Vpc Specialty Lending In... Share Discussion Threads

[escapetohome] 15/10/2020 12:30

Try EQI, none of that trouble with the KDI, just a tick box exercise to confirm that you read the KDI.

Simple to do, no hassles.

[redhill9] 15/10/2020 12:13

Thanks davebowler for posting that Stifel report.

Difficult to disagree with anything they say; seems to me a very fair assessment, and a positive one. I keep finding it hard to resist buying more shares despite my portfolio already being overweight in VPC, but Stifel may just have persuaded me.

[waterloo01] 15/10/2020 09:53

Well I keep adding. 13% divi and decent discount to NAV. Hard to beat. (Spoken with Barclays and sent them the KID. Nuts it was up to me to do it)

Barclays called back and even though I've shown the KID they need it to be updated by the company. I despair.

[davebowler] 15/10/2020 09:23

Stifel;
It is now over six months since the virus was unleashed, and while the fund has weathered the challenging period well, the discount remains at a historically wide level of 28% and still offers a covered dividend yield of 13%. The underlying loans have a short duration of c.1 year and so the portfolio has also been significantly de-risked with c.50% of the pre-March portfolio rolled-over. With many income funds suffering from dividend cuts, the pricing of VPC looks an anomaly. Although concerns regarding a fragile US consumer are valid, we think the portfolio should now be in a better position as new originations have tighter underwriting standards and are also to higher quality borrowers. We upgrade to Positive.

Key Points
Concerns over US consumer. We downgraded VPC in April to Neutral on the back of concerns for the US consumer. Since then the manager and underlying borrowers have limited new originations which essentially means the portfolio has been de-risking. The average duration of loans made to consumers is approximately one year, which means that c.50% of the March portfolio has now been amortised, which is a significant reduction in risk. As with all lending funds, new originations will take into consideration the higher risk environment today by tightening lending standards. Hence, we view portfolio churn as positive as the investment process does not stand still. Historically, loans made today should be the most profitable as the interest rate charged can be increased while borrower quality should also improve.


Provisions released. In August, the manager noted that provisions had begun to be released as the portfolio has weathered this period well. We think there is scope for this to continue as the underlying portfolio continues to amortise and so should benefit from a pull to par effect. As at 30/06/20 the IFRS 9 reserve was £15.6m with 37% designated as stage 1 and 60% stage 2. In total this represents 6% of NAV.


Increasing international exposure. The fund has also increased its international footprint with a new investment in Laybuy which provides consumers with a buy now pay later option in UK, Australia and New Zealand. We have our reservations around expanding the portfolio's international reach but also recognise that some diversification away from the US consumer can also be positive. How this segment performs will be an area to watch going forward. The manager has also broadened the funds profile by investing in the sponsor economics of its own SPAC which raised $200m (ticker: VIH). Sponsor economics in a SPAC can be quite accretive as it receives an outsized share of the vehicle for sponsoring it during its pre-IPO stage. The SPAC is targeting a high growth fintech company with an enterprise value of between $800m - $2bn.


Unlisted equity. The manager is also increasingly confident in the prospects of some of its unlisted equity positions, which took markdowns in Q1 but have not yet reflected the rebound seen in equity markets. As online purchasing and 'buy now pay later' has grown through the pandemic, there is the potential for markdowns to be reversed and even marked up. There are 26 unlisted portfolio company investments that represent 10% of NAV, so exposure is diversified. Unlisted equity investments are valued based on the last funding round or comparable public company multiples.



Key positives. The demise of Pollen Street Secured Lending through an eventual run-off or sale of the company may well provide a technical tailwind to the fund as investors have limited options for a high yielding lending fund. This along with continued large share buybacks, a large discount to NAV (with a long term plan to narrow the discount) and high dividend yield should support the share price.


Key negatives. The manager has done a good job in protecting the portfolio from the economic problems caused by COVID-19 and has also benefited from the large stimulus measures introduced by the US government. However, there is no hiding from the risk of further restrictions due to a surge in infections and the knock on impact to the economy. In theory, the portfolio should be better protected given the portfolio churn that has taken place. Negative sentiment surrounding the lending sector also persists as some bad apples have tainted the sector but we think this is unfair.

[chucko1] 14/10/2020 14:44

Same big volume on Monday with a trade of 2mn. But it's just noise in the big scheme of things with this stock.

[redhill9] 14/10/2020 14:15

At yesterday's close the yield was over 12.5% which seems just much too high so I'm not surprised if someone is buying (unless it's more buybacks?).

[waterloo01] 14/10/2020 12:52

2m buys in 3 trades.

[chucko1] 12/10/2020 18:50

Yup - I spent 2 years moving 9 accounts. Had a Junior ISA for my daughter who turned 18 when they changed from BS to BSI. It would have been easier to have pulled my teeth out.

[waterloo01] 12/10/2020 15:09

I also moved all but the one ISA account. Quite useless generally.

