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RM Secured Direct Lending

Defensive qualities in uncertain times

26 Sep 2019 / Corporate research

This note examines RMDL’s potential performance in uncertain times. RMDL is a debt fund, and the key issues for continuing its track record of capital preservation and dividend streams are what it has done to reduce both the probability of default (POD) and the loss in the event of default (LED). We conclude that i) the initial credit assessment follows best practice, ii) accounts are closely managed on an ongoing basis, allowing early intervention, reducing both POD and LED, iii) security is structurally robust, and iv) RM has the right approach to recoveries. We believe the top four accounts would all have to default to eliminate the annual dividend.

  • Limiting POD: RMDL’s effective credit assessment processes include detailed cash-driven, scenario modelling. Its close ongoing relationships allow early action on a co-operative basis with the borrower. Sponsor-backed companies, a key borrower group, operationally outperform quoted companies in a downturn.
  • Limiting LED: In a scenario of worsening economic conditions, there will be much more focus on recoveries. We believe RMDL has the right approach to limiting LED through its culture, experience, documentation, legal structures, control of the enforcement process and risk-adjusted pricing.
  • Valuation: RMDL trades at a small premium to NAV and to the average of its closest peers. In addition to the factors above, we estimate that further equity issues at a premium to NAV will enhance current shareholders by 1%. RMDL has not seen a major loss, and has no uncertainty discount over loan realisable values.
  • Risks: Credit remains key for any lender, and we examine in detail the investment manager’s approach. We believe the right approaches are in place to limit the probability of default and loss, in the event of default. The book shows a surprising propensity to turn over. There are modest currency and key personnel risks.
  • Investment summary: RMDL is a non-bank lender focused on non-benchmarked, middle-market corporate debt, where competitive pressures are relatively modest, and yields can be enhanced through its service and structuring skills. Its bespoke lending is 60% self-originated (balance in small syndicates), with a current bias to non-cyclical sectors, and further counterparty diversification is achieved through having 36 loans.
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