RM Secured Direct Lending Plc (LON:RMDL) is the topic of conversation when Hardman and Co’s Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.
Q1: You recently wrote on RM SECURED DIRECT LENDING. What were the key messages from your note?
A1: What feels a lifetime ago, but was only the 10th March, Hardman and Co hosted an Investor Forum where RMDL made a presentation. There is a video available to view on our website. At that Forum, the company summarised the investment opportunity as “RM Secured Direct Lending offers access to a diverse portfolio of secured loans with good collateral – overall the portfolio is high income due to the ability of the manager to capture the complexity premium”. It offers investors i) a high dividend yield, ii) a proven record in downside risk management, and iii) a non-correlated share price. Its monthly NAV has until this month been very stable, driven by predictable net interest income. We examined these themes and how RMDL assesses, monitors and collects credit in our initiation report in June last year.
Q2: How does the portfolio fare in the current market turmoil?
A2: The manager commented “It is the view of the Manager that RMDL’s portfolio of secured debt investments offers downside protection to capital, reduced volatility and above average yields given its diversification across real estate, hard assets, social infrastructure and “non-cyclical” mid-market-corporates”. The portfolio has 34 investments in 13 sectors, so there is a degree of diversification. 49% of the book is senior debt. We published a note in September last year called Defensive Qualities in Uncertain times and another in January on the social infrastructure elements, both of which are on our website.
There are two downsides in the short term. Firstly, 23% of the portfolio is backed by hotels where the security values currently appear robust, and management emphasised that, unlike many in the market, they had not compromised on covenants, but that is clearly an area of concern. Second, RMDL marks to market its portfolio and has seen volatility associated with sentiment-driven spread movements rather than the underlying customer cashflows. An update was provided on 25 March for MTM movements, which gave an implied NAV of circa 87.44 pence per share as at the market close on 19 March. It is likely to have fallen further since but, at the current share price, there is an enormous discount to the likely NAV. It is important to realise these are sentiment driven issues at the moment. The ultimate cashflow is likely to be very different.
Q3: Getting back to your recent note, there was an interesting section in the Q&A that the manager faced and especially on credit. Can you summarise that for us?
A3: It is hardly surprising that attendees at our Forum focused very heavily on this subject. For us, one of the most important things to consider is one of the hardest to put on paper and that is the culture of the company. Is this a business led by lenders who take personal responsibility for collecting the money back and whose interests are closely aligned to shareholders? Has the experience of collecting money in bad times in the past affected how they lend now? We concluded yes to both. The nature of the portfolio and resulting risks drop out from that culture and RMDL does have many defensive qualities. Losses cannot of course be ruled out, especially given the current uncertainty, but investors should be looking at the likelihood of defaults, what the losses will be if there is a default, and then comparing that with the discount.