Vpc Specialty Lending In... Share Discussion Threads

[twistednik] 04/1/2023 07:35

Wow, surprised at how informative this board is so well done to posters!I'm thinking of buying on the basis of getting a >-15% return ytm on a wind down.It sounds like the debt assets will naturally run off giving you 65p of ~82p back.You then have the equity, prefs, warrants etc (the tail) which can be managed out over time & if anywhere close to current NAV, will give you a 'full' return.The risk for me is around the current value of these instruments & if they have been conservative around their mark-to-market?! (not easy given types of assets & tech sector sell-off etc).

[brucie5] 03/1/2023 20:47

Thanks for that, Smidge, I think I got it... And to others for trying.

[smidge21] 03/1/2023 19:55

My hunch is this:

As at end March 22, the company reported that "the weighted average remaining life of the asset backed lending investments is 24 months". Over the summer, the turbulence caused by the currency hedge most likely saw longer duration assets sold (to in-house buyers looking to place money for the medium term), this would see the average asset life fall. The post Truss recovery in £ would have returned some cash - this may well not have been fully invested. The result is a very short dated asset pool, likely to run off within the projected two-year wind-down timetable that has been floated. VSL is likely awash with cash and so capital returned to investors is likely to be heavy over 2023. The dividend flow may soon dry up while the share price should start to creep to NAV.

BWDIK

[waterloo01] 03/1/2023 18:15

Brucie kind of with you there, however as the issue has been he discount to nav, even if they narrow it by having to write anything down on sale, it should at least return the NAV (reducing as they sell bits) and return the cash + ongoing dividends, although that has not been clarified as far as I know.

[brucie5] 03/1/2023 18:01

I think that's a hold, then? Unless it's a buy; or also a sell, in which case it's a buy/sell.
I remain confused and out of my depth, so will continue to take the monthly dividends, which at least I do understand, until I find something better!
Thanks for trying.
;)-

[solarno lopez] 03/1/2023 17:49

Many thanks chucko1

[chucko1] 03/1/2023 17:12

Brucie5:

solarno lopez31 Dec '22 - 11:24 - 1387 of 1388
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Thank you for your highly informative post Chucko1

For clarity are you saying, from the current price level of around 83p we can expect an increase or return of 150% = to circa 120p?
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Exactly my question - thanks for asking, Solano. If that is the case, then surely it's a buy?!

Chucko1:

I was referring to what had happened, and what was still possible, with SLFX. Although the read-across is quite mild, there are some things which will become more common in the event that VSL does indeed proceed to full wind down.

However, I am waiting to see what really happens and take it from there, given the shenanigans of the past few months.

In the event of no wind down, the fund has always performed well, especially recently as it has become more mature and seemingly battle-tested. In the event of wind down (though who knows at this stage in what precise form) the analysis is different and will have good possibilities for larger returns, especially if considered per annum over the remaining life (though that is not really what a lot of us intended!!). Even more especially if one were to put in the analytic mileage and, in common with SLFX, trade off other market participants' more haphazard attitude.

With a market cap of just £275mn odd, it could fall to a level that just is not sufficiently interesting for funds and HFs to take a deep dive into.

For anyone genuinely interested, read what I posted a number of months ago on SLFX (KKVL board) and how I was modelling the remaining portfolio (in that case, just loans). What I did not ever say was what was going to happen - rather, I presented probabilities of certain outcomes given certain assumptions, but using some deep knowledge to lessen the variability of the various inputs.

These structured things are always fun because they seem to cause more anger than just about anything else apart from small oil exploration companies - and Brexit.

[nicholasblake] 31/12/2022 15:58

Chucky, Kudos for liquidating such large debt-based portfolios.

I think where you and I digress is that you seem to be using a debt-based lens in respect of the warrants, preferred and common equity, which together would equate to around 35% of net assets.

These are neither self liquidating, nor have valuations based on reliable cash flows.

If we take your two year figure for a wind down, by eighteen months we might expect most of the debt-based assets to have been liquidated and the pressure to be on from shareholders to complete the process, in part because of the substantial cost drag as you have noted.

In those circumstances, having had direct professional experience, the ENV of equity-style instruments often becomes esoteric and theoretical and the realisation value dependent on who's actually in the market to buy.

Take a look at the AFS note on valuation of preferreds for some pointers.

In short, there are lots of unmanageable uncertainties.

So it boils down to asking yourself, 'Do I feel lucky'!

Adieu et bonne chance!

[solarno lopez] 31/12/2022 14:10

Brucie yes a buy if we have such a % increase

Need to wait on Chucko1 for his reasoned response

I too purchased for the quarterly dividends

[solarno lopez] 31/12/2022 14:08

Like you Brucie I am out of my depth of understanding on this one because of the different loans it has made and it’s equity holdings

[brucie5] 31/12/2022 14:04

solarno lopez31 Dec '22 - 11:24 - 1387 of 1388
0 0 0
Thank you for your highly informative post Chucko1

For clarity are you saying, from the current price level of around 83p we can expect an increase or return of 150% = to circa 120p?
----------------------------------------------------------------------------
Exactly my question - thanks for asking, Solano. If that is the case, then surely it's a buy?!

