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We published a note, Getting a balanced view on outlook, on 21 May 2020. RECI’s 19% discount to NAV, we believe, reflects the uncertain outlook, security values and potential impairments. When considering if this discount is excessive, we noted i) a relatively low-risk profile, ii) strong liquidity means RECI can optimise recovery returns, iii) restructuring is a core competency, iv) realised losses to date are just 2.1p, v) bond valuations were then priced at 17% below par, but RECI expects them to be repaid at par, and vi) borrowers have injected equity into their deals. The 3p 4Q dividend and unchanged policy show confidence. Re-investment returns are rising.

  • RECI news flow: RECI’s end June Factsheet reported a 1.2%, 1.8p monthly performance, with 0.8p from regular interest income and 1p from bond mark-to-market gains. Gross debt was £50m, 14% of NAV (net debt £19m, 6%of NAV). The pipeline is described as “healthy” and expected to complete “in the near term”.
  • Peer news flow: ICG Longbow’s 23 July portfolio update confirmed the positive trends reported by RECI, with a rise in attractive new lending opportunities and a couple of completions in July/August. SWEF also reported similar trends to RECI, with its end-June NAV of 104.08p, against May’s 102.87p.
  • Valuation: Despite a strong recovery from mid-May lows, RECI still trades at a 19% discount to NAV, when, normally, it has traded at a modest premium. We recommend that investors consider the range of factors identified above in concluding whether such a discount is excessive.
  • Risks: Any lender is exposed to credit risks and individual loans going wrong. 76% of loans are senior-secured, providing a downside cushion. We believe RECI has appropriate policies to reduce the probability of default and loss in the event thereof. Some assets are illiquid. Short term, investor sentiment may 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 have, to date, injected further equity into deals.
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