M&G CREDIT INCOME INVESTMENT TRUST PLC

(the “Company”)

LEI: 549300E9W63X1E5A3N24

Quarterly Review

The Company announces that its quarterly review as at 30 September 2022 is now available, a summary of which is provided below. The full quarterly review is available on the Company’s website at: 

Market Review

The downward pressure afflicting the health of several leading economies increased in the third quarter, as policymakers continued to battle inflation. The US Federal Reserve announced its third 0.75 percentage point interest rate rise of this tightening cycle in September despite concerns over a slowing economy. Other central banks carried out similarly dramatic rate hikes during the quarter despite growing fears about the health of many economies as an energy crisis took hold in Europe.

Developments in the third quarter were largely overshadowed by political and market events in the UK during the closing weeks of September. Although UK gilts had been under pressure for much of the quarter amid fears over persistent inflation and rising interest rates, the sell-off intensified following the UK government’s mini-budget announcement. Investors took fright from the prospect of a raft of unfunded tax cuts and additional government borrowing, triggering extreme turbulence in gilt markets and creating a “doom loop” for LDI pension strategies. As gilt prices tumbled pension funds were forced to cover collateral calls, selling gilts into a falling market, resulting in even lower gilt prices, higher gilt yields, bigger losses and further collateral calls. In the final days of the month the Bank of England was forced to step in and launch a temporary £65bn programme to purchase long-dated government bonds in order to ease pressure in the gilt market.

Manager Commentary

It was another difficult quarter for bond returns as core sovereign yields continued to climb even higher and investment grade credit spreads widened. Given the market turmoil in the UK, gilts and sterling credit underperformed, particularly long duration assets as a result of selling pressure from UK LDI accounts, although our duration hedge mitigated the effect of rising interest rates on portfolio returns. Credit spreads remained under pressure into the quarter’s close as hawkish central banks, intensifying fears of a recession and disruptions to Europe’s energy supply contributed to a deteriorating macro outlook. Against this backdrop, the Company’s NAV total return for Q3 was -1.60%. This compares favourably to the performance on investment grade fixed income indices such as the ICE BofA Sterling and Collateralised Index which fell by 12.56%. The portfolio’s low duration was the main contributor to this relative outperformance.

During the period we sold down our remaining AAA-rated CLO holdings and rotated into BBB-rated corporate bonds which, in our opinion, represented an attractive opportunity to meaningfully add risk and yield into the portfolio. We continue to see strong relative value in investment grade financials and insurers, adding subordinated paper from Scottish Widows, Hiscox and HSBC along with senior unsecured bonds from Zurich, Deutsche Bank and Credit Suisse. Issuers in the banking sector typically benefit from robust, prudently managed balance sheets in addition to loss-absorbing capital buffers which became a regulatory requirement for banks in the wake of the 2008/09 financial crisis, making them well positioned to perform through an economic downturn. Private transaction activity remained steady and during the quarter we participated in the refinancing of a securitisation backed by fund finance commitments, maintaining our original commitment whilst taking additional exposure by purchasing the BB+ first loss tranche, in a sector that benefits from very low historical default rates. We also took a c. £1.5m hold in a new receivables backed loan to a European life insurance company, with the original loan having almost fully amortised after performing well since being purchased in 2019.

During the quarter we drew down a total of £5m from the Company’s credit facility in order to take advantage of the pronounced volatility and enhanced returns available in the public bond market.

Outlook

Economic conditions have continued to deteriorate in the third quarter, with the UK, Europe and the US expected to be in recession by, or at some point during 2023. In the UK, events since the summer have led to a rise in political instability which has played out against a backdrop of continued widespread industrial action and growing civil unrest at the cost of living crisis. As recently witnessed, political events have the potential to unleash seismic ramifications on markets and could stoke volatility in the short term, although initial market reactions to Prime Minister Sunak’s appointment have been positive. Additionally, the announcement that energy support measures would be reassessed In April 2023 carries potential for further upside inflationary risk. On the international stage geopolitical uncertainties will remain central to the economic outlook for 2023, with a now greater probability of the Russian invasion of Ukraine developing into a long, drawn-out struggle. At present, a settlement to the conflict looks unlikely, with the economic and military stand-off between Russia and the West set to continue and energy prices remaining elevated as a result. Following the mini budget, UK mortgage rates reached a 14-year high in another blow to real disposable incomes already constrained by rocketing food and energy prices, whilst global policy tightening has seen this trend mirrored more widely. The threat to small businesses as well as non-essential goods and services looms large, with changing consumer habits and reduced spend set to affect the margins and profitability of businesses, from SMEs to large corporates.

Overall bond yields are at a 10-year high and although we believe this represents an attractive entry point (as displayed by our increased purchasing activity in the public market), we wish to remain flexible and retain some firepower for future deployment. We expect credit spreads to remain under pressure as central banks continue their tightening cycles and envisage further opportunities to add attractively priced risk into the portfolio. As always we remain selective, with our present focus on public investment grade sterling credit where bonds remain historically cheap despite bouncing off recent lows. Companies in this space are large corporations with strong balance sheets and limited probability of default, well equipped to go through periods of uncertainty or even recessions. That said, given the rise in borrowing costs there are issuers that will face difficulty in refinancing existing debt profiles and as such we favour those with manageable maturity walls and access to ample liquidity. Although ongoing volatility in public markets has reduced the number of new private opportunities we are being shown, those which we have proceeded on have seen an improvement in pricing terms (vs earlier in the year), with deals moving to completion more swiftly. Historically, the final quarter of the year has seen an increase in private deal flow as borrowers budget for the year ahead and move to secure funding.

Whilst portfolio returns have been affected by the volatility in credit markets, volatility creates dislocations and dislocations create opportunities, particularly for investors equipped with resources and experience. We are now seeing an increased number of public and private bonds offering returns in line with or in excess of our long term target of SONIA+4% and will continue to cherry-pick the credits we believe offer the most attractive risk-adjusted returns, seeking to increase the yield and credit quality of the portfolio as we do so.

Link Company Matters Limited

Company Secretary

2 November 2022

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