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@Trotsky: I don't disagree with anything you've said.
I just wished to evaluate for myself how close RGL might be to breaking a covenant as it now stands. If the figures are correct, then I would say that being within 3% of an LTV breach within 12m is a significant revelation.
As investors, we can only guess what would happen if the covenant is breached, but a good working assumption is that the lender is within their rights to call the loan.
Obviously it would require more analysis to determine whether or not that would lead to a reduction in the dividend as it would depend on which of the properties is void etc. As I am not currently an equity holder, I have no interest in doing that.
Good luck.
FYI. You will find a similar conclusion from Ad v fn/@airbus5000 on 13 Jun @ 6:13pm.
In summary, unless something has changed (i.e. that they have renegotiated the covenants), there is more than a theoretical possibility of a breach within 12m. A breach looks quite likely unless property values bounce.
I've just had a look at the loan documentation in the prospectus from the last equity raise and the HY 2023 report.
From what I see, the Santander loan could be problematic if the LTV was to rise by a few percent.
Unless it has changed, the covenant for this loan is currently 60%, while the LTV for the properties against which it is secured is currently 47.2%. The covenant drops to 50% from the 5th anniversary, which is on 18 Jun 2024!
The RBS loan covenant is the next closest which was 7% away as of 30 Jun 2023.
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*Do your own research*
*I could be wrong*
Please note that I am going on the covenant info from the prospectus which might have changed, but I can't see that data given anywhere else.
The covenant info is taken from page 166 of the prospectus and from the data given in the latest HY report.
@Trotsky: I'm unclear why you've made the comments in your first paragraph. Clearly, the market value of the bond is irrelevant to RGL. It can't be called early. The cost to them is precisely £50m plus the remaining two coupons of £1.125m each.
Anyway, as a bond investor, I'm only concerned about their ability to pay; i.e. what happens if they had to liquidate everything/will there be sufficient funds to repay.
I think it's amazing that the equity popped after the LTV had risen in the latest RNS. It makes me wonder how far off a breach we are for one of the secured lenders. It could be very close indeed, if not reachable within months? Does anybody know the lowest LTV covenants that they have? I am guessing they are different per lender. I'd be surprised if they were beyond 60%.
I am now of the opinion that a breach of a loan covenant is a real possibility. If that happens, the bank in question will be within legal rights to require a liquidation of sufficient property to repay them immediately, in full. At the moment, I don't see that being a problem for bond holders, but clearly that will be a disaster for the equity holders.
The 'coupon' on the retail bond bond is 4.5%, paid in installments every 6m, but that's not the 'yield'. In order to compare different bonds, it's not as simple as comparing coupons...
The retail bond is looking attractive on a risk/reward basis, with yield of ~15%. It would be interesting to hear some other viewpoints.
Bull:
- Only 8-months to expiry; the first secured debt expires in August 26, 2y later
- Cash on hand and cancellation of the common share dividend would allow repayment of the bond
- Not repaying the bond would be a 'nuclear' event for RGL which would almost certainly cause the banks to call in the loans, resulting in the liquidation of assets and the end of the company. This seems like an unlikely event
- The LTV includes the retail bond, so there's no reason to believe they wouldn't want to repay it as it would reduce LTV by around 6%
- All of the debt is fully hedged at 3.5%
- The Net gearing is not high by US REIT standards
- Achieving even 50% of the portfolio value in a liquidation scenario would allow repayment of the retail bond
Bear:
- The retail bond is unrated and unsecured
- How much of the cash on hand is 'restricted' by the banks?
- How realistic is the NAV?
- The NET gearing is very high by UK REIT standards
Suppose you buy 100 units of the bond at a price of @91p each. You'll receive £2.25 interest on 6 Feb and another £102.25 on 6 Aug (£2.25 is interest, plus the notional value of the bond, which is 100). This gives £104.50 in total. That's a profit of £13.50, which is an roi of roughly 15%.
In summary - most of the profit comes from the capital gain on the bond.
There's some 'bond maths' involved if you want to do a more accurate comparison, but I'll leave that to you!
dyor.
I crunched the numbers again today for RGL and for the £50m Retail Bond - RGL1.
The RGL common stock is yielding about 15.5% while the Retail Bond has an (annualised) yield of about 15%. The Retail Bond can be repaid even if property values fall by another 50%, while common equity would be wiped out under that (silly/extreme?) scenario.
