Ranger Direct Lending fund takes hit after platform failure
The closed-ended portfolio has seen a write-down hamper performance with one analyst calling it a “bellwether moment” for alternative credit funds.
The £269m Ranger Direct Lending investment trust has taken a 4 per cent hit to its net asset value [NAV] due to an impairment from the collapse of direct lending platform Argon Credit.
Back in December the Chicago-based direct lending platform Argon Credit filed for bankruptcy. Shortly after the news broke, Ranger in an update to the market said that despite exposure of more than $28m to Argon, that they expected little by way of impairment to the fund’s NAV. That has clearly not materialised evident by the 9 per cent fall in its share price yesterday.
Ranger Direct Lending’s substantial holding in the Princeton Alternative Income fund – which in turn had a major holding in Argon Credit – means the UK-listed investment trust has now had to write down part of its expected returns as the anticipated performance of some of the Argon Credit loan book has deteriorated.
The graph below shows the performance of Ranger Direct Lending since its inception back in April 2015 and its performance against the broader market – as measured by the AltFi Data Marketplace Lending index. While the NAV hit is clearly a blow for investors, it should be noted that Ranger Direct Lending has performed well in recent years, although some of this is attributable to currency movements.
Analysts at Numis Securities say, however, while the situation is clearly complex and unfolding, it could have further reaching implications for investors.
“[It is] an important bellwether for how the Direct Lending/Peer-to-Peer sector copes with platform failure. As a result, it is worrying to see the write-down,” they said.
The Numis analysts add that the situation was confused because Argon, in breach of its terms, assigned a portion of the underlying collateral to an unapproved special purpose vehicle (SPV) that was under the management of a former employee.
This transaction was structured as a Balance Sheet loan to Argon, essentially providing a loan facility to the platform to allow it to originate loans.
The Princeton fund (also called SME Credit Line Platform) has had to take a reserve of $11.7m against the Argon portfolio “due to a decline in recent cash flows attributable to the portfolio”. However, Ranger also says it “is unable to confirm the precise impact of the reserve on NAV at the current time and is seeking clarification from Princeton”.
Ranger had previously indicated that it expected to make a full recovery on the Princeton investment, but the market was clearly sceptical of this outcome, with the fund moving to a high double-digit discount following the initial announcement in December.
“The entire position represented 12.1 per cent of net assets in December, and given that Ranger cannot currently quantify the precise impact, we would not be surprised to see further write-downs.”
“We believe this transaction raises questions about Ranger’s due diligence process given the platform failure and the complicated structure of the transaction. In light of the uncertainty over the NAV, we would still avoid the shares, even though they trade on a c.14 per cent discount to the February NAV adjusted for the write-down.”
Numis analysts also add that the timing of this announcement “will be extremely disappointing for investors in the C share issue” which raised £16.1m in December 2016.
“The C shares converted into Ordinary shares on 7 April and therefore will take also take a hit on the exposure to Argon because of the conversion. We question why the C shares were converted when there was uncertainty over the outcome of the Argon bankruptcy, even if it was performing at the time.”
They add that they remain cautious of balance sheet loans due to uncertainty about how they will perform in the event of platform failure and also because they say it can lead to a focus on platforms that are focused on high risk/return underlying loans.
“As a result, we are also wary of VPC Speciality Lending,” they said.
This highlights a recent talking point among industry commentators that investing via direct lenders involves 'concentration risk', while pure P2P and marketplace lending funds in contrast can benefit from broader diversification.