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VPC Specialty Lending seems to be coping fairly well

VPC Specialty Lending seems to be coping fairly well (apart from its wide discount) – VPC Specialty Lending’s return on NAV for 2019 was 11.3%. The dividend was increased from 6.8p to 8p. Despite buying back 12.5% of the company’s shares (helping to facilitate the sale of Woodford’s stake in the company), the discount widened from 15.6% to 16.2%.

One reason why the discount didn’t narrow was an overhang of shares owned by Invesco. These were sold in February to SVS Opportunity Fund, L.P., a newly formed investment vehicle, whose underlying investor is a large US insurance company, managed by the investment manager.

At the end of December 2019, the portfolio consisted of 87% balance sheet loans, 10% equity investments and 1% marketplace loans and securitisation residuals combined. The remaining 2% was cash.

Shareholders get to vote on the continuation of the company at this year’s AGM. The board is keen that the company should continue.

The NAV has fallen from 93.3p to 88.9p over the course of 2020, The discount has widened again too, with the shares now trading at 58p. These moves are largely the effect of the COVID-19 pandemic.

The managers are comforted by the collateral held against the underlying loans in the portfolio, the fact that this collateral is liquid (easy to turn into cash) and the conservative structure of the company’s investments (their loans are cushioned by equity and lower ranking debt – this would need to be wiped out first before they would start to lose money). Most of the money has been lent to US consumers. The managers say that, so far, while the number of borrowers asking for some form of payment relief rose in April, this has tailed off again since, and overall deliquency rates have remained stable. If the portfolio companies run into trouble and struggle to raise more equity, VPC Specialty Investments also has the ability to step in and 1) operate the business as a going concern 2) attempt to raise equity from a new sponsor to recapitalise the business or 3) to wind down the portfolio and seek recovery on its secured debt.

All contractual interest payments were received in April, but the company made provisions against both its equity investments and its loan portfolio. It is largely this that drove the fall in NAV. New lending fell away at most platforms as it became harder to assess the creditworthiness of borrowers. loans were still repaid, however and so cash began to accumulate – since early March, they have received USD$60 million of prepayments. USD$25 million was used to pay down its PacWest credit facility (which can be redrawn in the future). Money has also been invested into a Legal Finance strategy [which they say is uncorrelated to the economic outlook but isn’t what investors signed up to] and kept in cash to fund future investments.

To sum up, the managers say “While we hope for the best, we must be prepared for the worst. As such, we will continue to monitor the portfolio very closely and proactively work with our portfolio companies to manage the situation as it unfolds. In addition, we continue to coordinate with our portfolio companies to ensure they are equipped to manage employee illness/dislocation during the lockdown orders and react to any impact to borrowers and manage any resulting liquidity needs in the short term. “

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