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Funding Circle fund hit by US Hurricanes and regulation costs

By Daniel Lanyon on 16th November 2017

The portfolio has a track record as one of the most consistent performers in the listed alternative credit space. 



The £407m Funding Circle SME Income fund’s October returns of its net asset value (NAV) have fallen slightly below target, owing to the impact of extreme weather and impending new regulation.


Funding Circle said in October the portfolio was affected by higher delinquency rates in its US book in areas affected by Hurricanes Harvey and Irma, although the overall impact is expected to be “modest and contained”.


The Funding Circle SME Income fund saw a total NAV return of 0.4 per cent for both its Ordinary and C shares, marginally below expected. With an implied dividend target of 6-7per cent, monthly returns of 0.49 per cent-0.57 per cent are needed.


Analysts at Numis Securities say despite the monthly return being marginally below the target level the fund has so far delivered consistent returns since its launch in 2015.


“We believe that the fund’s explanation of the factors driving the returns provides comfort to shareholders and we understand the delinquencies are focused on the affected areas of Texas and Florida.”


“Nevertheless, the next few months will be important to see whether the impact from higher delinquencies from the US Hurricanes remains modest and relatively short-lived.”


On a second front, the fund is seeing higher costs owing to an external consultant assisting with the implementation of new regulation.  IFRS 9, effective in 2018, will mean some funds change pricing structures.


“We expect a number of Listed Debt funds to suffer a mark-down in NAV in 2018 due to the implementation of IFRS 9. In particular this will apply to funds valuing loans at amortised cost, such as Direct Lending/Peer-to-Peer funds,” Numis said.


“This is purely an accounting change that does not impact the fundamental cash flows and returns over the life of the loans. The changes will be implemented for financial years beginning on 1 January 2018 and thereafter.”


While this will hit the majority of funds within the Direct Lending / Peer-to-Peer Lending sector, Numis adds that Ranger Direct Lending may be an exception as it already creates a provision for expected losses.


“The degree to which the implantation of IFRS 9 will impact funds will vary depending on the risk/return profile of underlying assets, seasoning of the portfolio and nature of security. For example, funds investing in assets with higher expected default rates will have to take a larger hit to NAV in 2018 than those investing in assets with low default rates.”


The investment trust has a current yield of 6.4 per cent.


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