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The key messages we take from RECI’s April’s quarterly investor update and end-March 2021 factsheet are i) mark-to-market (MTM) writedowns in March 2020 proved overly conservative, and RECI has been making recoveries since, ii) with no defaults, RECI’s assets have proved highly resilient (this is no accident, but reflects the different way in which the assets are managed from other lenders), and iii) as expected, RECI’s bond portfolio provided significant liquidity at only a modest cost. Despite the reasons driving the 2020 discount having all been negated by experience, the shares still trade at a 6% discount to NAV, when, ahead of COVID-19, they were at premium.

  • Why defensive: Realised losses have been just 1% of NAV, reflecting Cheyne’s strong credit assessment and security. We understand that all borrowers are paying in full on current terms and bonds are expected to be repaid in full. The housebuilder mezzanine loan writedown may reverse further if current conditions continue.
  • New business: New business pricing has widened (still ca.2% above pre-crisis levels), and terms have improved. This is most visible in the market bond book, where yields have more than doubled since February and the LTV is nearly 10ppts lower. The dividend is now covered by stable interest income.
  • Valuation: RECI trades at a discount to a conservative NAV (historically, it has traded at a premium). Its 8.4% 2021E dividend yield is the highest of its immediate peers, and especially valuable at a time when alternative investments offer little income. RECI’s defensive qualities mean the dividend has been held through the COVID-19 crisis.
  • 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 the loss in the event of default. Some assets are illiquid, and Repos financing has a short duration.
  • 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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