tier could create significant opportunities
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.