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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 existing portfolio through COVID-19, ii) full interest and capital repayments expected on bond portfolio, iii) strong volume in 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 15% discount to NAV.

  • Current portfolio: Realised losses have been 1% of NAV, reflecting Cheyne’s strong credit assessment and security. Some borrowers have extended facilities (at an appropriate interest cost) but, also, there have been early repayments. We understand all borrowers are paying in full and on time on their (revised) terms..
  • New business: Against these realised losses, new business pricing has widened and terms have improved. The extra value of new business to be added is likely to exceed realised losses, implying that the overall value of the company should have risen. This may be valued by investors as stable returns reduce uncertainty..
  • Valuation: Despite a strong share price recovery from mid-May lows, RECI still trades at a 15% 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. 74% of loans are senior-secured, providing a downside cushion. We believe RECI has appropriate policies to reduce the probability of default and 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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