Funding Circle fund mulls new cash raise

By Daniel Lanyon on 10th April 2018

Alternative Credit

The portfolio has also released its first new NAV under new accounting rules.

Funding Circle fund mulls new cash raise

The £305m Funding Circle SME Income fund is considering a new cash raise, the firm has said in a statement.

Since launching in November 2015 the fund has had a relatively smooth run and unlike sector peers such as P2P Global Investments and VPC Specialty Lending it has not only avoided a move to a discount in its net asset value  [NAV] but – most likely owing to its so far regular stream of dividends – has moved to a premium to NAV of 4.9 per cent.

Now, with proceeds from its last cash raise via a C share issue fully invested, the investment trust is considering a new cash raise.

“With the Company's portfolio now substantially invested, the Board is evaluating growth options which may include a potential equity raise. Any issue of Ordinary Shares or sale from treasury would be priced at NAV per share plus a premium to cover all commissions and expenses,” Funding Circle said in a statement.

Matt Hose, an analyst at Jefferies, says a new cash raise could hit the fund’s portfolio.  

“The investment of the fund's IPO proceeds within a relatively short space of time created a visible seasoning effect in late 2016/early 2017,” he said.

This means, he says, that the portfolio reached peak delinquency as the loans were around a year-old (FCIF's IPO was in November 2015), with a corresponding impact on monthly NAV returns.

“Subsequently, the seasoning effect abated as the loss curves began to flatten out, resulting in higher NAV returns. FCIF's C share issue (in April last year) appears to have repeated this effect, with the part of the portfolio that stemmed from this issue now likely to be reaching the point of peak delinquency”.

“However, looking forward, the portfolio will again naturally become more seasoned, with a greater proportion of the loans sitting on the flat part of the loss curve. The IFRS 9 provision attempts to anticipate impairments over the next twelve months on performing loans and so will factor in this lower level of expected delinquencies.”

A new equity raise “would obviously upset this seasoning process”, Hose said. But, he added, this time around the effect would be largely be incorporated within the new accounting rules’ - IFRS 9  - provision“.

“[This would be] either as the proceeds get invested, or if a C share, at the point of conversion. Moreover, assuming that as the fund grows further capital raises will be smaller in size relative to the size of existing vehicle, the seasoning effect will become less pronounced anyway,” Hose added.

IFRS 9 are new accounting regulations and Funding Circle SME Income’s board expects the implementation of IFRS 9 will lead to a one-off decrease in the Company's NAV of between 0.8 per cent and 1.5 per cent.

However, the it said the adjustment to NAV is “purely driven by a revised accounting methodology” and therefore will have no impact on future cash flows.

“The Board therefore expects the Company to continue to pay a dividend of 6.5p per annum on its Ordinary shares,” it said in the same investor update

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