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In previous notes, we have outlined why we believe RECI shows resilience against inflation and interest rate risks, while our latest note, New faces, same resilience, (and as outlined in RECI’s recent quarterly presentation), highlighted how the recent deals have confirmed this protection. The other key themes were the sector and geographical diversity, strong loan to value (LTV) metrics, conservative leverage and good counterparty quality. Corporate loan investors appear to be ubiquitously pricing in marketwide uncertainty, while analysts and rating agencies are highlighting resilient cashflows – a very different scenario from early 2020.

  • June factsheet: Recurring interest income added 1p to NAV, but this more than offset a 1.3p negative mark-to-market (MTM) loss on the bond portfolio, due to yield-widening across the corporate bond market. Cash was £38m, and gross leverage was £99m. The book has 62 positions, an average LTV of 60% and a yield of 10%.
  • Experience through COVID-19: In previous notes, we have highlighted how RECI’s bond portfolio took extreme MTM hits at the start of the pandemic, only to see month-on-month recoveries thereafter, as actual cashflows proved more resilient than forecast at the time of peak uncertainty. History may repeat itself.
  • Valuation: In the five-year, pre-pandemic era, on average, RECI traded at a premium to NAV. In periods of market uncertainty, it has traded at a small discount. It now trades at a 6.5% discount, a level not seen since May 2021. RECI paid its annualised 12p dividend, which generates a yield of 8.5% ‒ expected to be covered by net interest income.
  • Risks: Any lender is exposed to credit risks. We believe RECI has appropriate policies to reduce the probability of default. As noted, its average LTV is 60%, 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. Marketwide 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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