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RECI released its quarterly investor update on 17 August and its end-July factsheet on 7 August. The key messages are i) robust performance of existing portfolio through COVID-19, ii) the continuation of some modest mark-to-market volatility on the bond portfolio (July effect -1p on NAV), but full interest and capital repayments are expected in due course, iii) strong early repayment and pipeline volumes – the latter have now started to be complete, iv) lower-risk business is being added, v) pricing on new business is 2%-5% above pre-COVID-19 levels like-for-like, vi) low gearing, and vii) stable 3p per quarter dividends. This seems anomalous with the 13% discount to NAV.

  • RECI news flow: RECI’s end-July factsheet reported a -0.2% monthly performance, with 0.9p from regular interest income and -1.0p from bond mark-to-market gains. Gross debt was £71m, 21% of NAV (net debt £18m, 5% of NAV). Cash (£53m) included the successful re-financing of its largest (Paris) exposure.
  • Peer news flow: ICG Longbow’s 10 August portfolio update reported that 82% of interest payments had been made on time. It still believes that all contractual interest, principal and fees will be repaid in full. In its end-June Factsheet, SWEF, with material hospitality exposure, reported full repayments on time, and no impairments.
  • Valuation: Despite a strong share price recovery from mid-May lows, RECI still trades at a 13% 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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