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Register now for 4 October 2022 at 3:00pm -

October Investor Forum: Shareholder value in ESG investing

We have, in multiple notes, highlighted how RECI’s approach to lending is different from that of mainstream banks. At its core, the lenders own their loans, and they have a very different approach towards decisions about being part of a large organisation. Skill and speed in structuring what can be complex deals allow a premium to be charged that does involve incremental risk. At times of uncertainty, market spreads widen, and this does have an impact on mark-to-market (MTM) on bonds, but we have seen, in the past, that this is quickly recouped with modest, if any, actual loss. The rapid recovery to a premium above NAV, following the initial Ukraine-related uncertainty, may reflect the market valuing this approach.

  • March Factsheet: RECI showed the usual recurring 1p of interest income NAV gain. The Ukrainian crisis saw a modest 0.2p MTM loss on the bond portfolio, with the corporate yield widening. RECI had cash of £53m and gross leverage of £101m. The book has 63 positions (35 loans, 28 bonds), with a weighted average LTV of 62% and a yield of 10.0%.
  • 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 to NAV. In periods of market uncertainty, it has traded at a small discount (now 2.1%). RECI has continued to pay its annualised 12p dividend through COVID-19. This now generates a yield of 7.8%, 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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