RM Secured Direct Lending (RMDL) has reported its annual results to 31 December 2019. Over the course of the year, the portfolio generated a NAV total return of 8.2%. The company’s shares trading in a narrow range within 99.50 pence and 103 pence over the period.
Reflecting on 2019’s market environment
RMDL said the following in its management report:
“The macro-economic picture was mixed during 2019, however there was ultimately a firm tone over the year for risk assets which masks mini bouts of volatility seen over the period. Concerns over the US/China trade war abated and no solution to Brexit for the majority of the year hampered UK business investment and confidence. The election win for the Conservatives in December provided clarity and a firm tone to end the year for the UK market.
Within Europe, quantitative easing restarted which provided stimulus to underperforming economies and supported Eurozone equity and bond markets.
Our view at RM is that the market is susceptible to weakness, as the rally seen during 2019 was not underpinned by positive economic news but relief that the trade war has not escalated, that Brexit will be done (in whatever form that may take) and signs that any further weakness in Europe will see continued Central Bank support to the markets.
As a result, we believe that Social Infrastructure and Real Estate backed lending offers the best place for capital at this point of the cycle. For the year we successfully deployed capital to mid-market branded hotels and student accommodation investments. Looking forward to 2020, our focus is on healthcare, childcare and additional investments within the student accommodation space. These sectors offer tangible asset backed lending and stable cash flows which are not directly correlated to the wider business cycle.”
“Over recent days and weeks there have been significant changes to equity and credit market valuations caused by the global effects of the spread of covid-19. This sell off has increased in pace over this recent period and become a major market shock which might equal or exceed the previous and infamous periods such as the dot com, global financial crisis and the eurozone crisis. The speed of the sell-off has been astonishing with equity markets experiencing recent highs in mid-February and then by mid -March multi year lows. The unusual nature of this potential market shock affects both demand and supply and both equity and credit markets have moved in tandem. For a number of years, the Investment Management team has been extolling the virtue of secured private credit and have made favourable valuation comparisons to unsecured high yield bonds. We are therefore not surprised to see wider credit spreads; however, we are astounded to see where these spreads have moved to and also where secured Loans have been trading.
It is the stated aim of the company to mark the portfolio to market – such marks give investors real-time accurate information as to the Net Asset Value of the portfolio. This allows them to make informed decisions with regards to the share price and the value of the Company on a monthly basis on or around the 16th of each month. These valuations are temporal as the markets are clearly constantly moving, and in addition they are exacerbated by the fact that the underling instruments are generally relatively illiquid and therefore price movements can be exacerbated by extreme changes in sentiment.
The recent market movements are considered a significant post balance sheet event. The company’s most recently published post year end NAV, prepared as at 31 March 2020, showed that total net assets of the Company fell by 11.4% to £105.9 million. This was primarily driven by the value of investments falling from £131.2 million as at 31 December to £119.7 million as at 31 March 2020. The valuation was prepared by the company’s independent valuer. This portfolio revaluation is driven by all of the investments being marked reflect that perceived or actual risks have increased where visible price points are available these reference prices have been used. We expect these marks to return to normality as we move through this current crisis and as the “fear” levels subside.
Looking ahead to the rest of 2020, opportunities will arise. However, first and foremost will be the management of the existing portfolio. Largely the overall credit environment will be dictated by other global events – the Investment Manager will focus on the monitoring of the portfolio and ensuring scheduled payments are received. Given the unique nature of this event, and the almost wholesale shut down to industry, we expect monthly trading performance of a number of our borrowers to be impacted, the degree and severity will be subject to both sector specific factors, macro “health” factors and any structural credit support mechanisms built into the transaction/investment (for example funded interest reserve accounts). The Investment Manager in partnership with financial sponsors and borrowers will provide guidance and advice to holdings experiencing temporal stress, and aid in any workout situation as the case maybe.”
RMDL aims to generate attractive and regular dividends through investment in secured debt instruments of UK SMEs and mid-market corporates and/or individuals including any loan, promissory notes, lease, bond, or preference share sourced or originated by the manager with a degree of inflation protection through-linked returns where appropriate.
Loans will generally be, but not limited to, senior, subordinated, unitranche and mezzanine debt instruments, documented as loans, notes, leases,or convertible bonds. Such loans shall typically have a life of 2-10 years. In certain limited cases Loans in which the company invests may have equity instruments attached, ordinarily any such equity interests would come in the form of warrants or options attached to a Loan. Typically, the loans will have coupons which may be fixed, index-linked or linked. For the purposes of this investment policy, UK SMEs include entities incorporated outside of the UK provided their assets and/or principal operations are within the UK.
Loans in which the company invests are predominantly secured against assets such as real estate or plant and machinery and/or income streams such as account receivables. The company will make loans to borrowers in a range of sectors within certain exposure limits which will vary from time to time, according to market conditions.
RMDL: Annual results and update from SME-focused RM Secured Direct Lending