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The key messages from RECI’s April’s quarterly investor update, and end-March 2021 factsheet are: i) stable, predictable interest income (1.1p p.m.) now covers the quarterly dividend (3p); ii) as we detailed in our note Portfolio repayments fund enhanced return pipeline, capital gains are likely as historical MTM bond losses reverse (and management expects full repayment of bonds); iii) loan to values are conservative; iv) the portfolio is diversified by sector, geography and borrower; and v) gearing is modest. The discount has closed materially since March 2020, but, pre COVID-19, the shares were on a premium to NAV and RECI has now proved its resilience amid challenging conditions.

  • End-March factsheet: In March, NAV fell by 0.6p after paying a 3p dividend with 1.1p of interest income and 1.5p of MTM gains including 1p from partial recovery of a prior write-down on a UK housebuilder. Cash was £22m, gross debt £78m, and net debt 16% of NAV. £3.3m of existing commitments funded.
  • Portfolio summary: At end-March 2021, the portfolio had 61 positions, with an average LTV of 64.9%. The 29 loans (£310m fair value) had an unlevered yield of 8.8%, a weighted average life (WAL) of 1.7 years and LTV of 68.4%. The market bond book had a yield of 6.1%, WAL of 3.0 years and a lower LTV (51.5%).
  • Valuation: Despite a strong share price recovery from mid-May lows, RECI still trades at a 6.7% 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 8.5%, 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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