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, 2023. The Fund's net asset value (the "NAV") was $7.85 as of June 30th. The market price for the Fund's shares ended the period at $6.65, representing a market price discount of 15.3%. The Fund paid dividends totaling $0.20 per share from earnings during the six-month period.
The Federal Reserve (the "Fed") continued its program of increasing interest rates in order to combat stubbornly high inflation. The Fed increased the federal funds rate three times during the period. Worries about the impact of higher interest rates and inflation on economic growth continued to weigh on investors' minds. The Fund's investment adviser - T. Rowe Price Associates - discusses the market environment and its market outlook in detail below.
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 31% of the Fund's total assets. Amounts borrowed under the Facility bear interest at an adjustable rate based on a margin above the Secured Overnight Financing Rate. The interest rate on the Facility as of June 30th was 6.10%, well above the rate of 5.32% at year-end 2022 and more than double the 2.47% rate the Fund was paying on the Facility a year ago. The difference between the market-value weighted average current yield on the portfolio and the rate paid on the Facility has narrowed to 1.30 percentage points at June 30th, compared to a yield spread of 2.07 percentage points as of December 31, 2022 and 4.68 percentage points a year ago.
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. In addition to increasing the amount of income available for the dividend, leverage magnifies the effect of price movements on the Fund's NAV per share. The Fund's leverage increased the Fund's total return in the positive high yield market of the first six months of the year. Of course, in a poorly performing high yield market, the leverage would decrease the Fund's total return.
||Total Returns for the Periods Ending
December 31, 2023
||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 widening of the stock price discount to the NAV over the period.
The high yield market returned 5.84% in the six months ended June 30, 2023, according to the Credit Suisse High Yield Index.
The collapse of two major regional banks in mid-March weighed on investor sentiment. Following a run on its deposits, Silicon Valley Bank fell into Federal Deposit Insurance Company ("FDIC") receivership, followed within days by New York-based Signature Bank. Reports of stressed balance sheets at other regional banks fed investors' concerns that problems in the industry - a key source of financing for commercial real estate and other smaller-size businesses-would result in a severe tightening in credit conditions. Working with other regulators, the Fed appeared to successfully stem the regional bank outflows, at least temporarily. Fed officials increased rates by a quarter point at their March 22 policy meeting but acknowledged that tighter credit conditions might lessen the need for further hikes.
The apparent containment of a potential regional banking crisis appeared to boost investor sentiment. Signs emerged in April that California's First Republic Bank was likely to follow similarly tech-focused Silicon Valley Bank into failure. The FDIC took the bank into receivership on May 1st, marking the second-biggest bank failure in U.S. history, but the stocks of other regional banks stabilized over the following weeks. News late in the second quarter that all 23 of the nation's largest banks had passed the Fed's stress tests also seemed to reassure investors.
During the period, improving economic data appeared to support the performance of risk assets. After falling in four of the previous five months, retail sales rose in both April and May. In addition, in May an unexpected increase in durable goods orders, a jump in the construction and sale of new homes, a positive reading on consumer sentiment and a solid rise in personal incomes further bolstered investors' outlook on the markets. Though weekly jobless claims spiked to their highest level in nearly two years in June, continuing claims fell over most of the quarter.
After raising rates by a quarter point at their early-May policy meeting, Fed officials held rates steady in June. However, they continued to insist that the battle against inflation had yet to be won - suggesting that June's lack of action was probably a "skip" instead of the widely anticipated "pause" in their rate-hiking program. In prepared testimony before Congress late in the quarter, Fed Chair Jerome Powell stated that "nearly all policymakers expect that it will be appropriate to raise interest rates somewhat further by the end of the year." As measured by futures contracts, expectations that the Fed would reverse course and begin cutting rates late in 2023 seemed to fade.
The yield spread between high yield bonds and U.S. Treasuries narrowed by 87 basis points during the six-month period as measured by the J.P. Morgan Global High Yield Index; however, the average yield on a high yield bond of over 9%, is indicative of attractive forward returns. Capital markets activity increased year-over-year, producing $95.6 billion in new high yield issues compared with $71 billion during the first half of 2022.
