June 2020 Monthly

The 26 May announcement noted i) in April, the NAV fell 2.3%, driven primarily by an adverse 1.8% forex effect, ii) despite the market rally that month, the manager’s provision, which was designed to reflect the timing gap between valuations received from underlying managers and market movements, was left unchanged, iii) the 8% of the portfolio whose valuations were updated saw a 5% fall, iv) its undrawn revolving credit facility was increased from £175m to £300m and, with available cash of £114m, ca.80% of undrawn commitments are covered. Investors could not get better proof of the company’s conservatism than its actions in April.

• RECI news flow: In a busy month, RECI published its usual factsheet (12 May), showed its confidence by declaring an unchanged dividend and no change to its dividend policy for the current financial year ending 31 March 2021, and gave a detailed update presentation. The Chairman has also been buying shares.
• RECI corporate update: In addition to the points above, the 36-page corporate update went through COVID-19 exposures in detail, noting especially loss-mitigating factors such as security, high-quality borrowers with good rent flows, and diversification. Potential new deals are on ca.2%-3% higher margins.
• Valuation: RECI trades at a 19% discount to NAV, when, normally, it has traded at a modest premium. We believe the current discount reflects concerns about an uncertain outlook. We recommend that investors consider the range of factors identified above in concluding whether such a discount is excessive.
• Risks: Any lender is exposed to credit risks and individual loans going wrong. 76% of loans are senior-secured, providing a downside cushion. We believe RECI has appropriate policies to reduce the probability of default and the loss in the event thereof. Some assets are illiquid. Short term, investor sentiment may be an issue.
• Investment summary: RECI generates an above-average dividend yield from well-managed credit assets. Management has confirmed no change to dividend policy, showing its confidence in its sustainability. Bond pricing includes a discount reflecting uncertainty, which should unwind when conditions normalise. Market-wide credit risk is currently above-average, but RECI’s strong liquidity and debt restructuring expertise should allow it time to manage problem accounts. Borrowers have, to date, injected further equity into deals.