ICG-Longbow has laid out proposals for revisions to the investment objective and policy for its listed UK senior debt fund aimed at broadening its lending criteria so it can grow the business in the face of lower achievable returns for senior debt. It also proposing a placing programme for 40m shares in response to “material changes in market dynamics affecting the financial market for UK property sector” since its launch in 2013.
In particular the Board of ICG-Longbow Senior Secured UK Property Debt Investments is seeking a revised investment policy that allows it to target increased opportunities for funding in support of small to medium sized acquisition or refinancing transactions across the UK, especially where there is a leverage requirement above 70% LTV, “which is particularly undersupplied with capital”.
Since launch the fund has invested in a diversified portfolio of senior CRE loans with initial loan to value ratios no higher than 65% and a weighted average contracted return in excess of 8% pa.
It says similar senior debt loans now secured by investment property offer a return in the range of 4% to 5% pa.
In response the company's revised investment poliy will invest in:
- direct real estate debt investments via a diversified loan portfolio comprised of first ranking loans secured on UK Commercial Property, with an aggregate LTV of no more than 75%;
- and ICGL Private Funds acquired in primary or secondary transactions, including from the Investment Adviser or its Associates.
It will only invest in loans that benefit from a first ranking fixed charge over the relevant properties, including in respect of any receivable income and have an LTV no higher than 85% at the time of origination or acquisition provided however that the aggregate value of the loans with an LTV of greater than 80% shall be no greater than 20% of the company's gross asset value.
The company will not invest in subordinated loans and mezzanine loans, bridge loans, development loans or loan-on-loan financings.
ICG-Longbow UK Senior Secured UK Property Debt Investments Limited launched in February 2013 with the objective of producing dividends of 6% pa, derived from investing in a “diversified portfolio of good quality defensive senior secured UK real estate loans”.
The company has achieved this objective paying a dividend equivalent to 6p per share since it became fully invested in April 2014. Since then, the company has produced a total shareholder return of 7.24% pa and the share price has generally at a premium to the company's prevailing NAV.
As at 9 January 2017, the share price was 105.5 p per Ordinary Share compared with the latest published NAV of 104.02p, representing a premium of 1.42%.
However, as previously indicated in its half-yearly results in October over the coming 24 months the majority of the current loans become due for repayment but as Interest rates achievable on senior loans were materially higher when the fund launched “given the material changes in the market dynamics affecting the financial market for the UK property sector since 2013, it will not be possible for the relevant proceeds to be reinvested in accordance with both the current investment objective and policy”.
Today the Board said it believes that attractive risk adjusted investment returns remain available in the UK real estate debt market and following a shareholder consultation programme which received positive feedback it is pursuing a “more widely drafted and flexible investment policy while remaining true to the prudent philosophy of the current objective and policy”.
It will shortly publish a circular proposing a revised investment objective and investment policy, a continuation vote, a follow-on continuation resolution and adoption of the proposed articles and a placing programme.
The proposals will enable it to reinvest proceeds into new loans while also now permitting exposure to some of the private funds that the Investment Adviser and the direct and indirect subsidiary and parent undertakings of the Investment Adviser manage in the UK real estate lending sector, without incurring any second layer of fees.
The Board believes that the Revised Investment Policy will enable it to maintain its current dividend policy for the foreseeable future, together with the prospect of some continued modest capital uplift over time and also believes that it will grant sufficient flexibility to enable the portfolio to continue to be managed prudently over the long term.
The Board also believes that it will be able to grow the size of the company from its current value of approximately £112m and expect to do this progressively as investment opportunities present themselves.
It is seeking to place up to 40m new Ordinary Shares which may be issued over a 12 month period to fund investment opportunities as they arise.
In addition, through adoption of the Proposed Articles, the proposals also seek to renew for a further five year period the directors' general authority to allot and issue shares under Article 4.4 which is otherwise due to expire on 29 November 2017.
Focusing on the changing market ICG said that since early 2014 the market has evolved with the gradual return of banks to the market, along with new entrants, and now similar senior debt loans secured by investment property offer a return in the range of 4% to 5% pa.
ICG said a key trend has been that the regions and particularly the small to medium sized investment market are relatively undersupplied with debt capital.
It writes: “Coupled with less stretched underlying property valuations and rental levels in the regions, the Investment Adviser believes that this has resulted in the availability of attractive risk adjusted returns in this part of the market and has consequently focused much of its activity in recent years in these areas.
“Even though capital has returned to the market, the imposition of more stringent capital allocation requirements on the banking market under Basel III, coupled with the credit losses experienced by banks in their CRE debt books following the global financial crisis, has resulted in a reduced CRE risk appetite of banks, with the average LTV reducing to 63% at the end of 2015, from 77% at the peak in 2006.
“Given the dynamics in the CRE finance market described above, the Investment Adviser expects to see increased opportunities for funding in support of small to medium sized acquisition or refinancing transactions across the UK, especially where there is a leverage requirement above 70% LTV, which is particularly undersupplied with capital.
“By targeting this market opportunity and through applying its extensive experience and knowledge of the UK commercial property market, coupled with a deep understanding of the drivers of the CRE financing market, the Investment Adviser anticipates that the company will be able to deliver attractive returns without compromising the company's and Investment Advisers shared long-standing prudent investment philosophies”.
The Revised Investment Policy contains a range of restrictions, in particular that on a look-through basis, at the time an investment is made, the company's aggregate investment portfolio will be at least 97% invested in UK real estate debt and at least 88% will be in first ranking senior secured debt (although the Board expects that each of these numbers will be higher in practice).
The Revised Investment Policy also permits the use of borrowings from time to time, limited to 20% of the company's NAV. The Board believes that the ability to use modest gearing will be a "critical tool in facilitating the future growth of the company, with the objective of minimising the return-dilutive effects of un-invested cash without materially increasing risk".