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In this note, we review how RECI is positioned to face the current market challenges, noting i) the track record of superior credit assessment, monitoring and collection reducing the probability of default, ii) the high quality and high level of security limiting the loss in the event of default, iii) low exposure to high-risk sectors and proven limited loss in ones where they have had exposures in the past, iv) proven conservative accounting, and v) the benefits to income from rising rates and re-investment opportunities. There are risks, including investor sentiment and the macroeconomic environment, but the Cheyne team proved, through COVID-19, that it has the skills to deliver consistent returns in challenging times.

  • October quarterly update: Key themes are i) attractive returns from low LTV credit exposure to UK and European commercial real estate assets, ii) quarterly dividends delivering consistently since October 2013, iii) a highly granular book, iv) transparent and conservative leverage, and v) access to a strong pipeline.
  • October Factsheet: Recurring interest income added 1p to NAV. There was a negative 0.2p mark-to-market (MTM) on the bond portfolio, due to the bond market turmoil. RECI had cash of £22m and gross leverage of £134m. The book has 63 positions (37 loans, 26 bonds), with a weighted average LTV of 59% and a yield of 11.3%.
  • 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 discount. It now trades at a 10% discount, a level not seen since late 2020. RECI paid its annualised 12p dividend in 2022, which generated a yield of 9.0% ‒ expected to be covered by interest.
  • Risks: Any lender is exposed to the credit cycle and individual loans going wrong. Security is currently hard to value and to crystallise. We believe RECI has appropriate policies to reduce the probability of default, and loss in the event of default. Some assets are illiquid, and repo financing has a short duration.
  • Investment summary: RECI generates an above-average dividend yield from well-managed credit assets. Bond pricing includes a slight discount, reflecting uncertainty, which should unwind when conditions normalise. Sentiment to 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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