Quickview: Greenwich Loan Income Fund
Edison | Apr 04, 2013 08:46AM ET
Our long-standing recommendation is that clients do not overly focus on statutory accounts from Greenwich Loan Income Fund’s (AIM: GLIF CISX: GLI) as they bring theoretical capital movements into revenue. We can establish that the high dividend yield is covered by interest and dividend income less costs. While conditions are more challenging, we expect this to continue for the foreseeable future.
GLIF’s statutory accounts include the mark-to-market (MTM) of its liabilities in income. As a going concern it will meet its debts at par when due. Volatile MTM of assets is also taken through income statements masking the long-term value of these loans. We are extremely cautious about using the statutory accounts. We can establish interest and dividend income and costs, and consider this against the dividend paid. As noted above this indicates a cover ratio of 1.4x, without relying on any capital gains (which should form an inherent part of the business model).
Good loan-market conditions are encouraging the early repayment of loans and re-investment is at lower yields. This will put some pressure on GLIF’s revenues but we note (1) there is ample current coverage, (2) the full effect of lower management fees will only be felt in 2013, (3) negotiations are underway which could reduce costs further, (4) high margin opportunities are available in the UK business, and (5) niche lending markets offer good and more sustainable margins.
We will examine in detail in our next report a number of issues raised in these accounts including: (i) management incentives, (ii) appointment of new manager for non T2 assets, (ii) improving asset quality, and (iv) the impact of the BMS acquisition.
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