Portfolio Update

Alcentra European Floating Rate Income Fund Limited

Market Commentary

January saw a solid recovery in the European Loan market on the back of improved sentiment (better news flows on trade negotiations, US rates policy and the US economy) and solid technicals (low European issuance, firm demand and less USD selling pressures). USD loans within the index outperformed, but from a lower level (+2.12% return for the month), after the technical selling pressure from US retail outflows in December abated. The Credit Suisse Western European Leveraged Loan Index ("CS WELLI") excluding USD returned +0.85%, in line with the performance of the Fund[1].

The Fund was up 0.77% (gross) for the month. The CS WELLI (hedged to GBP) returned 1.22% for the same period2.

With only €2.0bn of European Loan issuance, January saw one of the quietest starts to the year on record, and the lowest January volume since 20123. Overall issuance was down -86%4, with declines in both M&A driven volumes (-91%) and refinancings (-73%)5. The lower volume is a function of the high level of M&A activity seen in 2018 leading to a thinner near term pipeline, coupled with the Q4 market volatility leading to less PE Sponsor M&A activity (buyer and seller mismatch), despite continued dry powder to put to work. For the month, the average new issue spread was 413bps (including the benefit of above-zero floors) at a price of 99.736, however this was based on a relatively small volumes of deals, a number of which were add-ons for existing borrowers (Nets, Wittur, M7).

As is usual for the CLO market, new issuance volumes for January remained low with €0.5bn pricing in the month, -34% from €0.8bn in the prior year. Subsequent to the month-end two further CLOs priced, bringing YTD volumes to €1.4bn7. While there is a pipeline of c.30 warehouses in the European CLO market, the recent widening in CLO liability costs is putting the arbitrage under pressure, and will likely limit the volume of these deals to price in the near term. The other driver of demand in Europe, unleveraged loan funds, has not seen the same level of flow volatility as in the US market, due to a lower exposure to retail investors. As such, overall, demand remains skewed to the positive.

The S&P default rate for the 12 months ending January has now fallen to 0.00%8, the lowest level on record. We do not expect default rates to remain at such low levels and would expect a return to a more normalised 1.5% - 2.0% rate. This is backed up by the S&P distress ratio (share of performing issuers trading below 80) which stood at 1.75%9 for December.

While the prospect of volatility across broader financial markets remains, we expect the core European Loan market to continue to be relatively well insulated. Given fund flows from both CLO issuance and unleveraged funds is skewed to the positive and the fact that the new loan issuance pipeline remains light for the near term, we do not expect further material widening from current levels in the European Loan market. There is potential for some upside from increasing demand from CLO issuance, although this is likely to be disciplined, given the current arbitrage pressure relative to new issue spreads.

Portfolio Manager's Commentary

The top performing credits in the month were mainly bonds that benefitted from the improved high-yield market sentiment in the month. The top mover was a utility business that saw its bonds recover +5.36% in January after weakness in December, while the second best performer was a specialist financial services company that was up +5.08%, also due to the market recovery.

The worst performing credit was a technology services business that saw its loans fall -5.85% after reporting weaker results driven by higher churn and weaker sales. The second weakest name was digital media business that was -4.14% lower after seeing selling pressure on its loans and after a ratings downgrade.

For the month as a whole, the Fund returned 0.77% whilst the benchmark returned 1.22% as it benefitted from a recovery in US dollar denominated assets.

ENDS

For further information please contact:

Alcentra Limited

Simon Perry +44 20 7367 5272

Factsheet

An accompanying factsheet which includes the information above as well as wider commentary on the investments made by the Fund can be found on the Fund's website www.aefrif.com.

Background Information

Alcentra European Floating Rate Income Fund Limited, a Guernsey Authorised Closed-Ended Collective Investment Scheme, regulated by the Guernsey Financial Services Commission and listed on the Main Market of the London Stock Exchange invests predominantly in senior secured loans and senior secured bonds issued by European corporates and targets returns (net of fees and expenses) of 7% to 10% per annum. The Fund targets a dividend yield of 5.5 pence per £1.00 issue price of the initial offering of shares in the Fund for the first full year of investment, paid quarterly.

Important Notices

Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.

This report is aimed at existing investors in the fund and has not been approved by any competent regulatory authority.

The information contained in this document is given as at the date of its publication (unless otherwise marked) and is based on past performance. Past performance is not a guide to future performance and the value of investments and investment value can go down as well as up. The future performance of the Fund will depend on numerous factors which are subject to uncertainty. Including changes in market conditions and interest rates and exchange rates and in response to other economic, political or financial developments, investment return and principal value of your investment will fluctuate, so that when your investment is sold, the amount you receive could be less than what you originally invested. Past or current yields are not indicative of future yields.

This document does not contain any representations, does not constitute or form part of any solicitation of any offer to sell or invitation to purchase any securities of the Fund, nor shall it or any part of it or the fact of its distribution form the basis of or be relied upon in connection with any contract therefor, and does not constitute a recommendation regarding the securities of the Fund. Nothing in this document should be construed as a profit or dividend forecast.

This document includes statements that are, or may be deemed to be, "forward-looking statements". These forward-looking statements include, without limitation, statements typically containing words such as "believes", "considers", "intends", "expects", "anticipates", "targets", "estimates", "will", "may", or "should" and words of similar import. The forward-looking statements are based on the beliefs, assumptions and expectations of future performance and market development of Alcentra Limited ("Alcentra"), taking into account information currently available and made as at the date of this document. These can change as a result of many possible events or factors, not all of which are known or within Alcentra's control. If a change occurs, the Fund's business, financial condition, liquidity and results of operations may vary materially from those expressed in the forward-looking statements. By their nature, forward-looking statements involve known and unknown risks and uncertainties. Forward-looking statements are not guarantees of future performance. Alcentra qualifies any and all of the forward-looking statements by these cautionary factors. Please keep this cautionary note in mind while reading this document.

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