We believe RECI’s 21% discount to NAV reflects a reduction in investors’ confidence, reflecting the uncertain outlook, security values and potential impairments. When considering if this discount is excessive, we note i) a relatively low-risk profile, ii) strong liquidity means RECI can optimise recovery returns, iii) restructuring is a core competency, iv) realised losses to date are just 2.1p, v) bond valuations are expected by RECI to be repaid at par, but priced at 17% below par, and vi) borrowers have been injecting equity into their deals. The stable 3p 4Q dividend and unchanged policy show confidence and re-investment returns rising.
Like-for-like, senior secured lending (76% NAV), especially when backed by property, should be a lower-risk profile than most lending. Borrowers have injected equity, and governments’ support for borrowers is unprecedented. RECI’s liquidity risk is low (net debt just 6% of NAV).
Realised losses to date have been just 2.1p. RECI believes its bonds will be repaid at par over the next couple of years, and their discount is a temporary sentiment issue, unjustified by fundamentals. For loans, having expertise, and working over time with borrowers, significantly reduces final losses.
RECI trades at a large discount to NAV, in line with secured lending peers. Its yield, at 10.3%, is the highest of its immediate peers and above wider peer averages. RECI showed its confidence with an accelerated dividend declaration (3p unchanged on prior quarter) and “stable” dividends going forward.
Any lender is exposed to the credit cycle and individual loans going wrong. Security is currently hard to value and to crystallise. We believe RECI has appropriate policies to reduce the probability of default and the loss in the event of default. Some assets are illiquid, and Repos financing has a short duration.
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.
