VPC Specialty Lending a “Buy”, says Jefferies

By Daniel Lanyon on Wednesday 7 February 2018

Alternative Lending

The Investment trust has upped stakes in balance sheet lending with profits from its marketplace loan holdings

The Investment trust has upped stakes in balance sheet lending with profits from its marketplace loan holdings.

Analysts at investment banking group Jefferies say the £338m VPC Specialty Lending trust is a firm ‘buy’.

The closed-ended portfolio has been transitioning away from P2P lending exposure to ‘balance sheet’ loans over the past 18 months or so and with the “end game” in sight Jefferies’ analysts believe the fund has reached an attractive entry point.

Share price performance of VPC Specialty Lending over 1yr

Source: Google

Its recent sales of marketplace lender Prosper’s loans has reduced the legacy portfolio exposure to 6 per cent of NAV.

Elsewhere, the new regulatory IFRS 9 provision will present further 'one-off' impact to VSL's NAV, Jefferies adds but this ‘conservative’ approach should represent an on-going benefit.

“Much of the interesting detail during December hinged on VSL's sale of its remaining Prosper loans. While this resulted in a 56bps negative impact to the NAV (inferring the loans were sold on a c.14% discount to carrying value), the cash appears to have been reinvested by the month end in the balance sheet facilities provided by Branch and NCP.”

“The hit to NAV from the disposal also serves to hide some positive performance from the remaining marketplace loans, likely to be Funding Circle Europe loans.”

“There was yet still no stabilisation in the securitisation residuals during the month due to further defaults in the underlying portfolios. However, the senior bond tranche of all three securitisations has now amortised down, leaving only the smaller subordinated tranches ahead of VSL's equity, meaning the end-game is finally in sight.”

Two further features of the portfolio also point to a more bullish future for the fund, Jefferies said.

“The exposure to legacy assets (being the marketplace loans and securitisation residuals) is down to 6 per cent of NAV at 31/12/17. However, we note that within this is a bond tranche of AVNT 2016-A, which will shortly begin to amortise down, lowering the exposure further still, albeit taking c.4bps of revenue per month with it.”

“Moreover, while there is likely to be limited additional return accretion stemming from the portfolio transition, rising short-term borrowing rates, particularly in the U.S., should flow through the LIBOR linking of the balance sheet facilities.”

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