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Hardman & Co Investor Forum | November 2024

In our note, Why the discount has been closing and its outlook, published 15 October, we noted that RECI’s discount has halved over the past six months. We believe this is due to both actions taken by the trust (active buyback programme, changing asset mix and enhanced disclosure) and more favourable markets. Not all debt investment companies have benefitted from the more favourable markets. RECI’s current discount is still high, ca.10% above the 10-year average. RECI was at an average 2% premium in 2015-19, and traded at a premium again in 2021-22, leaving room for investor concerns to moderate considerably, just reverting to historical average levels.

  • Why discount has closed: Management has been proactive in changing the asset mix (into lower-risk senior loans, away from development loans, reducing bond holdings), commencing an active share buyback programme and improving disclosure. Some real-estate market concerns have also moderated.
  • Outlook: The benefits from RECI’s risk reduction should improve the balance of investors’ risk/reward. The share buyback has recently been renewed at the higher (up to £10m) level. The initial programme was just £5m. Deal activity in the property sector shows participants’ confidence in that market.
  • 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; currently, it trades at a well-above-average 11% discount. RECI is paying an annualised 12p dividend, generating a yield of 9.3%, which we expect to be covered by recurring net interest income.
  • Risks: Any lender is exposed to credit risks. We believe RECI has appropriate policies to reduce the probability of default. Its average LTV is 59.5%, and most loans (inc. all of the top 10) 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. Directors and management have demonstrated their confidence in its sustainability through share purchases. 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 have injected further equity into deals. To date, £9.1m has been completed since August 2023. A new £10m programme was announced on 27 September.
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