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October Investor Forum: Shareholder value in ESG investing

RECI had cash at end-September of £58.4m, following the repayment of two loans. Five more deals are expected to repay in the coming months. These resources will be largely required to meet the expected near-term drawings on existing commitments and new opportunities in Cheyne’s pipeline, should cash allow. RECI has potential to access capital to further exploit the strong pipeline, as its shares are at a premium to NAV. This would deliver further economies of scale in the listed vehicle. Since March 2020, RECI has participated in under half of Cheyne’s deals, given its historical funding constraints. We note that there have been multiple director share purchases in October.

  • End-Sept factsheet: The NAV was up 0.8p, driven by recurring interest income. Cash was up from £45m at end-August to £58.4m, gross debt was £99.3m (down £3m) and net debt was 12% of NAV (August 17%). The strong pipeline includes a mix of UK, French and Spanish opportunities, which offer attractive yields.
  • Portfolio summary: At end-September 2021, the portfolio had 61 positions, with average loan to value (LTV) of 65%. The 30 loans (£298m fair value) had an unlevered yield of 9%, a weighted average life (WAL) of 1.5 years and LTV of 69%. The 31 market bonds’ levered yield was up slightly, at 9.9% (unlevered: 4.3%), with WAL of 3.5 years and LTV of 51.7%.
  • Valuation: RECI continues its steady recovery from COVID-19 lows, and now trades at a 0.1% premium to NAV, slightly below the five-year, pre-pandemic average. RECI has continued to pay its annualised 12p dividend, generating a dividend yield of 7.9%, 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. As noted, 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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