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Trust Insider: has property credit escaped the shadow of 2008?
by James Carthew on Oct 04, 2013 at 11:47
Reci started life in 2005 as Queens Walk Investments, raising money at €10 per share. Its focus then was on investing in the most junior tranches of asset backed securities (the riskier end of the capital structure) and its portfolio was spread across the UK, the rest of Europe and the US.
When the credit crunch hit, RECI suffered as people stopped paying their mortgages (leading to an increase in default rates and losses in the portfolio) and panicky sellers of asset-backed securities drove down the NAV.
In spring 2010, with the NAV at €3.73, 2010 Reci changed tack. The old investment portfolio was to be run off, it would focus on more senior (but not the most senior) tranches of securitised debt and drop the exposure to the US. Shareholders were given a bonus issue of preference shares that carried an 8% coupon and it also raised fresh capital at €2 per share.
In combination the preference share issue and dilutive fund raise decreased the NAV of the ordinary shares to €1.59. In summer 2011 Reci transferred the old investments to a separate cell (European Residual Income Investments). This is being wound up and the proceeds returned to its shareholders.
Reci’s new portfolio was similar to TFIF’s (Reci does not have TFIF’s exposure to collateralised debt obligations) but in recent quarters it has been increasing exposure to real estate loans. In June it reckoned the average yield on its loan portfolio was 14.2% and, at the end of March 2013, the yield to maturity on its ABS investments was 8.9%.
The difficulties for Reci as it tries to raise fresh capital, however, are that it trades on a discount (around 3% – not huge, but unusual among funds that are succeeding in raising money) and it has the highest charges of the peer group (1.75% on net assets and an incentive fee that works out at the moment at 25% of the excess income generated above 2% per quarter).
I think new investors might want to see a reduction in the fees – which were agreed in the heady pre-credit crunch days – and I also wonder whether there might be some way of refinancing the preference shares at a lower rate.
James Carthew is director of Sapient Research
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