VPC Specialty Lending Trust cuts dividend, dips into reserves

The Victory Park Capital (VPC) Specialty Lending Investments Trust used its reserve cash to partly fund its latest shareholder dividend, according to regulatory filings to the London Stock Exchange.

The £382m investment trust, which offers exposure to both P2P/marketplace lending and balance sheet lending in the US and UK, recently also announced that it was cutting the same dividend from 2p to 1.5p per share for the first quarter of 2016.

This includes a 0.19p contribution from the company's reserves. The dividend will be paid on 30 June 2016 to shareholders.

During the quarter, the trust's revenue return was 1.31p, below the targeted annualised dividend. This was, according to the company, due to a number of factors, including the use of leverage facilities and securitisations which incurred fees and costs as well as completed securitisations and cash drag.

“The company has selectively accessed the securitisation market and added leverage to certain assets in the portfolio. These transactions resulted in an increased level of cash pending reinvestment, which has impacted the company's performance and its ability to meet the dividend target in the short term,” a spokesman for the company said in a statement.

“For example, the company was substantially fully invested on 29 January 2016, but was only 72 per cent invested at 31 March 2016 after closing a securitisation transaction and a leverage facility in February and March, respectively.”

The trust was launched back in March 2015 and like many of its peers such as P2P Global Investments, it initially moved to a hefty premium. However, due to a ramp up in bearishness in markets in general in 2016 and more specific concerns around the platforms that originate the loan’s business model, it now sits on its widest discount since launch.

Performance of premium/ discount since lauch

Source: AIC

The trust is on a discount of 15.8 per cent to net asset value, which converts to 12-month backward looking yield of 9.8 per cent.

Cormac Leech, an analyst at Liberum Capital says the cut in dividend is explainable by the trust’s securitisation and despite being initially disappointing, should mean greater income in the medium term.  

“The fund effectively moved to cash and so the returns are a bit lower temporarily until they put that money to work.” 

“But once it getS leverage and puts the cash to work, their returns should actually be very, very strong. for the less sophisticated investor it looks like you should sell because they are cutting dividends but actually it bodes for much strong performance longer term.”

“I'd see it selling off recently as an opportunity rather than a reason to sell.”

Monica Tepes, director of investment company research at Cantor Fitzgerald, says investment trusts' use of their cash reserves can be bad if it represents a structural issue in the investment strategy of the portfolio. However, she does not think this is the case with VPC.

“That’s the whole purpose of the reserves, they are set up on the assumption that there will be times when income falls short so you put some income away in good times and pay it out in bad to smooth payments out.

“[If structural] it probably makes sense to review the distribution policy – do you need to cut the dividend to a sustainable level or do you need to alter the investment strategy to continue to meet the current level?”

“With VPC, I interpret the company’s statement as this being a short term/temporary problem and very much down to the balance sheet structuring of the company rather than the income generation of the underlying portfolio of loans.”