The UK/10y is substantially down from a month ago and I think that the retail bond is quite attractive now that the price has fallen back to the low 90s. I've taken a small position in RGL1 (@91.79p); I'll keep an eye on office values, but from what I am seeing, only *prime London commercial offices with high sustainability ratings* are holding up; regional offices with poor ratings are continuing to fall heavily. That explains a lot here. Maybe the recent collapse in the UK/10y will ease things a bit, but I'm not a gambler and it is clear that covid has changed working habits. There is a good discussion about this in the latest report from VIP (Value and Indexed Property Income Trust).
Edison has always been incredibly bullish here which is not a surprise because they are being paid! Their articles from 27 Feb, 17 Apr and 25 May continued with the fiction that the dividend was sustainable, while on 27 Sep they announced that the divi reduction was pragmatic! What a joke! Now they're saying that they've 'trimmed their forecasts, but continue to expect dividend cover even on the reduced divi'! I detect some caution in their latest document and will not be buying the common stock at this point.
Good luck
All looks positive to me. I think they've done a good job of the presentation; I didn't realise that the debt was rated investment grade.
I picked up another tranche of DEC, bringing my portfolio weight to 2%.
Hopefully this dispells the idea that the dividend is unsustainable. In a logical world, I would now expect many onlookers to take a nibble here, given the attractive dividend on offer. At least, I would expect some of the income funds to snap some up. Let's see if it holds/leads to a change in direction in the coming weeks!
@Trek: Good luck. I tend to run a large number iof positions, with nothing bigger than ~2.5% or so. You never know what the market will throw at us tomorrow. This is a decent dividend though, comparing nicely to US BDCs and lower risk - IMHO.
"Need to be investigated as we are seeing big drops followed by buying and further big drops which looks like manipulation and manufactured swings.."
I am afraid that is just the UK market....... it is the most corrupt market that I have witnessed. Some of the manipulations (take note: not on this stock) were blatant and in full view, e.g. with CEOs selling their stock 1-day before a profit warning and then fleeing the country before the share collapse! They were examples of some of the most blatant insider trading ever - BUT THE FCA DID NOTHING. The FCA are totally useles and have no regard for PIs whatsoever. They are a useless bunch of toothless muppets. You will learn that if you ever try and report anything.
Hence I avoid most UK stocks now, as do most companies avoid listing in the UK!
But I am still invested in DEC. Let's hope it comes good.
@G_G_G: I hope you are wrong about a split.
Just look at how lowly UK Oil & Gas companies (e.g. Serica, Harbour Energy,..) are valued - and that is for companies that have a large production base. I can't see any value in a UK-only listing. It would be amongst the weakest of AIM energy companies if it did. The Canadian part of this company is the only part with any value.
@WCSBCanuck: '"You simply cannot analyse these small caps based on fundamentals - and you will lose money doing so.".... Yes you can.'
I've lost count of the number of times where somebody has done a brilliant job with fundamentals, only to have the investment lose money... If it were true that being an expert with fundamentals was the key, then accountants would make a killing in the stock market - but they don't... Warren Buffett claims to have never done a DCF calculation.
We don't know what's going on here. But the strong technical downtrend for over a year is a hint. Thank God I ignored the 'experts' here and exited my largest tranche over a year ago.
BEWARE OF EXPERTS IN CHATROOMS
@Trotsky: There's no need to use expletives such as 'WTF' to people here ...
You make a lot of assumptions:
'One would also assume that occupancy levels...'
'I think the quoted increase...'
'fair value of their properties, for this purpose, appears to have remained at...'
'Ignoring any potential valuation changes between...'
'one would have assumed that capex would normally...'
'the cash decline in the quarter may not be solely, or wholly...'
'you can't draw any firm conclusions about the cash movement...'
'I appreciate that property valuations generally may still be falling but...'
'It's ability to cut its dividend is therefore limited...'
It appears to me that you might have fallen in love with the story here.
There are dozens of US companies with investment-grade ratings yielding close to 10% atm. RGL has a *lot* of debt and a retail bond that is *unrated* and *unsecured*. At the current rate of repayment, it would require more than 20y to repay, if the £5m/quarter figure from @GeneralMonty is accurate.
Good luck in your investment, but please don't become angry if others choose to wait-and-see before investing in such a highly leveraged penny stock. The vast majority of such companies disappear entirely losing their investors most of their money.
That's definitely something that I'd support, though it's exceedingly unlikely to happen. I would have no interest whatsoever in buying shares in the UK operation, though would probably increase my holding in the CA business once the technical downtrend is finished.