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In our 6 May 2021 report, Experience shows resilience of the model, we noted that the key messages we take from RECI’s recent announcements were 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 reflects the different way in which the assets are managed from other lenders), and iii) as expected, RECI’s bond portfolio provided good 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 5% discount to NAV, when, ahead of COVID-19, they were at premium.

  • End-April factsheet: In April, NAV was up 1.1p, with 1.1p of interest income and 0.2p of MTM gains. Cash was £35.5m (up from £22m in March, following the re-financing of its seventh-largest position), gross debt was £96.2m and net debt was 17% of NAV. RECI invested £4m in April. New term financing was agreed in May.
  • Portfolio summary: At end-April 2021, the portfolio had 62 positions, with average loan to value (LTV) of 65%. The 29 loans (£313m fair value) had an unlevered yield of 8.8%, a weighted average life (WAL) of 1.6 years and LTV of 68.5%. The 33 market bonds’ levered yield was 9.9% (unlevered 4.6%), with WAL of 2.9 years and 52.1% LTV.
  • Valuation: Despite a strong share price recovery from mid-May 2020 lows, RECI still trades at a 5% discount to NAV, when it has regularly traded at a modest premium. RECI has continued to pay its annualised 12p dividend, generating a dividend yield of 8.3%, which is expected to be 1.14x 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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