RM Secured Direct Lending (RMDL) offers investors an ongoing ca.6.5% dividend yield, whose sustainability is supported by multi-year assets, a rising revenue yield and economies of scale. Credit, we believe, is well controlled, and we provide readers with a detailed review of its assessment, monitoring and recovery. We believe the gearing level is appropriate, the investment manager’s interests are aligned to shareholders, and that any discount will be actively managed. Like any lender, there are risks when the cycle turns; also, RMDL has some junior debt positions, and its book has shown a propensity to turn over, which in the future could see more external refinancing. The shares trade at a 3% premium to NAV.
- Strategy: RMDL operates where competition is moderate. Complex loans of £2m-£10m fall outside high-street banks’ model-driven approach and are too small for market-driven competition. This, good service, structuring skills, well-developed origination and exploiting illiquidity, see RMDL deliver good returns.
- Confidence in NAV: RMDL has 44% of its book Level 2 accounted (significant market observable inputs), backing confidence that its NAV is real. It does not have legacy issues around historical loss situations, and the gain on its warrant sale shows an accounting conservatism. Mazars is the independent valuer.
- Valuation: RMDL trades at a small premium to NAV and to its closest peers’ average. As well as the factors above, we estimate further equity issues at a premium to NAV will enhance current shareholders by 1%. RMDL has not seen a major loss and has no discount for uncertainty over loan realisable values.
- Risks: Credit remains key for any lender, and we examine in detail the investment manager’s approach. We think the right approaches to limit both the probability of default and loss, given default, are in place. The book has shown a surprising propensity to turn over. There are modest currency and key personnel risks.
- Investment summary: Debt investment companies offer investors a different asset class with which to generate substantial yields on a sustainable basis from long-term assets with predictable income streams. Like any lending business, credit needs to be correctly assessed, and managed once drawn down and recovered. RMDL has all these characteristics. The market has given it a small premium to NAV, reflecting these traits, and a material element of market-driven valuation.