Gcp Infrastructure Inves... Share Discussion Threads

[donald pond] 11/8/2023 09:37

Liberum have been tentative on GCP for a long time so their view today is interesting Planned merger announcedAnalyst: Joseph PepperGCP Mkt Cap £662m | Share price 75.4p | Prem/(disc) -31.5% | Div yield 9.3%GABI Mkt Cap £244m | Share price 57.4p | Prem/(disc) -38.9% | Div yield 11.0%RMII Mkt Cap £82m | Share price 91.7p | Prem/(disc) -23.9% | Div yield 9.3%EventGCP Infrastructure (GCP), GCP Asset Backed Income (GABI) and RM Infrastructure Income (RMII) have all issued statements this morning in relation to a potential combination of the funds. The announcements relate to two separate (but related) mergers:GABI Scheme: GCP and GABI have agreed heads of terms – GABI will enter a solvent wind-up, with GABI shareholders receiving GCP shares on a formula asset value (FAV) for FAV basis which reflects NAV less transaction costs. It is expected this merger will complete before the end of 2023.RMII Scheme: Potential combination with RMII – The newly enlarged Gravis fund (GABI and GCP) has outlined it is in discussions with the Board of RMII for the transfer of a material proportion of its assets to GCP in exchange for the issue of new shares. No heads of terms have been agreed and GCP will provide further details when appropriate.The GABI scheme would improve liquidity at GCP and enable significant deleveraging of expensive floating rate debt. £200m of cash that would be available to the enlarged portfolio will be allocated to reducing GCP's RCF to a drawn balance of £50m while £100m will be distributed via. buybacks, special dividends or otherwise. An enhanced cash balance from the merger is due to the short duration nature of GABI's loans (5 years at GABI vs 10 years at GCP), with c.£140m in cash expected to be received by the combined fund within the first 6 months of 2024.A revised investment policy will be issued, which provides greater flexibility to invest in higher return investments in the private sector and/or non-UK geographies. A new explicit sustainability objective will also be introduced into the investment mandate.Further benefits of the combination include enhanced secondary market liquidity, consolidation of holdings for large shareholders and lower costs (estimated at c.£0.8m p.a.).Neither GABI or GCP currently have a requirement to hold a continuation vote but the Board will commit to providing shareholders with a continuation vote at GCP's AGM in 2028 and every four years thereafter.As the investment manager, Gravis will contribute £1m to any transaction costs, with residual costs to be shared between GCP / GABI, which are expected to be £1.4m. The portfolio managers of the enlarged GCP Infra will remain unchanged.Liberum viewGCP trades at significant discount to NAV and hence equity raising is an unrealistic short-term option to de-lever the portfolio and improve liquidity. We have previously highlighted these as two key issues at GCP, with its floating-rate £190m RCF 81% drawn in December 2022. This merger largely resolves these key issues with the short duration portfolio at GABI providing a larger return of capital as loans mature more frequently. This allows for the repayment of floating-rate debt but also provides the opportunity to reinvest in a new higher rate environment.The RMII merger is a less natural combination given RMII's loans have a higher risk profile than GCP but only a 'material' proportion of the loans will be acquired if the RMII scheme proceeds, with the highest risk loans not being incorporated into the GCP portfolio. Furthermore, RMII's loan book is short duration and hence provides further liquidity to GCP and there are cost efficiencies from merging the three funds within a similar time period.The merger would be on a FAV for FAV basis using GCP's September NAV and given its exposure to more subjective valuation assumptions due to its equity asset exposure (power price assumptions, equity discount rates) we await the publication of its updated NAV to determine the relative value of the merger for GCP / GABI shareholders. However, the merger actively addresses key issues we have identified at GCP and we view such corporate activity as necessary and in shareholder's interest in a new subdued equity raising environment.

[donald pond] 11/8/2023 09:34

What do we think of the merger terms? Isn't there an argument that NAV is perhaps not the fairest methodology for calculating ownership of the merged company and that enterprise value would be better (market cap minus debt)?

[hpcg] 11/8/2023 08:52

Personally I'm not fussed about the dividend - I want what maximises my returns, and if that is buybacks then that's what I'd like. If the asset managers are only comfortable with extensive buybacks if they have a larger asset base to whittle down then so be it. Of course buybacks are dividend accretive over the long term.

My only concern is around NAV losses. The discount for interest rates is outside of the company's control and is a failure of investors to foresee higher rates. I think most of the nasties in GABI that I had seen before have been accounted for. To be fair I'm relatively happy for there to be 100bp of losses per year when the dividend is 9%; I'd clearly still be doing better than gilts which is the alternative.

[chucko1] 11/8/2023 08:52

Medium term, positive for all. share price reaction of GCP hardly a surprise and an invitation to at least buy back what was sold yesterday after not moving even after a 1.75p (2.3%) ex-div.

Patience is likely to continue to be rewarded regarding GCP. On GABI, all I can say is that GCP are "buying" it on the cheap. Its problems have been harshly regarded.

[spectoacc] 11/8/2023 08:26

Going as predicted so far - should be a positive eventually, but the benefits of scale/buybacks/costs reduction are still a while away, & I think the market's getting it about right, unfortunately.

