Hadrian’s Wall collapses in yet another blow to Mark Barnett and the direct lending industry

The future of Hadrian’s Wall Secured Investments (HWSL) seems very uncertain after the small business lender announced that it did not expect to get any money back on its two worst performing loans, causing net asset value to drop nearly 11% (NAV ).

Shares of the Guernsey investment firm, in which struggling Invesco fund manager Mark Barnett has a stake, had already lost more than a quarter of their value this year, as investors worried about the portfolio and its loans to finance, infrastructure and renewable energy companies.

They fell another 13%, or 8.5 pence, to 57 pence today after increasing provisions against loans to two biomass companies by £ 14.8million.

The increase brings the total provisions on Biomass Premium Fuels Limited (BPFL) and Biomass Optimum Fuels Limited (BOFL) to £ 18.1million, thus wiping out the total value of the loans.

Pellet problems

Hadrian’s Wall to businesses exhibition began with a £ 13million loan to Arensis, one of the UK’s leading wood pellet manufacturers, which collapsed in October of the year last due to lack of working capital. BPFL and BOFL bought the group’s assets back from the administration, with Hadrian’s Wall providing an additional £ 5million.

Last month, Hadrian’s Wall announced that BOFL has entered into a strategic partnership whereby biomass maker SDL Group will operate its facilities while fund manager Hadrian’s Wall Capital – led by Managing Director Marc Bajer and Chief Investment Officer Mike Schozer – was looking for a joint venture for BPFL.

Today, the board of directors of the investment firm warned that “due to recent and unexpected developments, the partnership between BOFL and SDL should not be continued beyond the short term”.

Also, after exploring a number of options, a joint venture for BPFL was no longer considered viable, he said.

The board, chaired by David Warr, a Guernsey-based chartered accountant, said: “In view of the lack of any certainty about the future of BPFL and the recent unfavorable developments with BOFL, the Board of Directors has taken the decision to provision a total loss on BPFL and BOFL and accordingly increased the loss reserves on these assets from £ 3.2million in total to £ 18.1million. in total.

“The investment advisor continues to explore options for BPFL and BOFL and related asset recovery and other updates will be provided in due course,” he added in a stock announcement.

Damaged credibility

Liberum analyst Conor Finn said the news was “very damaging to the credibility of the company,” given that a month ago the manager believed that the restructuring of BPFL and BOFL would not result in no material loss.

He pointed out that the company, whose market value declined to £ 99million due to shares traded at a 30% discount to net asset value, had two other bad debts in ‘training’ or recovery: a £ 13million loan to a renewable energy engineering firm, equivalent to 9.5% of NAV; and a £ 2.7million loan to a 2% -owned construction company.

Shareholders, such as Quilter Investors and Invesco, who own 24% and 16% of the company, according to Refinitiv data, would likely lobby for Hadrian’s Wall to fall back, Finn said.

“Investors have shown little tolerance for underperforming and undervalued funds in the direct lending and specialist credit sectors and several are now in the works. Hadrian’s Wall falls into this category and we believe it will come under pressure to return capital to shareholders, ”he said.

Bad news for Barnett

Hadrian’s Wall woes add to the pressure on Barnett (pictured) whose underperformance has come to light following the business collapse of his former boss Neil Woodford

Barnett held 1% of the Perpetual income and growth (PL) in the loan fund at the end of August, a stake of 11.1 million shares valued at £ 8.7 million at the time. The trust is one of the worst performers in its UK equity income sector, with a five-year shareholder return of -3.5% compared to the 37% gain in the FTSE All-Share index.

Investors like Barnett have turned to ‘alternative income’ funds like debt and infrastructure funds in an effort to reduce their reliance on a shrinking band of big dividend payers. in the FTSE 100.

However, this has not been painless research, particularly in the Association of Investment Companies’ direct lending sector, where Hadrian’s Wall is the latest fund to have encountered problems, validating concerns of investors. criticism that the relatively new peer group has not been tested by an economic downturn. .

Few unscathed funds

Within the ten-company sector, Ranger Direct Lending and Funding Circle SME Income Fund are already shutting down and paying investors back after disappointing performance, renaming themselves RDL realization (RDL) and SME loan realization (SCRF).

SQN Guaranteed Income (SSIF), formerly known as GLI Alternative Finance, appears unlikely to pass a continuation vote after failing to raise assets to a £ 250million target and will likely start pulling out next year.

P2P Global Investments, the industry’s first launch in May 2014, avoided closure after being taken over by new management and renamed Pollen Street Secured Loan (PSSL). However, it might end up being merged with Honeycomb (Sweetheart), a £ 388million secured loan fund managed by the same manager he increasingly looks like.

Honeycomb is well regarded and has a good track record under Pollen Street Capital. However, his previously highly rated shares fell to a 3% haircut due to a surplus caused by fears that Barnett would have to sell the third of the company he owns to deal with buyouts from his Invesco Income funds and High Income underperforming.

Specialized mail order loans (VSL) is halfway through a turnaround from a change in investment strategy, with its 10% return reflecting continued investor skepticism, although it recently reinstated dividend hedging.

That leaves only three investment firms relatively unscathed. They are:

BioPharma Credit (BPCR): A 7% yield lender to U.S. healthcare companies that has avoided any major upheaval since launching two years ago but struggles to reinvest big cash to cover next year’s dividend. Its shares recently fell at a small discount as investor enthusiasm waned.

GCP asset-backed income (GABI): A £ 480million diversified lender in asset finance, energy, real estate and social infrastructure, retains its fan base and trades at an 8% premium and a yield of 5.7 %.

In the same way, RM secured direct loan (RMDL), a £ 123million rival to Hadrian’s Wall, stands out with a premium of 2% above NAV and offers a dividend yield of 6.5%.

It looks like the direct loan investment company industry will contract significantly before investors can be sure these three are the eventual winners.