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No plan to tackle Ranger’s discount

No plan to tackle Ranger’s discount – Ranger Direct Lending has published its interim statement covering the six month period ended 30 June 2017. As Christopher Waldron, the chairman, points out, the first six months of 2017 has been a difficult period for Ranger Direct Lending, which has seen its share price fall to a substantial discount to net asset value, currently in excess of 25%. NAV returns for the period were 4.05%. The share price fall is related to the impairment to the Argon loan portfolio held within the Princeton fund investment. As the chairman acknowledges, the lack of clarity around this event and the qualification of the 2016 accounts served to add to investor uncertainty.

The dispute with Princeton is going to arbitration in November.

The board and manager have agreed that, over the next two years and as existing investments mature, exposure to unsecured debt instruments will be reduced to no more than 15% of gross assets, compared to the limit of 35% in the investment policy. The allocation to any single lending platform is intended to be reduced to 15% of gross assets, over 18 months, from the current limit of 25%.  In addition, no further gearing is envisaged, beyond the ZDPs already issued. These represent gearing of 29.6% as at the June NAV, below the maximum of 50% permitted at the IPO.

15bp per month off returns

The cost of the Princeton arbitration will inevitably weigh on short-term returns. They estimates that legal fees associated with Princeton will reduce NAV growth by approximately 15 basis points (“bps”) per calendar month for the rest of 2017. Higher loss reserves against other consumer loan platforms will also detract from returns, as will cash drag as funds are reallocated away from closing platforms into new investments.

Currently, they estimate that monthly NAV growth in the second half of 2017 will average 40-50 bps and will then recover to 60-70 bps in 2018, assuming a resolution of the Princeton issues this year. To the extent that this NAV growth is achieved, this is estimated to achieve an aggregate dividend yield of approximately 25p per ordinary share in the second half of 2017, compared to 46p paid in the first half of 2017.

No buy-backs

The Board and investment manager say that they have also carefully considered the potential for share buybacks. After consultation with some shareholders, they’ve decided not to buy back shares, despite the persistent wide discount and despite the uplift this would have on NAV. Their argument is that the cost of buying shares would reduce the income available to pay dividends. However, this does not make sense to us at QuotedData, as shares bought back would not be entitled to dividends and, as the shares can be bought back at a wide discount, the income available for remaining shareholders would be enhanced.

There is nothing else in the statement that would suggest that there is a plan to tackle the discount, except maybe, hoping for a share price recovery if and when  returns normalise.

Update on Princeton/Argon

A portion of the investment in the Princeton Alternative Income Fund was used by Princeton to provide credit lines to Argon Credit.  Each of the Argon credit lines were secured by an over collateralised portfolio of unsecured consumer loans that Argon originated. Following Argon’s bankruptcy, Princeton has taken possession of a portion of the Argon loans and has begun directly servicing them. Consequently, as at 30 June 2017, the Argon loans that are now controlled by Princeton are being reclassified by Ranger Direct Lending as Consumer Loans – Unsecured.  As a result of this change, the allocation of unsecured consumer loans in the portfolio has increased by 7% as at 30 June 2017.

The investment manager and Ranger Direct Lending have initiated arbitration proceedings with JAMS, a dispute resolution provider, against the Princeton Master Fund and its general partner, Princeton Alternative Funding, LLC. The proceedings are expected to be completed by the end of November 2017 and will be heard by a three-arbitrator panel.

The purpose of the arbitration is to seek to enforce Ranger Direct Lending’s rights against the Princeton Master Fund and the general partner. Among other claims, Ranger Direct Lending is seeking to enforce rights concerning redemption and the provision of financial information whilst also challenging the establishment by Princeton of a side pocket in the Princeton Master Fund that has been used as the basis for calculating Ranger’s exposure to the Argon bankruptcy.

Ranger Direct Lending has also been notified by Princeton that it intends to suspend cash distributions to its investors owing to the level of redemption requests it has received, including from Ranger Direct Lending. The suspension will not apply in respect of net proceeds from the Argon bankruptcy which Princeton is required to distribute. Income will be allocated by Princeton to Ranger Direct Lending’s capital account instead of being distributed. Ranger Direct Lending doesn’t think that the suspension of cash distributions will have a material impact on the amount or timing of Ranger Direct Lending’s dividends because it will still be able to treat this as income in its accounts. As part of the proceedings, they will seek to ensure that Princeton recommences cash distributions as soon as possible.

If they win the arbitration, they may get their legal and other associated costs back as well.

Princeton portfolio update

Investor statements as of 30 June 2017 from Princeton show that Ranger Direct Lending’s indirect loan exposure to Argon is now USD 21.7m via the side pocket referred to above. This contrasts with USD 26.2m reported as at 31 December 2016 due to Princeton’s reassignment of assets the fund held between the side pocket and the regular account. Of the remaining fair value balance of USD 25.1m as at 30 June 2017, USD 24.8m is associated with Ranger Direct Lending’s exposure to Princeton’s other borrowers.

One of the remaining credit lines was to a borrower that had filed for voluntary petition under Chapter 11 bankruptcy protection.  The exposure to this line is estimated to be USD 8.0m as of 22 May 2017.  Publicly available filings show that Princeton has now entered into a settlement with this borrower pursuant to which the borrower transferred certain groups of assets to Princeton, including what appear to be lease contracts/accounts receivable and, with certain specified exclusions, a significant portion of the borrowers operating assets, as well causes of action against third parties (including potential claims against Princeton).  The bankruptcy court approved parties’ settlement arrangement and the transfer of the subject assets to Princeton free and clear of all liens, claims and the encumbrances, except as to certain leases that were serviced by a third party lease/loan-servicer or its affiliates.   Ranger Direct Lending is seeking from Princeton the current value of the assets transferred pursuant to the described above order.

Princeton has also reported that two additional credit lines are in workout such that they are not in full compliance with Princeton’s credit facility agreements with those borrowers. The aggregate exposure to these two lines is estimated to be USD 2.1m as of 22 May 2017.

Other than investor statements, Princeton continues to provide only limited information typically via their legal counsel. Further announcements will be made in due course where there are any relevant updates for shareholders

RDL : No plan to tackle Ranger’s discount

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