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Hardman & Co

Social infrastructure: RM Secured Direct Lending an alternative alternative

Inter alia, we reviewed social infrastructure investment companies in our note “Secure income” REITs – Safe harbour available, published on 22 March 2019. In this note, we consider how RM Secured Direct Lending (LON:RMDL) may be viewed as an alternative to these investments with social infrastructure becoming an increasingly important part of its portfolio. We conclude that RMDL: i) offers a higher dividend yield; ii) carries less downside risk; and iii) has a non-correlated share price. RMDL does not have the same equity-upside, but offers investors a different portfolio option. As noted in our initiation, RMDL delivers its returns through high skill and service levels.

  • Limiting POD: We believe that investors are primarily in social infrastructure investments for what they see as a secure income, rather than for capital gains. For such investors, ones seeking safety and downside protection, having an element invested in higher-yielding, lower-downside-risk RMDL may be appropriate.
  • Other news: In December, one of RMDL’s larger investments pre-paid early. The associated fees have added 0.51p (0.5%) to the NAV. While announcing this deal, RMDL also advised that the majority of the recent £10m equity raise proceeds has been deployed. The pipeline appears to be very strong.
  • Valuation: RMDL trades at a small premium to NAV and to the average of its closest peers. In addition to the factors above, we estimate that further equity issues at a premium to NAV will enhance current shareholders by 1%. RMDL has not seen a major loss, and marks loans to market.
  • Risks: Credit remains key for any lender, and we examine in detail the investment manager’s approach. We believe the right approaches are in place to limit the probability of default and loss, in the event of default. The book shows a surprising propensity to turn over. There are modest currency and key personnel risks.
  • Investment summary: RM Secured Direct Lending is a non-bank lender focused on non-benchmarked, middle-market corporate debt, where competitive pressures are relatively modest, and yields can be enhanced by service and structuring skills. Its bespoke lending is 59% self-originated (balance in small syndicates), with a bias to non-cyclical sectors, and counterparty diversification is achieved with its portfolio of 35 loans.

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