High yield companies' fundamentals remain resilient, driven by a number of factors: (1) the refinancing waves of 2020 and 2021 have kept interest coverage ratios high for fixed-rate capital structures, which also (2) pushed out near-term maturity walls, and (3) the relative resilience of the U.S. economy. While the U.S. high yield default rate increased quarter-over-quarter to 1.6% as of June 30th from 1.3% in March, default activity has been idiosyncratic and notably 31% of defaults in the period are repeat offenders. The J.P. Morgan par-weighted default rate increased to 1.64% from 0.84% in December, but remains well below its long-term average.
Credit selection in the wireless communications segment added value. Asurion, the leading provider of mobile protection services, was a notable contributor within the portfolio's loan asset class. We believe that Asurion's dominant market position, solid credit profile, near-term revenue projections (partly due to the recent extension of its contract with Verizon through the end of 2027), and an attractive coupon support our high conviction in the company.
The portfolio's allocation to bank loans aided relative performance, partly due to UKG (Ultimate Kronos Group), a provider of workforce management solutions and human resource management services. The company has a market-leading product suite, diversified and sticky customer base, and a recession-resilient recurring revenue profile. Our investment in the issuer's second-lien loans continued to generate solid gains.
Security selection in the health care industry was beneficial, partly due to for-profit hospital company Community Health Systems. Declines in contract labor costs, recovering volumes, and marginally better reimbursement rates are expected to contribute to improved performance for the company throughout 2023.
The portfolio's overweight in the entertainment and leisure segment contributed to relative results due to the continued post-Covid resurgence of live events, trips, and activities. Airlines, hotels, theme parks, and cruise ships have been among the better-performing industries in terms of earnings improvement as consumers continued to demonstrate a preference for experiential spending. We expect this trend to continue throughout the rest of 2023.
Leading audio company iHeartMedia was a meaningful detractor from performance, partly due to cyclical pressures in the radio industry. When there is a pullback in the broader economy, advertising spending is typically one of the first expenses that companies reduce or eliminate. Therefore, iHeartMedia's results are highly sensitive to the macroeconomic environment. Terrestrial radio also faces a difficult secular outlook amid significant competition in digital audio from large, well-capitalized companies including Apple, Amazon, and SiriusXM. However, we believe iHeartMedia's scale and breadth of digital assets should continue to support significant free cash flow generation.
Credit selection and the portfolio's overweight in the cable operators reduced portfolio returns. DISH Network has faced delays in overhauling its spectrum as it moves into the wholesale wireless market. Additionally, in February the company disclosed a data breach that potentially included personal customer information. Despite the challenges the company has faced in rolling out its wireless network, they have made significant progress-reaching over 20% of the U.S. population in June 2022-and are poised to enter the wireless market as a facilities-based provider of wireless services with a nationwide consumer offering, competing with Verizon, AT&T, and T-Mobile.
Security selection in the CCC rating tier also weighed on investment performance, partly due to Altice France, a wireless telecommunications services and cable provider whose first quarter results were weaker than expected. The issuer's underperformance was largely the result of its split CCC rated capital structure and concerns about a 2025 debt maturity. However, we expect the company will be able to access capital markets to refinance the debt well ahead of maturity. Altice could also potentially use asset sales to deleverage. As with all the names in which we invest, we continue to monitor developments closely.
Financial conditions and lending standards have been tightening for over a year as the Fed and most developed market central banks aggressively raised short-term interest rates to combat inflation. These tighter financial conditions have resulted in historically light new issuance which, combined with manageable cash flows, have created positive technical conditions in the high yield market. Despite modest cash inflows, the need to reinvest coupon payments has fostered strong demand for new deals, while the absence of significant outflows has supported high yield bond prices in the secondary market.
As a result of the challenging macro economic environment and tighter financial conditions, we anticipate the high yield bond market default rate may continue to move toward to its long-term average of 3-4% annually over the near to medium term, although we believe it will remain well below levels seen during previous recessionary periods. Furthermore, the asset class continues to provide attractive yields, and we believe investors will be fairly compensated for accepting somewhat higher default risk.
High yield bonds have never experienced two consecutive years of negative returns. Years in which the asset class sells off, as it did in 2022, have historically been followed by multiyear periods of positive returns. Given the current relatively high-quality nature of the asset class - roughly 60% is composed of BB rated bonds - we believe this trend may continue.
|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.