[speedsgh] 11/8/2023 08:18

No mention of the core dividend target going forwards. I suppose it gives them the perfect opportunity for a reset if required?

[hpcg] 11/8/2023 08:15

Hmm - I only own GCP, and have reasons for not owning GABI, though I admit when the price was closer to 100p than at current levels. GCP discount is a few hundred basis points less than GABI; on the other hand RMII is only 24%.

It will come down to institutional holders of course, but I am minded to vote against, at least until I can get my head around the internals of the other funds.

[hugepants] 11/8/2023 08:13

GABI +11%
GCP -2%

Says it all.

[spoole5] 11/8/2023 08:08

That went down well!

[donald pond] 11/8/2023 07:59

The continuation vote is also a positive, though 2028 is a long time away.
Getting the market cap back towards the £1bn level may also be important to staying on the radar of wealth managers. It's good news imo. Phil Kent was already running GABI so lets merge and try to manage the debt down.

[chucko1] 11/8/2023 07:59

Better for GABI for sure, owing to the dilution of its risk premium stemming from the overreaction to its "problem" loans. Not that the market will necessarily read it through that lens, but I suspect it will in part.

The positive for GABI is necessarily borne by GCP, but this is likely to be offset by the liquidity and size positives.

[spangle93] 11/8/2023 07:53

Specto - my first read was as per your 672 - it might add some value to GCP, but it's better for GABI shareholders, no?

[wllmherk] 11/8/2023 07:50

I own all 3 so this will be interesting. My investments in GABI and GCP are 2 of my smaller holdings, I do have a more significant investment in RMII

wllm :)

[spectoacc] 11/8/2023 07:33

These are some of the mooted benefits, as well as a c.£800k pa reduction in costs from jus the GABI combination:


"£200m: £100 million to further reduce the Company's leverage to a target drawn balance (after a drawdown in respect of the GABI Scheme as detailed below) of c. £50 million; and

- £100 million to distribute to shareholders by way of share buy backs, special dividends or otherwise. This commitment is in addition to the remaining commitments under the £15 million buy-back programme announced by the Company on 14 March 2023."


I think an extra (say) £100m of buybacks could be handy.

[kevph] 11/8/2023 07:27

Mmm. Came in for the divi. I'm a simple person, so will this improve the discount to NAV, and will it improve the divi further? Looks like the merger is at NAV, so can't see this being high risk?

[spectoacc] 11/8/2023 07:22

And RMII. I'm suspicious of banging GCP together with two smaller, struggling funds. It looks better for GABI & RMII holders to me, but depends on whether weakness in all of them is liquidity-related, or not. GCP's pretty large already, this should take it over £1bn mkt cap.

[jonwig] 11/8/2023 07:17

Proposed merger with GABI:



I don't know enough to comment.

[hpcg] 08/8/2023 12:40

I'm more than happy for my FI type holdings to be liquidated at something close to NAV. To an extent it is more or less the reason for buying them at a deep discount. Not solely of course, there is the higher dividend stream and the cumulative effect of buybacks, and the potential for gains should interest rates drop.

Dividends should always be only just covered for this type of security, we aren't paying fees for them to accumulate cash, nor do they themselves have any cash flow concerns such that they need a large cash buffer.

[hugepants] 08/8/2023 11:23

Spoiled for choice a bit currently with these huge yielding infrastructure/renewable trusts. They look cheap. Just hope the market has misjudged the risk.
I hold GCP,RECI,SEIT,HEIT,NESF. Also AEET (on a 33%+ discount) which is commencing a managed wind-down.

[donald pond] 08/8/2023 08:31

As JW says there is discussion in the results about this and there are a few different metrics you can use but the cover is OK. The big question imo for all of these trusts is the business model. When things are at discounts there is no scope for fundraising and origination. That will make it hard to attract and retain staff and perhaps we start seeing trusts in this sector wound down and their assets sold to pension funds, which is how these sort of projects were initially funded. I absolutely trust the NAVs here but they need to close the discount and asset sales may be the way to do it

[jonwig] 07/8/2023 17:52

Look up "adjusted earnings cover" in the latest results. It's a pretty conservative measure, and is 1.1x.

[panshanger1] 07/8/2023 16:07

Any thoughts on the sustainability of the dividend here ?

[spangle93] 28/7/2023 08:13

They also seem a bit more investor-friendly than some companies...

The Board, and Gravis, are available to meet with the Company's shareholders at any time. A capital markets day is being scheduled for October, which investors would be welcome to participate in.

Following the release of the 30 June 2023 NAV, Gravis will be holding a webinar on Tuesday 1 August at 11am.

[jonwig] 28/7/2023 07:57

Company update:



Increased discount rate and lower power prices shave a bit off the NAV, but no company-specific issues.

Also dividend 1.75p, xd 10/08, pay 13/09.

[jonwig] 21/7/2023 16:28

NED buys nearly 60,000 shareshttps://www.investegate.co.uk/announcement/rns/gcp-infrastructure-investments-ltd--gcp/director-pdmr-shareholding/7647954