Gcp Infrastructure Inves... Share Discussion Threads

[williamcooper104] 18/8/2023 09:06

So unlike in the 1970s this time round we don't get to leg our creditors with inflation

[williamcooper104] 18/8/2023 09:04

It's the public accounts it hits QE was buying long gilts with floating rate debt and thus shortened the maturity profile of our national debt from c15 years to 4 years (and then we thought RPI linked debt was cheap so binged on it too) So higher for longer can only mean austerity

[spectoacc] 18/8/2023 08:49

Interest rate rises lower inflation, by reducing economic activity and demand.

Question is how high they have to go to do that, and how long the transmission takes - longer than it used to.

On food/essentials - sure, there's only so much trading down can be done on cheese/eggs.

But food was only the 3rd biggest contributor to recent inflation - the largest by far were foreign holidays, and flights. Ergo, far too much money in the economy (perhaps no surprise after the extra £400bn of QE during Covid).

Also consider that if it takes longer for rate rises to affect inflation, it also allows longer for the positive side effects - eg the wealthy having more interest on their savings - to build too.

Everything says "higher for longer", as it has throughout. The absolute key is the employment market, since only unemployment (caused by high interest rates slowing economic activity) will counter wage demands.

Inflation will not go to 2% with wage settlements over 7%, barring a really serious collapse in commodity prices.

[donald pond] 18/8/2023 08:42

I just don't think interest rate rises work to slow inflation. Those 15% on floating rates will all be workers and in a tight labour market each rise in rates will lead to them seeking wage rises. Which embeds inflation, which was originally driven by global energy prices. I simply don't believe the price of eggs and cheese has doubled over the last 12 months because of excess demand that needs to be stamped out.

[spectoacc] 18/8/2023 08:27

Something will happen on ISAs I'm sure - who'll march in the streets for 6/7 figure ISAs?

Rates aren't at their peak - but agree the peak might begin with a "5" not a "6". Can't see rates not beginning with a 5 for a long time ahead tho. One or two more +0.25's I reckon, but with risk to the upside. RMII are simply wrong, tho will use "..Near.." as the get-out after the next MPC meeting.

Interesting comment in the IC last week - same stat as before but expressed differently - that only around a quarter of households have a mortgage, and only around a half of them (ie c.12.5% of UK households overall) have seen any effect from the rate rises so far, due to fixes.

Arguably the proportion who rent (rather than own outright) will be indirectly affected too, but shows how much heavy lifting needs to be done by interest rates. Business should be hit first, but seemingly still have pricing power when incomes remain high/wages are running hot.

Govnt borrowing getting very costly, & we're effectively borrowing to pay the interest on previous debt, never a good look. And for QE losses. And for spending that's still exceeding income.

[donald pond] 18/8/2023 08:17

I think most believe rates are near the peak. People don't expect them to fall quickly but I've not heard anyone suggest we need more than another 0.5-0.75%. The big issue imo is that for 25 years government has encouraged the private sector to invest in infrastructure. When the risk free rate is so high, few will do that. So the government will have to issue gilts at high rates or try somehow to pass the costs of net zero on. Or force ISAs to invest in their approved projects.

[stockstockham] 18/8/2023 07:27

No one else sees interest rates as at their peak. Whether the market is pricing in too much with current discounts is another matter.

[alanpro1] 18/8/2023 07:23

Interesting view from RMII. "OutlookOverall, we see interest rates are now at or near their peaks. The curve inversion within the UK gilt market is creating a compelling story for valuations across the front end of the fixed income curve. There will probably be no better time to be investing into short-dated credit and closed-ended real asset funds than now, as the high levels of short-dated SONIA have driven down valuations and increased share price discounts to NAV, which in our view are unlikely to be maintained. The market is behind the curve as the inflation story is now moving into the background and the outlook will be driven by systemic risks that have arisen by the velocity and extent of the interest rate rises within the United Kingdom. RM Capital markets Limited17 August 2023"

[ptolemy] 17/8/2023 08:58

H&S pattern playing out. Left shoulder 27/06, daily chart. Target 67p.

[donald pond] 16/8/2023 15:43

Me too. Happy to trade around a core position here. Low 70s is too cheap to last for long imo

[panshanger1] 16/8/2023 15:11

Added today

[hpcg] 11/8/2023 15:15

I've probably changed my mind on the deal based on the ability to pay down the revolver, with the quid pro quo being the risk of more losses within the larger portfolio. The NIM on the debt covered by the revolver is effectively 0.8%. Were rates to go up another 100bp it would be borrowing to lose money. I accept timing is an issue here, and borrowing to lend out today, with a sufficient margin on top, is fine, though presumably further up the risk tree. Nothing can be done about lending made at lower rates in the past, and is an inherent risk with duration. That is in the price now, I guess.

High rates are designed to discourage frivolous borrowing and direct it at the most worthwhile. I'm not sure why the country needs to build child care nurseries when there are acres of empty retail units in town centres that could be repurposed. Then we have the total waste of money on PFI for police head quarters buildings. I can't really see the next government going for that when even the Conservatives have cold feet. IMO the correct thing to do now is to scale back the book and the market will tell the company through the share price when it should lend new money.

[citytilidie] 11/8/2023 15:09

Personally, I think it is just a way for GCP to try and cut costs in what have been 2 underperforming trust companies. They can put all the spin the want to on the benefits, but that’s all it is.

[wskill] 11/8/2023 14:49

Tend to think brokers talk their own book whatever way it is positioned so mostly just background noise to me .
Do think this merger will be of benefit to GCP in the long run which is what we investors are after,Glad it did not go the same as CSH difficult to replace these high yielding trusts.

[apollocreed1] 11/8/2023 12:03

What about mergers with other debt funds. Sequoia Economic Infrastructure, Riverstone Credit Opportunities - I think they would all do better as one big fund.

[cc2014] 11/8/2023 10:34

It seems to me the City are punishing the share prices of any IT with excessive leverage and have been doing so for the last 6 months.

Some have succeeded and sold assets but very many have done nothing or done alot of talking with no action. Indeed many have gone the opposite way and done share buybacks and increased the debt element.


It's a reflection on the Board's and the fund managers really.
GABI should have been well placed here. It's book is short duration and it should have been able to use proceeds at maturity to pay down the debt of it's own accord. Of course that becomes more difficult when the loan book starts going bad.


I guess a question might be that if all these IT's are going to sell off assets to pay down debt, where does the investment in the UK economy come from?

[speedsgh] 11/8/2023 10:15

Yes, thanks @dp. A very interesting note. Thanks for sharing.

[spectoacc] 11/8/2023 09:40

That is interesting, thanks.

I hadn't realised the RCF issue at GCP was seen that seriously. Feel a little more positive on the mergers, also with the comment about not all the RMII loans coming across.


"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."

[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.