Ranger Direct Lending plots Z-share issue

The £155m alternative credit investment trust Ranger Direct Lending is considering a new round of fundraising to launch Z-shares worth up to £30m, according to documents filed on the London Stock Exchange.

Having already consulted with potential investors and the investment trust’s board as to ways of diversifying its capital base, Ranger Direct Lending is pondering issuing the fixed return securities.

This will involve a placing of up to £30m of zero-dividend preference shares or "ZDP Shares".

The investment company currently expects the ZDP shares to be issued with a 5 year term and a gross redemption yield of 5 per cent per annum.

“The proposed fundraising is anticipated to take place around the end of July 2016, subject to prevailing market conditions and investor demand,” said a filing issued to the London Stock Exchange.

As the fund has a dividend target of 10 per cent and has previously stated it may look to additional forms of fundraising to achieve this the news is somewhat unsurprising, according to Monica Tepes, director of investment company research at Cantor Fitzgerald.

“Their IPO dividend target is 10 per cent and they said that they would need to employ leverage of up to 50 per cent of net asset value [NAV] to achieve it. Annualising their last dividend they are currently running at 8.2 per cent with no leverage.”

“Its peers – such as P2P Global Investments and VPC Speciality Lending - have gone down the route of securitising portfolios of loans issued by large, well established platforms.”

“The securitisation of such loans is relatively new, hence why at the moment banks are only comfortable with lending against loans originated by one platform per lending facility and also a platform that is large, well-established and has a sufficient track record to give them comfort to lend.”

The Lending Club fiasco which has drawn something of a cloud over alternative credit investing, has made the Z share route less surprising adds Tepes, who says they are “sufficiently attractive” at 5 per cent.

“Ranger not only that it invests in smaller platforms, but also the aforementioned securitisation market was not helped by the recent troubles at Lending Club.”

“There was no mention in the announcement of the covenants on the ZDP, most importantly the cover, but with a limit of 50 per cent of NAV on overall borrowings and the expected return profile of the investments, I think the cover would give enough comfort to investors.”

“Ideally I would rather they didn’t gear at all given the current sentiment towards Direct Lending. While this would mean that they are unlikely to hit their 10 per cent dividend target, I think that a yield of 8-9 per cent ungeared is extremely attractive and competitive in the sector.”

For example VPC Speciality Lending, Tepes says, are targeting 8 per cent and would need up to about 100 per cent of net asset value NAV gearing to achieve it. Their gearing at end of April was 77 per cent.

According to AltFi data, Ranger Direct Lending has underperformed the broader UK marketplace lending space, as measured by the Liberum AltFi Returns index since its launch back in April 2015. 

Performance of fund vs Lari index

Source: AltFi Data

The Ranger Direct Lending IT invests primarily in a diversified portfolio of SME loans originated by US direct lending platforms this makes it somewhat of a US dollar play says Tepes.

“Ranger is great if you want some US dollar exposure especially if you are caught up in all the talk about Brexit and what it could do to the currency.

“From the perspective of the equity investors in Ranger, I would have preferred it if at least the ZDP would have been issued in USD, to match the currency of the underlying investments. While they can hedge out the final ZDP entitlement, there is a cost associated with it and also it can contribute to NAV volatility when you are marking to market the currency swap.”

However, Tepes is broadly a fan of the trust and she says it stands out somewhat from other alternative credit vehicles due to how it lends.

“What I like most about Ranger Direct Lending is that most of these loans are asset backed. They lend to SMEs but they take collateral either company equipment or buildings or directors' guarantees. There is therefore a hope that you have better protection if there is default.”

Loans are typically secured, have short duration and are high yielding. The fund managers can also take equity stakes in platforms or other companies serving the direct lending industry.

The fund, which is managed by Jack Antonini, Kenneth Scott Canon, Mark Dawson, William Kassul, Wes McKnight, Gary Melara, is on a discount of 6.7 per cent.

The fund is currently on a yield of 10.2 per cent.  It charges a 1 per cent annual management fee and charges a performance fee.