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Hardman & Co Investor Forum | November 2024

While RECI cannot be immune from all the noise and turbulence in the bond and gilt markets, in our note of 5 August 2022, Marks taken in uncertainty, released thereafter, we outlined our view that the market was giving insufficient credit to RECI’s superior control assessment, monitoring and restructuring systems. RECI’s approach means that, in the past, it has shown superior resilience in downturns, and we believe it will continue to do so in the future) The widening in the discount to levels not seen since late 2020 appear anomalous with that view and the one shown in the manager’s recent quarterly update. There has been multiple recent market buying by the directors.

  • Impact of rising risk-free rate: We note that GABI recently saw a hit to its quarterly NAV to reflect the rising risk-free rate in its valuations. There is no read-across for RECI, which adopts monthly NAV reporting and has short-term loan duration (average 1.6 years), with an increasing floating rate nature (32% June, and forming the majority of new lending).
  • Sep’22 factsheet update: The NAV rose 0.5p (0.6%), due to 1p recurring interest income offset by a -0.5p bond MTM. RECI had cash of £27m and gross leverage of £119m. The book has 62 positions (36 loans, drawn value of £359m, undrawn commitments of £211m and 26 bonds). The weighted average LTV is 60% and the yield is 13.0%.
  • 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 trades at an15% discount currently, a level not seen since October 2020. RECI paid its annualised 12p dividend in FY’22, which generated a yield of 9.6% ‒ 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 61%, 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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