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RM Secured Direct says BoE rate rise should benefit its portfolio

The trust's assets have risen above £100mln - generally seen as the level at which institutional investors will start to take an interest
Bank of England
RM believes interest rates are below sustainable levels for this point in the economic cycle

RM Secured Direct Lending PLC (LON:RMDL) is well positioned to benefit from the recent increase in the Bank of England’s key lending rate.

The quarter-point rise in interest rates will see additional income flow through on the 55% of the portfolio that sterling floating rate loan exposures and which do not have a Libor floor, the company said in its interim results.

The investment trust, which specialises in secured debt investments, had already revealed details of its net asset value (NAV) performance in an update last month and confirmed in Friday’s interims that it generated a net asset value total return of 2.98% (dividends re-invested at NAV) and the ordinary share price has traded consistently at a modest premium to NAV.

READ: RM Secured Direct Lending says further market weakness would provide opportunities

At the half-year end, the ordinary share portfolio had grown significantly to 30 debt investments totalling more than £106mln, which represented roughly 98% of the committed capital excluding the undrawn revolving credit facility.

The average yield on investments is currently above the 8% target level at 8.27% but the investment manager is looking to raise it further over the coming months.

“There are some key takeaways from the portfolio statistics, the first being that during the six months to June 2018 there has been a steady rise in the number of investments linked to Libor from 39% to 55% of the portfolio, which is in line with the investment manager's desire to reduce duration risk within the portfolio, and not to take significant fixed rate exposure at this point of the interest rate cycle,” said Norman Crighton, the chairman of RM Secured.

“The investment manager has positioned the company's investments so that should interest rates start to move higher, investments linked to Libor will see an up-tick in financial return for the company,” he added.

“Secondly, the investment manager has increased the proportion of investments in the senior part of the capital structure, this has risen from 69% to 74%. The rationale for this adjustment reflects the investment manager's view around the overall economic environment, and the defensive nature of the company. Investments in the senior part of the capital structure, on average, have higher recovery rates than that of investments in subordinated, holding company or mezzanine positions.

“Finally, investments are spread across 15 sectors which provides broad sector diversity and are consistent with the desire to spread risk. Other key statistics are that the average yield on investments is 8.27% and there is one US dollar investment and two euro-denominated investments. These currency exposures are largely hedged back into sterling,” Crighton said.

The half-yearly target of a 3.25p dividend has been achieved and for the full year, the expectation is for a dividend of 6.5p.

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