THE BOARD of Hadrian’s Wall Secured Investments has consulted with major shareholders and has decided that the company “should not continue in its current form”.
The direct lending fund announced on Monday that the board is undertaking a strategic review of the options available, which might include putting the company into run-off.
The announcement said that the board acknowledges the challenges already facing the company in terms of its size, scalability, limited secondary market liquidity and the discount to net asset value (NAV) at which the shares have been trading.
“The board has asked Hadrian’s Wall Capital, the company’s investment adviser, to look at the possible options for realising value from the company’s portfolio,” the firm said.
“These options might include sales of individual investment assets, mainly structured as loans and leases, or running off the portfolio in accordance with the existing terms of the investments or a combination of both. The board recognises that the illiquid nature of the company’s investment assets means it could take some time to realise value from the portfolio.”
As such, the fund will not be originating any new investments. Any cash available, including that from loan repayments, will be used to repay the firm’s revolving credit facility and meet any existing commitments for follow-on funding, which are not expected to exceed £4m in total.
Thereafter, the intention would be to return capital to shareholders and the company may also consider repurchasing shares at a discount to NAV.
The board will be restructured to reflect the fact that the company is no longer continuing in its current form. Paul Craig, who has been a board member since launch in 2016, is stepping down. Corporate finance veteran Brett Miller is joining as director. Miller has considerable experience in corporate finance, corporate governance, corporate restructurings and optimising financial capital structures, and has been instrumental in a number of fund realisations in recent years including RDL Realisation.
The dividend target of 1.5p per share for the last quarter of 2019 is expected to be covered, however the ability to meet future dividend targets will depend on the outcome of the steps taken to realise value from the portfolio.
“The problems at Hadrian’s Wall are symptomatic of a number of the issues facing a number of funds in the direct lending sector,” said analysts at brokerage Numis. “In particular, it is a small fund, with a market cap of just £86m, and as a result the portfolio is concentrated, leaving investors heavily exposed to individual credit concerns about portfolio holdings. The largest investment is around 9.5 per cent of net assets.
“The hit to sentiment has been compounded by limited disclosure, with the private nature of debt meaning that names of investments are not disclosed, and there is limited disclosure of risk metrics either regarding individual investments or on an aggregated portfolio basis. We believe it make sense for the board to consider the future options for the fund, and focus on realising cash flows from the existing investments, and we believe Brett Miller has lots of relevant experience of dealing with troubled listed investment companies.”
A number of direct lending funds have wound down in recent years, including RDL Realisation (formerly Ranger Direct Lending) and SME Credit Realisation (formerly Funding Circle SME Income).
“We believe there may still be a place for direct lending investment companies, however, we believe that to be successful in the long-term they will need to have: sufficient scale, to diversify the portfolio and provide some trading liquidity; an experienced management team, with a relevant track-record of credit investing; and improved disclosure, to allow investors to undertake some informed analysis,” Numis added.