Cheyne Capital’s listed property debt fund takes defensive stance

The Real Estate Credit Investments fund, run by Cheyne Capital, has taken a defensive stance in terms of geographic exposure and high cash holdings, given the deteriorating economic outlook for Europe.

Shamez Alibhai (pictured), RECI’s manager, detailed the conservative positioning as the fund yesterday revealed its first net loss in nine quarters, of €10.8m.

The 9.2% decline in market value of its bond holdings compared to the FTSE 100’s 14.4% fall and 12.1% drop by the iTraxx Crossover index.

Bond positions in the fund, which is listed on the London Stock Exchange, have a market value of £74.7m.

Their combined face value, however, is £125.9m, “so there is £50m worth of capital gain in the portfolio, and [realising those gains] is not a distant event, we are getting capital returns from our portfolio every quarter.”

RECI also declared a dividend of 0.864p per share, producing a healthy yield based on the current share price of about 4.2%.

Alibhai said RECI’s latest quarterly loss was attributable to marking the bond portfolio’s holdings to falling markets, not any deterioration in the credit quality of the holdings themselves. “It is more a result of correlation [of markets] to the eurozone crisis,” he said.

Spreads over safer equivalents of most eurozone fixed income instruments – including of many sovereigns – widened significantly during RECI’s latest reporting quarter to 30 September, and Alibhai said the portfolio’s holdings could not remain immune from this.

Nevertheless, he said the average loan to value ratio of RECI’s top 10 holdings was 62%, up from about 55% in June.

Tom Chandos, RECI’s chairman, said: “With low loan-to-value ratios, backing of high quality assets and primary exposure to UK and Germany, RECI has full confidence in the fundamental strength of its real estate bond portfolio.”

Some 93% of the positions are on assets in Germany and the UK, widely regarded as Europe’s safer harbours.

Alibhai more than tripled the fund’s cash balance last quarter to €18.3m, from €4.6m mid-year, and he said the current high cash holdings could be useful for buying attractive property that Europe’s troubled banking sector is expected to offload to reduce its risk weighted asset levels in line with various regulatory demands.

“We will, however, maintain a cautious approach,” he said.

The fund expects more buying opportunities towards the end of 2011 and early in 2012, as “market reactions to the Eurozone debt crisis have exaggerated price dislocations in the real estate securities markets and the company expects to be able to make new investments at attractive prices”.

Stuart Fiertz, Cheyne’s co-founder, said: “We have seen more of an articulation of the amount of assets banks have to sell, or capital they have to raise, and that has exacerbated the sell-off in line with the European crisis. However, we view this as an opportunity to purchase high quality assets which have traded down in sympathy. We think RECI is well positioned to buy attractively priced bonds in the stronger parts of Europe.”

Alibhai said: “At the beginning of June we decided to increase our cash position by selling high beta names where the price would move around more in correlation with the eurozone crisis.

“Although we then had a defensive portfolio in terms of LTV and jurisdiction, there was still a sympathetic fall in prices as the eurozone crisis caused credit spreads to widen across the sector.”

RECI’s bond purchasing last quarter was defensive and smaller than the preceding period (£8.4m versus £37.4m in three months to 30 June). Of 20 bonds purchased, 14 carried an investment grade rating and six were rated single-A or above. RECI noted the weighted average expected yield to maturity of new investments was 16.3%, and RECI purchased them at an average price of 64 pence.

In October the fund also entered a short position, providing £16m of notional cover, against the IPD UK Commercial property index.

The derivative would pay the fund if capital prices in that sector fell by 5.5% or more next year.

This is not Alibhai’s expectation, but a protective measure particularly for the fund’s Class C and below bonds, “in the event bank financing is abruptly shut off, or there is a large fall-off in bank financing, which would make asset prices fall.


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