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RECI had cash at end-August of £45m. Seven more deals are expected to repay in the coming months, which should return a further ca.£100m to RECI. These resources will be required to meet the expected near-term drawings on existing loan commitments (total £108m), and new opportunities in Cheyne’s pipeline, should cash allow. With the shares now at a 3.6% premium to NAV, RECI has potential access to capital to further exploit Cheyne’s strong pipeline (12 deals with a value of ca.£0.7bn), which would deliver further economies of scale in the listed vehicle. Since March 2020, RECI has participated in just 10 of Cheyne’s 24 deals, given its historical funding constraints.

  • End-Aug factsheet: The underlying, post-dividend NAV was up 1.1p in August, driven by recurring interest income. Cash was up slightly, at £45m, gross debt was £102.6m, and net debt was 17% of NAV. The strong pipeline includes a mix of UK, French and Spanish opportunities, which offer attractive yields.
  • Portfolio summary: At end-August 2021, the portfolio had 61 positions, with average loan to value (LTV) of 65%. The 30 loans (£319m fair value) had an unlevered yield of 8.9%, a weighted average life (WAL) of 1.5 years and LTV of 69%. The 31 market bonds’ levered yield was down slightly, at 9.8% (unlevered: 4.3%), with WAL of 3.6 years and LTV of 51.7%.
  • Valuation: RECI continues its steady recovery from COVID-19 lows, and now trades at a 3.6% premium to NAV, a little above the five-year, pre-pandemic average of 2%. RECI has continued to pay its annualised 12p dividend, generating a dividend yield of 7.7%, which is expected to be 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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