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In our 18 January 2021 note, Portfolio repayments fund enhanced return pipeline, we highlighted i) RECI’s asset selection and management make it defensive, ii) its customer base is robust, with £100m+ interest and principal repayments since March, and iii) it is adding lower-risk, higher-margin new business. The dividend has been maintained at 3p p.q. throughout 2020 (yield 8.9%). While the discount has closed materially since March 2020, in the past (January 2020), the shares were on a premium to NAV. As we detailed in our note, the NAV will increase if historical MTM bond losses reverse (management expects full repayment) and the dividend is now covered by recurring interest income.

  • End-Feb factsheet: In February, the NAV increased by 1.1p. RECI funded £3.6m of new and existing commitments and invested £5.4m in two new listed bonds. Cash was £30m, gross debt £79m, and net debt 14% of NAV. A third interim dividend of 3p per share was declared on 19 February 2021.
  • Portfolio summary: At end-February 2021, the portfolio had 61 positions, with an average LTV of 64.8%. The 29 loans (£308m fair value) had an unlevered yield of 8.8%, a weighted average life (WAL) of 1.8 years and LTV of 68.3%. The market bond book had a yield of 6.0%, WAL of 3.2 years and a lower LTV (51.4%).
  • Valuation: Despite a strong share price recovery from mid-May lows, RECI still trades at a 12% discount to NAV, when it has regularly traded at a modest premium. RECI has continued to pay its annualised 12p dividend, generating a dividend yield of 8.9%, which is expected to be 1.14x covered by earnings.
  • Risks: Any lender is exposed to credit risks. We believe RECI has appropriate policies to reduce the probability of default. Its average LTV is 65%, and most loans are senior-secured, providing a downside cushion. Some assets are illiquid. In the short term, investor sentiment could 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, to date, have injected further equity into deals.
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