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RECI gave its latest quarterly update on 27 July. The key messages remain unchanged, namely i) attractive returns from low loan to value (average 65%) credit exposure to UK and European large, well-capitalised and experienced institutional borrowers, ii) stable dividends, at 3p per quarter (latest yield: 7.9%), iii) a highly granular book – 61 positions, with the top position 13.8% of NAV (by commitment), iv) modest leverage – gross 29%, net 16.0% (with £45.4m cash on balance sheet), and v) access to a strong pipeline of enhanced return investment opportunities identified by Cheyne. The discount to NAV has been closing (now 2%) but, pre-pandemic, it was at a premium.

  • End-June factsheet: In June, the NAV was up 1p, to 154.6p, driven by recurring interest income. Cash was up slightly (£43.7m vs. May’s £39.8m), gross debt was £101.3m (May: £94.3m) and net debt was 16% of NAV (May: 16%). RECI invested £2.1m in June in existing loan commitments. The end-June discount to NAV was 5%.
  • Portfolio summary: At end-June 2021, the portfolio had 61 positions, with average loan to value (LTV) of 65%. The 29 loans (£317m fair value) had an unlevered yield of 8.8%, a weighted average life (WAL) of 1.5 years and LTV of 68.5%. The 32 market bonds’ levered yield was 9.8% (unlevered: 4.3%), with WAL of 3.6 years and LTV of 51.4%.
  • Valuation: RECI continues its steady recovery from COVID-19 lows, and now trades at a 2% discount to NAV. For most of 2019, though, it was at a modest premium. 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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