ICG-Longbow seeks wider investment mandate for listed senior debt fund

ICG-Longbow is planning to change the investment strategy of its listed senior debt fund in the face of lower returns achievable for UK senior property debt.

Almost four years after launching and swiftly investing the £109.5 million fund, ICG-Longbow Senior Secured UK Property Debt Investments (SSUP), investments have started to pay off, and it says that re-investing at coupons which meet the company’s dividend target set in 2012 “will not be possible.”

SSUP chairman Jack Perry announced today (27 October) that a third loan this year has just been repaid. The £13.25 million ‘RAEES’ loan, which the borrower has refinanced with a third-party, netted SUPP £1.8 million of prepayment, accrued interest and exit fees, boosting the IRR. However, the fact that the borrower opted to refinance two years’ early with another debt provider suggests the loan could be refinanced cheaper than SSUP’s terms, in line with changes in the UK market since it was originally written.

In its half-yearly report, published this month, SUPP says: “As the residual loan terms and periods of income protection reduce further, we may begin to see further repayments in the underlying portfolio in the coming 12 months.

“We will approach the point at which the continued redeployment of repaid capital will not be possible in a manner which meets both the company’s dividend target and its investment parameters, which were set in market conditions prior to the (2013) IPO when interest rates achievable on senior loans were materially higher than today.”

At the half-year end of 31 July 2016, the 10 loans in the portfolio had a weighted coupon of 6.83 percent, which was down from 7.4 percent in the prior period. This was a result of replacing an £18.07 million loan secured on student housing to Mansion Group which had a 7 percent coupon, with a loan to Commercial Regional Space at 4.41 percent, in March.

SSUP has so far been hitting its income target and paying a dividend of 1.5p per quarter.

The company will shortly propose to shareholders a switch from pure senior lending to investing in a wider range of loans. This is “likely” to include whole loans at higher loan-to-values and smaller loans. Furthermore, it could include co-investment in deals alongside other ICG-Longbow funds, rather like the strategy of rival listed debt fund RECI, which is managed by Cheyne Capital.

A continuation vote, based on this strategy is slated for early 2017.

In the latest results, Perry said that the Brexit vote had resulted in the uncertainty the group had expected, but that “the defensive positioning of the group’s loan portfolio continues to offer a good level of potential security”, while the pipeline for SSUP was “encouraging.”

ICG-Longbow’s investment management fee for the half-year was slightly up at £548,127 (£536,151). The business is led by Kevin Cooper and Martin Wheeler.