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We published a note, Getting a balanced view on outlook, on 21 May 2020. RECI’s 14% 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: In a busy month, RECI published its usual factsheet (5 June), showing a 1.5p increase in NAV in May. Most of this was attributable to MTM recoveries in the prices of bonds, which RECI believes will be fully repaid at par over the next couple of years, but which are still priced at material discounts.
  • RECI corporate update: On 15 May 2020, RECI released a 36-page corporate update, which went through COVID-19 exposures in detail, noting especially loss-mitigating factors, such as security, high-quality borrowers, with good rent flows, and diversification. Potential new deals are on ca.2%-3% higher margins.
  • Valuation: Despite a strong recovery from mid-May lows, RECI still trades at a 14% 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 the 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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