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In the past month, RMDL has announced i) a 500k share buyback, on 7 April, at 72.5p, ii) end-March NAV of 86.64p (end-Feb 98.74p), and iii) FY ending 31 December 2019 results. The NAV fall of 10.5% in March was driven primarily by market-wide spread widening, reflecting lower investor risk appetite. These moves have been exacerbated by ETF and passive funds selling illiquid credit holdings into a weak market. Management’s base-case scenario is that “credit spreads will return to more normal levels over the coming months and the portfolio values will recover.” An April video covering the top holdings is available on RMDL’s website.

  • Liquidity: The company had end-March cash of £3m and an additional undrawn £4.2m under its revolving credit facility. In addition, RMDL has de-minimis obligations to fund existing transactions, and does not face any margin calls. This liquidity is important, as it means RMDL is unlikely to be a forced seller of assets.
  • RMDL can hold assets until markets improve: LTVs may currently be less robust than normal, as there is no certainty of buyers. However, RMDL is highly unlikely to be a forced seller. It can take time to restructure deals and wait for favourable conditions to sell assets. Its PE-backed borrowers have access to other capital.
  • Valuation: RMDL trades at an 8% discount to its marked-to-market NAV (provided by external parties). There is hotel and gym exposure but, given the extent of security cover, the collective experience of the managers, and the ability to hold assets until realisation in more favourable conditions, actual losses can be expected to be modest.
  • Risks: Credit is key for any lender, and we have examined in detail the investment manager’s approach. We believe the right approaches to limit both the probability of default and loss, given default, are in place. The book has shown a surprising propensity to turn over. There are modest currency and key personnel risks.
  • Investment summary: RMDL offers investors a different asset class, with a substantial yield generated on a sustainable basis from long-term assets, with predictable income streams and a strong pipeline. Any lending business needs to correctly assess and manage credit; this is done by RM Funds, which has a proven track record of doing so consistently well. There will be short-term sentiment volatility in the NAV, which the company believes will reverse in due course.
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