Following on from the wipeout of Silicon Valley Bank that David discussed in Friday’s QD view, the collapse of Credit Suisse and its eventual takeover by UBS have been hitting headlines in recent days. We have kept you in touch with the blogposts from the team at Polar Capital Global Financials Trust. As a major investor in banks, it was obviously going to be affected by these events, but pleasingly the team seems to have done relatively well by steering the portfolio towards more defensive investments. Following these woes, there has been another leg down to technology-related funds, which may prove short-lived. There are some other, less high-profile funds that may have been affected though.
One of these is EJF Investments. Its share price has dived since 8 March, to the extent that the shares now look to be trading on a 42% discount. EJF Investments describes itself as a closed-ended investment company investing in opportunities created in the US banking and insurance sectors by regulatory and structural changes impacting the financial services sector. The company seeks to generate risk-adjusted shareholder returns by investing in a diversified portfolio of long-term, cash-flow generating assets, which may include structured debt and equity, loans, bonds, preference shares, convertible notes, FinTech debt securities, and private equity, in both cash and synthetic formats issued by entities domiciled in the US, UK and Europe.
A look at its factsheet doesn’t reveal much by way of its exposure to individual banks. The largest positions are equity stakes in seven securitisations sponsored by its manager EJF Capital. The equity tranche of these types of investment is the riskiest – it bears the first losses when things go awry in the underlying portfolio. EJF Investment’s share price seems to be suggesting that this is the case.
On 15 March, EJF Investments announced that “Following recent events in the US banking industry, EJF Investments Ltd (the “Company”) is pleased to announce that it has no underlying exposure to SVB Financial Group or Signature Bank, which have been placed into receivership.
“The Company has a small underlying exposure to Silvergate Capital Corporation, which announced its intent to wind down operations and voluntarily liquidate Silvergate Bank in an orderly manner on 8 March 2023. This exposure is to a trust preferred security and resides in the collateral pools backing two of the Company’s securitisation investments: TruPS Financials Note Securitization 2019-1 Ltd and TruPS Financials Note Securitization 2019-2 Ltd. The combined exposure is equivalent to less than 2.5% of the Company’s most recently published NAV on a look through basis, prior to any recoveries. Due to the mechanics of securitisations, the size of exposure does not automatically translate into a write-down in NAV of an equal amount.” However, a 13F filing in February revealed that EJF Capital did have some exposure to SVB at end December 2022. It isn’t clear when this was sold.
This morning, the trust announced an end February NAV of 183p, up on the previous month. This is, of course, ahead of the problems in the banking market. We may have to wait a month to find out what the impact of recent events has been on the NAV, unless the company makes another statement sooner than that – which we’d like to see.
Another fund that may have some exposure to this is Axiom European Financial Debt (AXI). Its share price took a tumble on 17 March but could have further to fall. It specialises in investing in the capital structures of financial companies in Europe. One of the surprises of the Credit Suisse collapse was that investors in its Additional tier 1 bonds have been wiped out; they are not happy. We aren’t aware that AXI had any direct exposure to Credit Suisse but we think that it does hold similar instruments issued by other banks. Fortunately, unlike EJF Investments, AXI does publish daily NAVs. The NAV for 17 March slipped slightly and it will be interesting to see what yesterday’s figure was; this should be released after the market closes tonight, we think.
EJFI : Is EJF Investments a casualty of the Credit Suisse collapse?