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UK Mortgages takes steps to tackle falling NAV

UK Mortgages takes steps to tackle falling NAV as capital distributions eat into fund. UK Mortgages has made an update presentation to investors. In it, it acknowledges that it has taken longer to invest the proceeds of its IPO than expected. The longer investment period has meant:

  • Slower earnings growth
  • A longer period of uncovered dividend
  • A corresponding reduction in NAV as they distributed capital
  • Leading to reduced investable capital

They say that growth in the UK housing/mortgage market has slowed significantly and regulatory changes have also slowed the buy-to-let market. This has made potential sellers of new portfolios take more of a “wait and see” approach. the net effect is that The Mortgage Lender (TML)’s origination has grown more slowly than they had hoped. While legacy portfolios are still being offered and trading, credit quality of many of these is not of sufficient standard for UK Mortgages in their opinion. Other portfolios of mortgages (such as those from the, UK Government owned, failed banks) are extremely large and beyond UK Mortgages’ scope.

The running yield on these portfolios is low, so if they are to make their target returns, they will be reliant on using leverage and buying portfolios on a discount to book that then gradually trade towards book value – “pull to par”.

They have found that speed of execution is a significant challenge which means that investment timing has been unpredictable. A typical portfolio purchase takes:

  • Several weeks to negotiate commercial terms
  • Approx. 3 months to arrange financing, servicing and documentation to complete portfolio purchase
  • Approx. further 3 months to structure, launch and price a securitisation

Twenty Four recognises that the time taken to invest the initial capital has been longer than expected and, in the meantime the fund has been paying dividends from capital thereby reducing the NAV. In recognition of this, TwentyFour proposes to reduce its management fees., arguing that, at the very least this will reduce some of the cashflow burden currently faced by the fund. More detail on this will be made available as soon as practicable.

In addition they are considering some minor amendments to the fund’s investment policy. E.g. allowing free cash to be invested in senior RMBS. they see the advantage of this is that RMBS are highly liquid with low volatility. It should help reduce cash drag with significantly better returns than typical cash investments. These amendments may require changes to the fund prospectus.

UKML : UK Mortgages takes steps to tackle falling NAV

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