[cwa1] 12/10/2020 15:01

Good luck with that. IME of a few years ago, Barclays were spectacularly hopeless and eventually I just had to move my account...

[waterloo01] 12/10/2020 14:49

Spot on. Barclays don't have the KID. Asked them to chase

[chucko1] 12/10/2020 14:47

It might be to do with KID. If they don't have an update on a particular fund or Investment Trust, they stop you buying. This is because their 3rd party provider of these things along with Barclays Smart (laughable) Investors are totally useless. Clear?

[waterloo01] 12/10/2020 14:40

Wonder why my Barclays ISA won't let me buy? Will have to call them.

[cwa1] 12/10/2020 14:37

You can buy or sell in an ISA

[waterloo01] 12/10/2020 14:05

Another large buy 2m. Out of interest anyone know the status re ISA's. I hold a number in an ISA but have noticed I can't buy more but can sell. Can do either in regular account?

[johnroger] 05/10/2020 16:43

Director/associate buy

[redhill9] 01/10/2020 09:56

The August monthly report is again encouraging with NAV of 90.08p and the comment that all interest due for August had been received.

It was the additional comment regarding the investment in September in Victory Acquisition Corp that caught the eye (more details in the link in post above by rambutan2). It could mean the capital invested is "dead" money for up to two years if nothing happens but alternatively investment in a Fintech company could be exciting.

[rambutan2] 30/9/2020 22:05

A SPACtacular monthly update:

[davebowler] 29/9/2020 12:01

Liberum;
Event

VPC Specialty Lending Investments' NAV per share at 30 June 2020 was 89.8p (previously reported), representing a 0.5% NAV return in H1 2020. The July monthly report has since been published and the NAV total return for the seven months to July is 1.8%.

During H1 2020, the overall performance comprised 6.3% of revenue returns and a capital loss of -5.9%. The capital loss was primarily a result of writedowns on equity investments (-3.1%) and an increase in Expected Credit Loss provisions (-2.7%). The ECL provisions which now represent 4.6% of portfolio acquisition cost.

The portfolio comprises 19 balance sheet investments (83% of NAV) with a weighted average coupon of 11.3%. The remainder of the company's assets comprise equity investments in 26 companies (11% of NAV) and cash (6% of NAV). The manager continues to report robust credit performance from the balance sheet investments. Collection performance has exceeded the downside expectations on almost all of the balance sheet loans. Cash levels are also high within the SPV structures due to reduced origination and the short duration profile of the loan portfolios. The portfolio companies are taking a cautious approach to new origination given the underwriting challenges in the current market.

In the US consumer portfolio, payment performance is ahead of expectations and the proportion of deferred loans is declining. After completing a deferment, 65-75% of borrowers are agreeing regular repayment schedules, with less than 10% defaulting on loans.

Liberum view

During a turbulent period, portfolio performance has remained relatively robust with all contracted balance sheet loan payments received to date. The portfolio companies have made a number of prepayments, enabling a reduction in gearing from 0.59x at 31 March to 0.43x at 31 July. Cash levels have also built up within the SPV structures. Government support schemes have resulted in significantly better credit performance than would have been expected at the onset of the crisis. We expect the underlying loan pools will experience further stresses as support schemes are withdrawn but VSL does have a layer of protection through first loss equity positions. 93% of the loans also benefit from a guarantee from the portfolio company in addition to the loan collateral.

The current 29% discount is one of the widest of the performing direct lending funds and appears relatively attractive given the structural protection within the loans. The board has attributed the recent share price weakness to selling pressure from some shareholders who voted against continuation. We note the consistent level of buyback activity by the company in recent months to attempt to address the situation. In total, VSL has acquired 9.1% of the shares in issue at 31 December 2019.

[chucko1] 29/9/2020 11:27

I think VSL are effectively telling the seller that they will pick up the whole lot as and when they have sufficient cash flows to enable this. They could have done this already had they not repaid part of the borrowing facility they have, but why rush and not have (or endanger) the risk profile consistent with the wild uncertainty (which is largely out of their control)? They are doing the right thing.

[spectoacc] 29/9/2020 10:27

Thanks both. The comments on the seller were certainly interesting, in the absence of RNS's. Been picking up a few in other a/c's this morning.

[redhill9] 29/9/2020 10:06

Good post chucko1, as always.

The key words that jumped out to me in the announcement were regarding the current 2p per quarter dividend: "This continues to represent the long-term dividend target for the Company. A very confident statement for a company whose yield on that dividend is c.12.8% at the current share price

Regarding the discount to NAV it has always struck me since I first invested in VPC that this discount isn't compatible with that of,say, a propco where the NAV itself may be suspect due to valuation distortions or time lag. With VPC the NAV is much more "current" due to the nature of it's assets being mostly cash based, and consequently much more easily realisable at that value (as I think you intimate with your IRR comment if the company stopped investing.)

With the prospect of a continuing 8p annual dividend and the NAV seemingly resilient, the current share price looks, to me, a bit silly.