[brucie5] 31/12/2022 14:03

Cor blimey, Chucko1: I think what you advised herein, is to sit on our hands?
Or that just what I wanted to hear?

I am completely out of my depth.

And not sure how arrive at this thought:

"At last we agree on something! 150% return is a ride worth taking, even in the face of a terrible storm in that case. (I still think it has 30-40% more to come!)"

Are you suggesting there's 150% capital gain still to be had? Or 30-40%?

I'm mainly happy to receive the quarterly dividends, but call me easily pleased!

HNY.

[solarno lopez] 31/12/2022 11:24

Thank you for your highly informative post Chucko1

For clarity are you saying, from the current price level of around 83p we can expect an increase or return of 150% = to circa 120p?

[nicholasblake] 30/12/2022 16:16

chucky, I fear you can't see the wood for the trees.

The way auditors approach a company in wind down is significantly different from under the going concern assumption. The underlying investee cash flows become rather less important.

More crucial, in the sale process itself the less attractive investee realisations become something of a haggle.

As the AFS warns, 'If the Group were required to liquidate a portfolio investment in a forced or liquidation sale, the Group may realise significantly less than the value at which such investment had previously been recorded.'

The expected course of the disposal of junior securities is that the good ones will realise soonest, sometimes above book. But the tail becomes increasingly difficult as the end date gets closer.

In practice, it is better to take an early discount, so long as not too extreme, rather than holding out for book.

Enjoy the ride!

[chucko1] 29/12/2022 14:21

"NFM!" - I was looking for a shade more sophistication than that in your response!

An auditor will have nothing further to say about the chance (at an appropriate level) of realisations so long as they are comfortable with the method of valuation of the L3 assets. They audit process, not market inputs, per se. They will also potentially audit use of models, although nothing in their canon of investments is particularly sophisticated.

There is L3 and there is L3 and there is L3 - not by any means the same issue. In the case of VSL, their L3 assets relate to underlying loans for which the profile of cash flows is well established and realised (frequently, by definition). Where there are equities (of varying sorts) relating to these obligors, the discount rates and liquidity discounts are very high, reflecting the uncertainty. Hence the short effective durations. Other instruments have final maturities < 5yrs and with very high discount rates.

In the case, say, of Investment Banks back in 2008 etc., the L3 assets referred to certain types of correlation-based valuations where cash flows were imputed from other things where markets were very observable. The results were sometimes disastrous and sometimes fine. As I said previously, long durations and correlations in lieu of known cash flows are a different and more worrying breed of L3 in general - and sometimes much more so.

If VSL have truly been as conservative as they appear to have been in other tough periods, a write-up in the value of this stuff is not impossible, although it would only occur after a degree of liquidations implied any over-conservatism in these high discount rates. That may itself depend on the ratio of B2B vs. B2C lending as they have entirely different outcomes during recessions from private lending. Good lenders have very low loss experiences in their B2B portfolios, at least using the sample of the last decade to infer this from.

[waterloo01] 29/12/2022 09:08

The irony being that if they have to write down illiquid assets, bang goes the NAV gap and the whole point of the exercise.

[creme de menthe] 29/12/2022 07:49

The vote to wind up has not gone through yet, is it a foregone conclusion...I'm not sure.

[octopus7] 28/12/2022 23:37

Agree with chucko1 about valuations but quite frankly point about auditors view will quickly become irrelevant as assets are realised/disposed.

I'm more than happy to continue holding for the wind down period. I still think this is a buying opportunity for anyone who hasn't already got a bucket load

[nicholasblake] 28/12/2022 23:34

Level 3 is mark-to-model, whereas a two year wind down forces things to be pitched to what a buyer will actually pay in that time, irrespective of the theoretical 'valuation'.
The main exposure is to FinTech equity/subordinated securities. How much have listed FinTech equities fallen in the last year or so?
Why do you think preferred equity and equity is short duration, out of interest?
Great for the manager who in effect has last right of refusal, so if anything is going at a song they will snaffle it.
No surprise they didn't resist!
NFM!

[chucko1] 28/12/2022 22:39

Are you suggesting that their valuations are lacking "reality"? And your evidence is?

They have clearly laid out their Level 3 assumptions (almost all of the non-loan assets are Level 3), which appear to be slightly on the conservative side.

124/278 = 45% of assets are L3 (adjusted for leverage/debt). They have discounted these by some percentage on top of what appear to be perfectly reasonable valuation assumptions. Even if you add a further 20% discount owing to poor market conditions for an extended period and a desire for other VPC funds NOT to take any of these assets, then that would take 9% from the current NAV.

The problem with this thesis is that the shares already trade at a 20% or so discount.

On the issue of Audit "concern", it is clear that they have been conservative over the past years and that their current assumptions appear no different. Additionally, the short duration nature of all these assets is an order of size less troublesome than even Level 1 assets which have long durations. History demonstrates this.

PE may trade at some 45% discounts now, but PE this is not.

[nicholasblake] 28/12/2022 17:52

The loan themselves will be fine but the 100m+ of sub debt, preference capital, warrants, etc. might be in for a reality check.

[chucko1] 28/12/2022 16:42

Why do you think a "wind down" makes any difference? The realised cash flows, highly material owing to the short average life, say most of what has to be said.