Over in the listed lending space, Hadrian’s Wall has attracted a fair bit of (negative) coverage for its problem portfolio but I think a more interesting story is emerging at SME Credit Realisation. Hadrian’s issues are very company-specific, dependent on just a few specific businesses whereas the former Funding Circle fund has a much broader portfolio of SME credit, most of it British. I think recent numbers point to the very real weakness in the UK SME sector prior to the general election.

According to a recent Alternative Fund’s note from the team at Liberum, the interim report at SCRF suggests that the average monthly impairment is running at rate of 0.55%. “The majority of the fund’s capital has been invested in Funding Circle’s UK loans originated in 2016-2018. These vintages have experienced higher loss rates and lower returns than expectations. The unlevered return on assets before fund operating expenses for the fund since inception is c.4%.”. These numbers suggest that the annualised losses on loans are running at around 6% which is anything between three to four times greater than I was expecting. UK SME is suffering…

Sticking with lending – and Liberum – this week has also brought weakness in the share price of the leading aircraft leasing funds. Yesterday Liberum’s note observed that the funds were down an average of 3.8% on Tuesday (Doric Nimrod Air Two fell by 11.2%). Liberum reckons that “Boeing’s announcement regarding the halting of production of the 737 Max appears to have driven yesterday’s decline. The issues with the 737 Max have caused operational problems for many aircraft lessors although the London-listed funds have no exposure to the narrow-body aircraft. The A380 is the dominant aircraft in the fleets of the listed funds.” And of course, the A380 planes have their own challenges for investors, now that that program is winding down.

We’re now into a vast guessing game as to what the airplanes within the portfolios might be worth. A few weeks ago, Matthew Hose from Jefferies tried to pin some estimates on the residual value of the planes. This time its Liberum trying to pin some numbers on the donkey! The first chart below shows their base case IRR estimates – “Our stressed case assumes a 50% reduction in residual values from the latest published estimates.”

“In our worst-case scenario, the income returns are unchanged and reduce the residual values of the A380s to the sum of 10% of acquisition cost and the return condition payments under the respective leases. For example, the return condition payment for Doric Nimrod Air Two is $12m per aircraft if it is returned in half-life condition. In our view, the best relative value opportunities are Doric Nimrod Air Two (due to share price weakness) and Amedeo Air Four Plus (exposure to other aircraft and longer income profile).”

Summary overview of London-listed aircraft leasing funds
  Doric Nimrod Air One Doric Nimrod Air Two Doric Nimrod Air Three Amedeo Air Four Plus DP Aircraft I
Date of Launch Dec-10 Jul-11 Jul-13 May-15 Oct-13
Market Cap (£m) 34 269 173 501 124
Prem / (Disc) to last published NAV -33.5% -25.3% 3.8% -31.3% -24.2%
Prem / (Disc) to live NAV (FX-adjusted) -49.7% -51.9% -39.9% -48.4% -24.2%
Target Yield (issue price) 9.00% 9.00% 8.25% 8.25% 9.00%
Dividend Yield (current price) 11.5% 13.0% 11.0% 10.6% 11.5%
Fleet 1 Airbus A380s 7 Airbus A380s 4 Airbus A380s 8 Airbus A380s,

2 Boeing 777s,

4 Airbus A350s

4 Boeing 787s
Lessee Emirates Emirates Emirates Emirates, Etihad,

Thai Airways


Thai Airways

Year of lease expiry 2022 2023-2024 2025 2026-2030 2025-2026
Return condition Full-life Full-life Full-life Varies Full-life
LTV at acquisition 67.8% 63.1% 64.3% 73.0% 61.2%
Amortisation Full Full Full Partial Full
FX Risk Yes – residual value Yes – residual value Yes – residual value Yes – residual value Yes – USD listing


Big Ag comes to the London funds market

Today also brought news that I’ve long been waiting for – someone is trying to list a big agriculture land fund.

Now if I’m honest I’ve run into half a dozen managers trying to structure a closed-end fund investing in land. The attractions are obvious – at least in diversification terms. This is an asset class loved by big endowments and long-term investors and as Mark Twain famously said, they ain’t make much new land (though maybe a few active volcanoes might give it a go).

The challenge has always been to work through the following, not inconsiderable challenges;

  • How to amass the right portfolio of high-quality land in the right jurisdictions and then
  • Work out the economics of trying to run said land productively without stinging investors for huge management fees
  • Whilst also not overpaying for quality assets much in demand by big institutions

I’d also focus on two particular issues – operational focus and agricultural land cycles. The first is that running a portfolio of productive land over many diversified jurisdictions involves a trade-off between said diversification and the need to focus operational expertise. I worry that lots of little investments in different lots (and farms) might mean that the manager doesn’t watch any carefully enough.

The second concern is that from all the folk I’ve talked we are incredibly late in the cycle for most quality ag regions, with prices looking a bit toppy after an inflow of institutional money.

So, its against this background that we’ve found this week that something called the Global Sustainable Farmland Income Trust is looking to launch. According to the PR blurb the fund “will invest in a diversified portfolio of operational farmland assets located in major agricultural markets including the United States, Europe, New Zealand, Australia, and certain countries within Latin and South America.”

And the managers? “Capital Advisory Partners Limited, with more than 50 years’ experience investing in the agriculture sector, sourcing direct investments and growing crops, to act as Investment Manager”.

And the business model? “Land will be leased to experienced corporate and independent farmers with the track record and capital to operate the farmland and which adopt Linking Environment and Farming’s (“LEAF“) Integrated Farm Management framework or equivalent sustainable farming objectives; farmers assume the operational risk”.

The fund looks to be targeting an annualized initial dividend yield of 2.5% p.a. growing to 4.25% p.a. when fully invested; “progressive dividend policy thereafter; total target returns of 7-8% p.a. over the medium to long term through operational lease income and land appreciation”.

And the seed portfolio? “18 preferred target assets identified for acquisition within nine months with an allocation value of $330 million and ability to achieve scale quickly; 12 further assets in the pipeline “.

It all sounds interesting, my challenges notwithstanding, but I must admit to being slightly put off by the talk of sustainability which strikes me as a bit modish. I have no doubt that ESG investors will like this asset class, but experience has taught me to be extremely careful about promises on ESG in agriculture. The challenges most farmers have in kicking hydrocarbons, for instance, will be immense and not without very real cost. And as for organic farming, the less said the better.