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SME Credit Realisation updates on COVID-19

SME Credit Realisation (SCRF) has provided the market with an update of its preliminary assessment of the potential implications of the COVID-19 pandemic. It says that, while it future performance may be adversely affected by COVID-19, it is able to report positive progress in the Company’s winding-down with returns of cash to shareholders of around £22 million intended to be declared for payment in May 2020. Furthermore, it intends to continue returning surplus cash to shareholders on a quarterly basis, although SCRF and its advisers will continue to review how and when capital is returned to shareholders and this may change over the course of time. However, SCRF will pay a quarterly dividend of 1.3125 pence per share in May 2020; details of the timetable for the dividend payment will be published in the next few days.

Compulsory partial redemption of shares to proceed

In addition to the dividend, SCRF says that it will return approximately £18.5 million to shareholders by way of a compulsory partial redemption of shares. Again, further details of the partial redemption of shares will be published in the next few days.

NAV publication delayed and share repurchases suspended

As a result of the uncertainty caused by COVID-19, SCRF has decided to delay the publication of its NAV as at 31 March 2020 which otherwise would have been released mid-April. SCRF says that it will publish the NAV “when market conditions stabilise sufficiently to allow the establishment of detailed forward-looking assumptions based on evolving market data and thus facilitate the calculation of a reliable NAV”. Pending publication of the Company’s NAV as at 31 March 2020, the Board has resolved to suspend share repurchases.

It is the Board’s intention to be as transparent as possible with shareholders through this period of uncertainty and we will continue to provide updates at appropriate junctures.

Portfolio disposals delayed, and may not proceed

SCRF announced in early February 2020 that, having run an auction process over the preceding months, the Board were pursuing a potential sale of a portion of its assets. It is still the Company’s intention to effect this sale but, given current market volatility and uncertainty caused by COVID-19, it is likely the asset sales shall be delayed, or may not proceed at all.

Update on leverage

As at 31 March 2020, the Company’s outstanding borrowings were approximately £56 million on a look-through basis, which equates to a debt to equity ratio of 22% based on the Company’s 31 December 2019 NAV of approximately £259 million. All of the Company’s leverage facilities are in amortisation with the majority of cashflows from loans held within the respective SPVs being prioritised to reduce the Company’s borrowings.

Transition to fair value accounting – potential NAV impact

As referenced in the Company’s interim report published in December, the Company has, as a result of the Company’s business model changing, with effect from its FY20/21 beginning 1 April 2020 moved to fair value accounting for the loans it holds. The Company therefore expects to publish its NAV from and including as at 30 June 2020 using fair value methodology, which will involve the application of a discount rate implied by market comparables to the expected cashflows from the Company’s loan portfolio. Further details, including potential variance in NAV, will be disclosed in the Company’s FY19/20 annual report scheduled for publication in July.

[QD comment: There are no big surprises here. COVID-19 has yet to have a material impact on SCRF’s realisation process, so it will give back the money that it has planned to (both through the dividend and the compulsory partial redemption of shares), and plans to continue with its quarterly dividends. However, this may change as events unfold. It’s difficult to get a realistic estimate of the NAV, so publication of this is delayed for now, and presumably this is affecting its ability to repurchase shares as it can not reliably tell what the discount that these are being repurchased at. SCRF is in wind-up mode, and this will still take place, but may be delayed. The process may pushed out if this allows SCRF to achieve greater recoveries then if it pushes through realisations while the economic backdrop is difficult.]

 

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