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RECI released its quarterly investor update on 17 August and its end-August factsheet on 8 September. We reviewed these documents and the market outlook in our 14 September report, Improving returns on new opportunities. The key messages are i) robust performance of the existing portfolio throughout the COVID-19 pandemic, ii) full interest and capital repayments expected on the bond portfolio, iii) strong volume in the investment pipeline, iv) lower-risk business is being added, v) pricing on new business 2%-5% above pre-COVID-19 levels like-for-like, vi) low gearing, and vii) stable dividends. All this appears anomalous with the 16% discount to NAV.

  • September factsheet: The 1.7p NAV per share uplift was due to i) 0.9p of (recurring) interest income, and ii) 1.0p of positive mark-to-market adjustments on two bonds (secured against Italian outlet malls owned by a large global private equity sponsor). RECI funded £1.2m of its existing commitments. Cash was £49m.
  • Peer news flow: ICG Longbow reported interim results, which confirmed no losses incurred or impairment provisions required on any investments as at 25 September 2020 and a stable NAV. SWEF reported its end-Sep NAV was 103.74p against 102.9p at end-August. Both, like RECI, have performed well.
  • Valuation: Despite a strong share price recovery from mid-May lows, RECI still trades at a 16% discount to NAV, when it has regularly traded at a modest premium. We recommend that investors consider the range of factors identified in the opening paragraph above in concluding if such a discount is excessive.
  • Risks: Any lender is exposed to credit risks. We believe RECI has appropriate policies to reduce the probability of default. Its average LTV is 62.7% 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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