Portfolio Update

Alcentra European Floating Rate Income Fund Limited

Market Commentary

Financial markets saw increased volatility into year-end on the back of concerns around the US economic cycle, the potential impact of a trade war on global growth and a rise in European political risk. The European loan market held up relatively well through November, in comparison to other asset classes. However, December saw the weakness experienced in other markets spread to European loans, with prices falling c.-1.5pts. This was predominantly driven by the sell-off in USD loans in the Credit Suisse Western European Leveraged Loan Index ("CS WELLI") (-2.9pts for USD loans vs -1.1pt for GBP loans)[1] driven by general weakness in the US market as a result of retail fund outflows, as well as an element of relative value switching (selling EUR loans to buy pari-passu USD loans or EUR HY). There was also a theme of banks de-risking into year-end, further putting pressure on prices.

The Fund was down -0.44% (gross) for the month, materially better than the CS WELLI (hedged to GBP) at -1.16%[2].

While December is traditionally a quiet month for European loan issuance, volumes this year were lower than average at €0.4bn, -90% on the prior year[3]. This decline was driven by a thin pipeline coming in to year-end, as well as broader financial market volatility leading to deals either being pulled (e.g. Vue) or delayed to next year. Market conditions did mean that recent deals have come at more favourable terms, with wider spreads and larger OIDs (e.g. Tilney, Schur Flexibles). For the full year 2018 issuance stood at €95.9bn, -21% on 2017[4], but with M&A volumes +37% and refinancings/repricings -61%[5]. So while volumes were down for the year, net issuance was up. M&A volumes accounted for 70% of full year volumes, versus only 41% in 2017[6].

The below table illustrates the return from price movements for the European Loan market in comparison to other asset classes. Note that it shows price movements only and not overall return, as positive income is not included. This demonstrates the positive relative performance of the European loan market.

It is worth highlighting that fund flows in the European Loan market have remained more supportive due to the strong CLO issuance through November as well as due to the market having less exposure to retail fund flows than other markets. This drove the outperformance of GBP denominated Loans within the Index, which returned -0.59% relative to USD loans at -2.54%. Spreads in the market have now widened on the back of the above moves, with the CS WELLI 3-year DM now standing at 473bps, up from 383bps in October[7].

As expected going into year-end, CLO formation also slowed down, with no new CLOs pricing in the month versus €1.1bn in the prior year[8]. In recent months CLO liability spreads have widened and this caused a number of planned CLOs to be delayed to next year due to a less favourable arbitrage. Full year CLO issuance was €27.3bn, a material +33% growth on 2017[9] levels and the highest level seen post-crisis. This strong CLO technical has helped support trading levels in the European loan market relative to other asset classes.

The default rate for the 12 months ending December remains at the same record low level of 0.11%[10] seen in prior months. The market trade off however has resulted in an increase in the S&P distress ratio (share of performing loans trading below 80) which stood at 2.3%[11] for November.

While the prospect of volatility across broader financial markets remains, we expect the core European Loan market to continue to be relatively well insulated due to the more supportive technical versus other markets discussed above. The risk to this outlook is the possibility of a larger than expected new issue pipeline for Q1 and lower demand from weaker CLO issuance due to continued widening in CLO liability costs. For 2019 we would expect a coupon return year, with the potential for some capital upside from a recovery in market conditions. Alcentra will look to continue to outperform the market by continuing to avoid defaults and through a focus on strong credit selection.

Portfolio Manager's Commentary

The top performing credits were a group of names that saw broadly flat prices in what was a declining market, with no specific credit news. These names included a specialty chemicals business, a French speciality food retailer and a specialist financial services business.

The worst performing credits were impacted by reporting weaker results. This includes an agricultural products business that saw its debt trade down -6.92% and a UK healthcare business that was down -4.26%, both on the back of reporting numbers that were below expectations.

For the month as a whole, the fund returned -0.44%, ahead of the benchmark at -1.16% as positive credit selection benefited the Fund in an overall weaker market.

2018 NAV return for the fund finished the year at +2.28% on a net basis. For Q4 the return was -0.58%, net. Given the volatility seen across financial markets in Q4, this performance demonstrates the defensive nature of the fund. See below for a comparison for the fund's return to those of the GBP hedged benchmark and other asset classes during the period.

Another point of note is the relative resilience of the European Loan Market in comparison to the US Loan Market, with the European market seeing a return from price moves of -2.90% versus -4.63% for the US market in Q4. Note that this excludes the positive return from income.

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.

An investment in the Fund is suitable only for investors who are capable of evaluating the merits and risks of such an investment and who have sufficient resources to be able to bear losses (which may equal the whole amount invested) that may result from such an investment. An investment in the Fund should constitute part of a diversified investment portfolio. Accordingly, typical investors in the Fund are expected to be sophisticated and/or professional investors who understand the risks involved in investing in the Fund.

Alcentra gives no undertaking to provide recipients of this document with access to any additional information, or to update this document or any additional information, or to correct any inaccuracies in it which may become apparent including in relation to any forward-looking statements. The distribution of this document shall not be deemed to be any form of commitment on the part of Alcentra to proceed with any transaction.

This document is issued by Alcentra Limited, which is authorised and regulated in the United Kingdom by the Financial Conduct Authority and whose registered address is at 160 Queen Victoria Street, London, United Kingdom, EC4V 4LA.

BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may also be used as a generic term to reference the Corporation as a whole or its various subsidiaries generally.

© 2019 The Bank of New York Mellon Corporation. All rights reserved. Trademarks and logos belong to their respective owners.