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In our 12 August note, Experience shows resilience of the model (2), we noted the key takeaways from RECI’s July quarterly investor update and end-July 2021 factsheets were i) attractive returns from low LTV (average 65%) credit exposure to UK and European large, well-capitalised and experienced institutional borrowers, ii) stable dividends,, iii) a highly granular book, iv) modest leverage, and v) access to a strong pipeline of enhanced return investment opportunities identified by Cheyne. With the shares now at a premium to NAV, RECI has potential access to capital to fully exploit these opportunities and achieve further economies of scale in the listed vehicle.

  • End-July factsheet: In July, the NAV was down 2.1p (up 0.9p excluding 3p dividend paid), to 152.5p. The underlying increase was driven by recurring interest income. Cash was up slightly (£44.4m), gross debt was stable, at £101.1m, and net debt was 16% of NAV. RECI invested £2.3m in existing loan commitments.
  • Portfolio summary: At end-July 2021, the portfolio had 61 positions, with average LTV of 65%. The 29 loans (£311m fair value) had an unlevered yield of 8.8%, a weighted average life (WAL) of 1.5 years and LTV of 68%. The 32 market bonds’ levered yield was up slightly, at 10.1% (unlevered: 4.2%), with WAL of 3.6 years and LTV of 51.4%.
  • Valuation: RECI continues its steady recovery from COVID-19 lows, and now trades at a 3% premium to NAV in line with the five-year average 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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