RECI released its quarterly investor update on 17 August and factsheet on 8 September. This note updates investors with the key developments in both these documents. 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 17% 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: RECI trades at a large discount to NAV, in line with its secured lending peers. Its dividend yield, at 9.9%, 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.
Risks: 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.
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.