Monday brought two interesting nuggets of information about funds discussed extensively in this blog. Let’s start with Ranger, where I am long all the way through a share price of around 815p. The RNS carried an interesting series of titbits. First up the managers announced a third party valuer – a useful first start to maybe getting more external involvement in the fund. Next up the board announced that they’ve kicked off a “formal process to determine the management arrangements for the company beyond May 2018. The board has appointed Kinmont to provide independent advice on this process”. This doesn’t terribly like a small, minor change of management – more like a proper review which might result in Ranger maybe not managing the fund on an exclusive basis. Lastly, we heard that the arbitration process with Princeton is going to drag on even longer. We’ve now got a revised ETA of early March. In the round, I think these are all positive bits of news which suggests that the corporate reorganisation at the investment trust will be more wide-ranging than first thought. This backs my central contention that the share price will tick up past 800p as we move into the Spring – as long, that is, as the Princeton affair doesn’t bring any nasty surprises.
If the share price does tick up, we might usefully then move on to the other key trade in this space I’ve identified – going short Honeycomb and long P2PGI. My central contention here is that the two funds are converging and that over time they’ll look a lot like each other. The downside for Honeycomb shareholders is that the premium might vanish, whilst the discount on P2PGI might tighten appreciably. Anyway, Monday brought some interesting ‘grist’ to this particular mill. The announcement was as follows:
“The Board of GLI are pleased to announce the signing of a new funding facility with Honeycomb Investment Trust plc (“HIT”). The funding line has a term of 3 years and comprises a GBP50 million accordion and revolving credit facility, of which GBP20 million will be drawn and deployed immediately. The facility will be used to expand further the activities of Sancus, the Company’s property backed lending business.”
I can completely see why Honeycomb has put money to work on Sancus, an interesting, quirky platform in a real niche servicing wealthy offshore HNWs. Increasingly GLIF’s future is now dependent on this Sancus platform – a fact that is backed up the big upwards share price move on Monday.
The more important point though is that Sancus is precisely the kind of platform more conventional direct lending funds invest in – nearly all of which boast noticeable discounts as opposed to the premium on Honeycomb. To repeat, there’s nothing wrong with that – it’s just that I’m not convinced that Honeycomb’s shares deserve the premium rating when you can buy into platforms like Sancus through other much cheaper (discount heavy) peers in listed direct lending space. In fact, Sancus sounds exactly like the kind of platform that P2PGI would be focusing on moving forward.
Carillion and the infrastructure funds
Monday also brought more news about the impact of the Carillion collapse on the listed infrastructure funds. Numis reported the latest developments:
“INPP: Facilities management services are provided by Carillion FM to c.3% (by investment fair value) of the INPP portfolio. INPP has estimated a cost of £1.5m (0.07% of NAV) from transitioning projects to new providers, equivalent to c.0.1p per share. INPP also notes that it does not believe that Carillion’s liquidation will have any valuation impact on its NAV.
JLIF: JLIF has nine operational PPP projects where Carillion are the facilities manager provider: four schools projects; four emergency services projects; and one road project. It is seeking to appoint new providers on all of them. The projects account for 8.5% of the portfolio, and 9.6% of NAV. JLIF expects additional advisory and transaction costs from the appointment of replacement facilities managers to cost c.£3m (0.25% of NAV) or 0.3p per share. JLIF also owns one project where Carillion is still liable for any construction defects found on the project, with the construction period having completed over 10 years ago. A recently completed routine defects survey has not highlighted any significant areas of concern.”
HICL provided an update on service provision for the PPP projects affected by Carillion’s liquidation. Based on current information, the impact is estimated at c.£50m, equivalent to 2.8p (1.8%) of its September NAV of 149.6p (ex-dividend). This is in addition to a provision of £9.4m that was taken at the time of HICL’s Interim Results. HICL has the largest exposure of the infrastructure funds to Carillion (14% of portfolio), but its provision also includes a view on the possible impact on the valuation of these projects when HICL completes its next portfolio valuation. Elsewhere in the peer group,BBGI has no exposure to Carillion.
The last time I looked HICL’s share price was at 144.8p a share which represents a roughly 6% discount to NAV. At that share price the likely dividend yield is running a shade under 5.4%. I’d personally be a buyer of HICL at anything below 140p a share and a yield of approaching 5.5% per annum.