Greenwich Loan Income Fund Acquisition Increases Scale And Diversity

Greenwich Loan Income Fund (GLIF.L) has announced the acquisition of assets from BMS Specialist Debt Fund (BMS SDF) for a consideration of £11.6m (£10.3m in shares and £1.3m in cash). GLIF is primarily buying a portfolio of specialist UK SME loans, with an average 2008-12 return of 12%. There is some cash, some warrants (valued at nil) and a platform through which GLIF intends to offer similar loans to third parties. Management is committing funds to the new holding company and is appropriately incentivised. This acquisition modestly builds scale for the group, increasing the portfolio by approximately 5%, and gives some diversification.

BMS SDF acquisition
Following its value-adding AMIC deal in 2011 GLIF has flagged inorganic growth, and in line with this strategy, it has announced the £11.6m acquisition of assets from BMS SDF. It provides specialist loans to UK SMEs through subsidiaries BMS Finance AB Limited (BMS), NAV £10m, and Noble Venture Finance II LP (NVF), which has an NAV of £1.6m. In BMS GLIF will be acquiring gross loans of £9m (average post-tax return on assets 2008-2012 12%), cash of £1m and a warrant portfolio (valued at nil but future realisations expected). It is expected that cash will be deployed into high-return loans relatively quickly (the pipeline is over £35m). NVF is being wound down and £1.4m will be paid to GLIF before end 2012. Once the cash in BMS is deployed in loans, we expect the business to generate an annual cash flow in excess of dividends of £1.2m, which will accrue to the 20.5m shares issued to finance the acquisition. The deal is structured through a new company in such a way that GLIF will initially earn the first 8% return on assets and two-thirds of any profit above this (management is taking the other third for an investment of £0.3m in the new company). Over time, we expect some gearing to be introduced.

Cash-flow analysis
In this report we review GLIF’s cash flow in detail highlighting why investors should take comfort that the recently increased dividend is sustainable. The most important point is that, following management action, the surplus of revenue over all finance and administration costs is considerably more than the dividend. We consider what drove the dividend cut in 2008/09 and how GLIF has developed its business in such a way to make a cut less likely now.

Valuation: Franchise value 54.3p
We believe GLIF’s assets should be valued at their expected cash realisation value so prefer the franchise value (54.3p, September 2012) over the accounting NAV (49.7p).

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