[chucko1] 29/9/2020 09:45

So, now a 31 month average life and better than expected collections. Crucial stuff, because they have a meaningful degree of first loss protection and in March/April, any sensible-minded investor would have been concerned as to whether or not this degree of protection was sufficient.

But the folk running this company are well schooled in credit structuring. They knew straight away that the risk was sudden and considerable and moved to a position of maximum defence. Nothing was reinvested - in normal times, unacceptable as generating a covered 8p dividend requires constant redeployment, especially in (what was) a 2% yield environment. In the meantime, there was the confounding issue of the continuation - I have to say that I cannot for the life of me understand why 13.4% of the votes were against the motion, but it is what it is. And the Chairman made it really clear in his statement that some of the votes against were now constantly selling their shares, and VSL are constantly buying them. And that this contributes to the weak share price.

But this is brilliant. Because, as time goes by (and a kiss is just a kiss), the ratio of cash (or reduction in leverage - take your pick) that forms part of the discount increases, and so the discount, which should compensate for additional risk, does no such thing. It far exceeds the level of risk and so were the company to never invest another penny, I calculate that there is an IRR of 18% to be earned by continuing shareholders. So I have added recently, and may do so a fair bit more.

This is an irony, as the continuation means that such an IRR cannot be a certainty. Perhaps this is what the 13.4% wanted - a runoff and a certainty for their own portfolio reasons (one can only speculate). However, although continuation indicates a lower IRR, it will be for longer and that is the point of a good investment in most peoples' minds. Do you want a low-risk 18% 31 month bond or a 12-13% 10 year bond. Well, if you thought you could reinvest at the end of 31 months at a further high rate, good luck to you. But as I have written here before, I expect that a narrowing of the discount to 10% over a couple of years will result in an annual return of circa 15% and then around 10-11% thereafter. Good enough for me, especially with the people and structure they appear to have in place.

There were some other interesting bits in there, such as the undue markdown of the equity investments as a result of using proxy pricing. Also, the constant reference to the share price and discount by the Chairman. Anyone would think it mattered to him! No mention of a release of credit reserve - this is normal. Once you have taken it, you leave it for a lot longer than it might be needed as flip-flopping on credit reserves looks awful. You release it when you most do not need it, as otherwise it raises questions. Sometimes, you have to release it as the specific underlying credit gets repaid. But in this case, it is of a general nature across multiple assets.

[davebowler] 29/9/2020 09:06

Stifel-
Performance. The Company delivered a revenue return of 6.34%, a capital return of
-5.86%, and a total return of 0.48%. The declared quarterly dividends for the first half of
the year totalled 4p per share and were fully covered by the revenue return generated by
the Company. This continues to represent the long-term dividend target for the Company.


Portfolio. The investment portfolio consisted of 83% balance sheet loans, 11% equity investments and
6% cash. The revenue returns continued to be in line with expectations, even during the COVID-19
pandemic, as all contractual cash payments during the period were received. However, the Company's
capital returns were negatively impacted by unrealised valuation adjustments and increased expected
credit loss reserves.
Balance sheet loans. The balance sheet loan portfolio comprised 19 Portfolio Companies with a
weighted average coupon rate (excluding gearing) of 11.26% and the weighted average remaining life
of the balance sheet investments was 31 months. Most of the balance sheet investments are delayed
draw, floating rate senior secured loans that have equity subordination. The balance sheet investments
are backed by underlying collateral consisting of consumer loans, small business loans and other types
of collateral. The total expected credit losses as at 30 June 2020, which also includes reserves on the
residual marketplace loans, was £15,605,793, up from £9,631,612 as at 31 December 2019 as a result
of updating the modelling to reflect a 100% likelihood of a stress scenario. The modelling of the stress
scenario was the result of a stringent analysis performed by the Investment Manager with a
conservative set of assumptions. The reserve as at 30 June 2020 represented 4.6% of the cost before
the expected credit losses.
Equity portfolio. The equity portfolio comprised 26 investments in Portfolio Companies. Many of the
investments were acquired in conjunction with funding the Group's balance sheet loan investments. The
equity investments are made up of common stock, preferred stock, warrants and convertible debt.
During the period, the Company's returns reflected unrealised reductions in the valuations of the equity
portfolio. This is because we use public market comparables to estimate fair market value, and this
method resulted in deeper reductions in value due to general market deterioration resulting from the
COVID-19 pandemic. (Analyst: Sachin Saggar)

[spectoacc] 29/9/2020 07:39

This morning's report reads well to me - divi covered, no further deterioration - will await @Chucko1's analysis tho :)

"As of the date of this report, the existing balance sheet debt portfolio has remained resilient to the macroeconomic stress resulting from the COVID-19 pandemic and have continued to perform, as outlined in the Investment Manager's Report. We believe that the Company's investments are well positioned to sustain any continued volatility or deterioration in the credit environment as the effects of the immediate fiscal stimulus in the U.S. start to be reduced and the long term impacts of the crisis unfold."