The new fund that aims to provide a secure 6.5% dividend yield

4 mins. to read
The new fund that aims to provide a secure 6.5% dividend yield

December saw the launch of a new closed-ended fund that will make secured, direct loans to small and medium sized companies that are mainly based in the UK. This part of the market is poorly served by the banks and other lenders, which means there is the potential to earn attractive risk-adjusted returns. 

RM Secured Lending (LON:RMDL) was admitted to the London Stock Exchange on December 15th and trades under the ticker RMDL. The fund will lend to companies with a good visibility over cash flow and earnings and that have exceptional management teams, with the loans supported by strong security. Each advance will typically be in the range of £2-10m and will normally last for anything from 3-15 years.

The loans will be secured on a range of assets including property, plant and machinery, and income streams. They will mainly have senior secured status to help ensure the return of capital in the event that the company runs into difficulties. No loan or borrower will exceed 10% of the gross assets and at least 70% of the capital will be deployed in the UK.

For 2017 the fund is targeting a 4% dividend yield on the issue price of a pound a share. It should be fully invested by the start of 2018, at which point the annual yield is expected to increase to 6.5% with quarterly distributions. This sort of return is feasible because the interest rates on its loans will typically be in the range of 8% to 12% per annum.

The annual management fee is up to 0.875% of NAV and there is a share buyback facility to control the discount. Gearing of a maximum of 20% can be used to boost the potential returns.

The fund is managed by RM Capital Markets, which has a lot of experience in this area, although the IPO failed to hit the firm’s initial £100m funding target and only raised £50.3m.

Other secured income options

It is early days for RMDL and will take time for the fund to invest its capital and build up the income so that it can start paying dividends, but those who are prepared to wait can still pick the shares up at a price close to their underlying NAV. If you want to start earning income straight away there are several similar funds that have already invested their capital and moved onto a premium rating.

A few weeks ago I wrote about Hadrian’s Wall Secured Investments (LON:HWSL), which raised £80m when it floated on the London Stock Exchange last June. It offers a very similar exposure to RM Secured Lending and is targeting an annual dividend yield of at least 6%.

The fund aims to make regular, sustained long-term distributions while preserving its capital value.

HWSL paid its first interim dividend in early December and issued an update just before Christmas. The company has now made seven secured loans with a total value of £20.6m. These have a weighted average term of 4.1 years and pay an average interest rate of 8.3%. Other deals are well advanced and the fund expects to be fully invested by the end of the first quarter. The shares are currently trading at a 9% premium to their NAV.

There are two other similar closed-ended funds that provide exposure to relatively low-risk loans that pay high rates of interest that you might want to consider. They are GCP Infrastructure Investments (LON:GCP) and GCP Asset Backed Income (LON:GABI), which was previously called Project Finance Investments Ltd.

Steady sources of income

The firm that manages them is Gravis Capital Partners, which offers several ‘sleep-at-night investments’ that are designed to provide long-term predictable returns from assets that will always be crucial to society.

GCP Infrastructure Investments invests in infrastructure debt, which means that the £811m fund’s diversified portfolio is secured against long dated public sector backed cash flows and offers a partial degree of protection against inflation. The fund aims to make regular, sustained long-term distributions while preserving its capital value.

At the end of September GCP had built up a portfolio of 43 infrastructure loans with a weighted average annualised yield of 8.8% and an average life of 15 years, with two further loans being made in October. The fund has delivered strong returns since it listed in July 2010 and is now paying quarterly dividends of 1.9p per share. This gives it a prospective yield of just over 6% with the shares trading on a 12% premium to NAV.

The GCP Asset Backed Income fund provides exposure to a portfolio of UK-based asset backed loans that are secured against physical assets and/or cash flows. It is targeting a dividend yield of 6% for the 2017 financial year.

GABI has £166m of assets that at the end of September had been invested in 10 different loans with a weighted average annualised yield of 8.2% and an average life across the portfolio of 9 years. It has since made two further loans in October. The last quarterly dividend was 1.5 pence per share, which gives the fund a prospective yield of about 5.7% with the shares trading on a 6% premium to NAV.

These sorts of debt-backed funds allow income investors to earn a yield of around 6% with quarterly distributions. The fact that the loans are secured should help to keep the volatility and risk to capital at a fairly low level, although it is worth bearing in mind that the high premiums might slowly start to erode once interest rates begin to move higher.

Comments (0)

Leave a Reply

Your email address will not be published. Required fields are marked *