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The company’s January Presentation highlighted the continued delivery and stability in the business. In our report, Vive la difference, published on 15 February 2022, we focused on RECI’s French exposures, which account for 37% of commitments and three of the top-10 commitments. We reviewed the geographical and sector risk diversification, as well as the growth opportunity benefits, that this brings to RECI investors. We also noted the competitive advantages of the manager in this area, noting particularly its structuring of complex deals and certainty of finance. We used case studies from its €1bn+ cumulative lending to illustrate these advantages.

  • February Factsheet: RECI showed the usual recurring 1p of interest income NAV gain. The Ukrainian crisis saw a modest 0.6p MTM loss on the bond portfolio, with the corporate yield widening. RECI had cash of £62m and gross leverage of £102m. The book has 62 positions (34 loans, 28 bonds), with a weighted LTV of 62% and a yield of 9.7%.
  • Risk exposure: Through COVID-19, RECI’s risk controls were tested, and proved robust. An initial bond MTM hit was steadily recovered through 2020, and, as we outlined in Vive la difference, and other notes, even hotel exposures proved resilient. Spread widening offers opportunities for higher-return new investment.
  • Valuation: In the five-year, pre-pandemic era, on average, RECI traded at a premium. In periods of market uncertainty, it has traded at a small discount and (now 1.4%). RECI has continued to pay its annualised 12p dividend through COVID-19. This now generates a yield of 8.0%, which is expected to be 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 62%, 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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