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RM Secured Direct Lending: THE INVESTMENT CASE
INVESTMENT OVERVIEW

RM Secured Direct Lending's focus on non-cyclicals paying dividends

The stock consistently trades above its net asset value per share, which could have something to do with the dividend yield of more than 6%
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INVESTMENT OVERVIEW: RMDL The Big Picture
The portfolio's largest exposures are to the Health and Social care sector (16% of the loan portfolio) and Asset Finance (14%)

Secured debt-focused investment trust RM Secured Direct Lending PLC (LON:RMDL) had a strong finish to 2017 and a solid first half of 2018.

Its net asset value (NAV) at the end of June eased to 97.85p from 98.59p at the end of 2017 but factoring in the 3.25p interim dividend, the trust generated a net asset value total return of 2.98% (dividends re-invested at NAV) in the first half of the year 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

After listing on the premium segment of the main market of the London Stock Exchange on December 15 2016, the company exceeded its first-year target return of 4% and remains on track to increase this to 6.5% for 2018.

The portfolio continues to grow

In its interim results, the company revealed 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.

Passing the £100mln assets milestone could be significant as it is generally accepted that a trust starts to attract the interest of institutional investors once it passes this level.

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.

The company chairman, Norman Crighton, said the recent quarter-point hike in the Bank of England’s base rate should work out well for the trust’s portfolio, 55% of which has sterling floating rate loan exposure and does not have a Libor floor.

A steady rise in the number of investments linked to Libor from 39% to 55% of the portfolio 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.

RM believes interest rates are still below sustainable levels despite recent upward adjustments.

Strong pipeline of opportunities

At the beginning of 2018, RM Capital Markets was particularly keen on two sectors: Property Bridging and Asset Finance.

Anyone who has bought a house but not yet completed the sale of their own knows all about bridging loans.

Property Bridging is the term for when loans are made on a very limited loan-to-value basis over property in circumstances where a bank cannot cough up the money quickly enough. RM believes it can fill this gap within the unregulated space by providing the "bridge" and adds value by conducting the due diligence and legal process within an expedited time period.

Funding Asset Finance opportunities are attractive due to recourse to a wide pool of hard assets, guarantees from underlying borrowers and significant sponsor equity, RM Capital said.

“We continue to see a number of bespoke, higher-yielding lending opportunities to established businesses that offer attractive returns profiles across a number of sectors," said James Robson, the chief investment officer of RM Funds.

Come August 2018, the company revealed its largest exposures were to the Health and Social care sector (16% of the loan portfolio) and Asset Finance (14%).

Overall, the theme is to focus on non-cyclical sectors, such as Social Infrastructure.

In all, its investments are spread across 15 sectors, thus providing broad sector diversity.

Other key statistics highlighted at the time of the interim results (in August) are that the average yield on investments is 8.27% and there are one US dollar investment and two euro-denominated investments. These currency exposures are largely hedged back into sterling, the trust revealed.

A portfolio yielding more than 8% opens the door to decent dividends

The company declared 4.2p per share of dividends for 2017, which was above the 4p per share target set at the time of the initial public offering.

In 2018, 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.

At the current share price (at the time of writing) of 102.5p, the shares are on a projected dividend yield of 6.34%.

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RM Secured Direct Lending Timeline

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The stock consistently trades above its net asset value per share, which could have something to do with the dividend yield of more than 6%

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