Grab a 6% div­i­dend yield with se­cured lender Hadrian’s Wall

This in­vest­ment trust can help you ob­tain a much bet­ter re­turn on your money than cash in the bank

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Imag­ine a bank or build­ing so­ci­ety with a poster in the win­dow of­fer­ing a sav­ings ac­count that pays 6% an­nual in­ter­est.

It would be quite fea­si­ble to ex­pect queues down the road as the gen­eral pub­lic seizes the op­por­tu­nity to get a much bet­ter re­turn on their money than has been the norm over the past decade.

Sadly that 6% rate is noth­ing but a dream for savers at the mo­ment un­less they are pre­pared to take on higher risks and in­vest their money in the mar­kets.

The idea of buy­ing in­di­vid­ual com­pany shares can be too daunt­ing for many in­di­vid­u­als so they look for so­lace in in­vest­ment funds as a source of reg­u­lar in­come.

It is fairly easy to find eq­uity funds which yield in the re­gion of 3% to 4%. These prod­ucts will have a port­fo­lio made up of lots of stakes in in­di­vid­ual com­pa­nies.

To get a higher yield, you would have to look at places like prop­erty or in­fras­truc­ture funds which may of­fer 5%.

WHERE TO FIND EVEN HIGHER IN­COME YIELDS

Hit­ting the magic 6% in­come fig­ure would in­evitably mean ven­tur­ing into more com­pli­cated in­vest­ment prod­ucts such as funds that in­vest in higher risk cor­po­rate bonds or other parts of the credit mar­ket.

Many in­vestors are re­luc­tant to go down this path as debt mar­kets can be dif­fi­cult to un­der­stand. If this res­onates with you, we may have some­thing to win you over.

We’ve come across a debt­fo­cused fund that is very easy to un­der­stand, looks to be lower risk rel­a­tive to some of the other ‘al­ter­na­tive in­vest­ments’ on the mar­ket, and strives to pay that all-im­por­tant high in­come. Hadrian’s Wall Se­cured

In­vest­ments (HWSL), an in­vest­ment trust listed on the Lon­don Stock Ex­change since June 2016, lends money di­rectly to small busi­nesses at an aver­age 9% in­ter­est rate – the full range is 7.5% to 11%.

Af­ter pay­ing the costs of run­ning the trust and keep­ing back 15% of in­come to help pay div­i­dends in tougher times, Hadrian’s Wall typ­i­cally has enough money to pay a 6% div­i­dend yield each year, based on its 100p stock mar­ket flota­tion price.

AD­DRESS­ING A NICHE PART OF THE MAR­KET

‘We’re kind of like what a bank used to do 30 years ago,’ says Michael Schozer, chief in­vest­ment of­fi­cer at Hadrian’s Wall Cap­i­tal, the trust’s in­vest­ment ad­viser. ‘For

ex­am­ple, a £7m man­u­fac­turer in Nor­wich who needed to bor­row £3m would visit their lo­cal bank man­ager who’d they known for 15 years and get a loan.’

Schozer says main­stream banks have since phased out that method of lend­ing in pref­er­ence of hav­ing a more for­mu­laic way of mak­ing loans via a cen­tralised lo­ca­tion. ‘That method has got rid of ex­pen­sive peo­ple in the branches and in­tro­duced clear cri­te­ria to whom they will lend.’

Hadrian’s Wall spe­cialises in loans to small busi­nesses which may have been re­jected by these banks be­cause their sit­u­a­tion was com­pli­cated rather than be­ing a bad credit risk. It com­petes for these op­por­tu­ni­ties against chal­lenger banks like Shaw­brook rather than pri­vate eq­uity which pre­fer larger sized loans.

Schozer be­lieves the in­vest­ment trust’s down­side is limited be­cause its loans are se­cured against phys­i­cal as­sets. If some­one can’t pay back the loan, Hadrian’s Wall takes own­er­ship of as­sets and sells them to re­cover its money.

‘Any loan book has de­faults; it is part of the in­dus­try. Imag­ine an eq­uity fund man­ager say­ing all the stocks they buy have gone up – it is un­likely. We’ve had one full re­pay­ment so far and no de­faults yet,’ ex­plains Schozer.

‘When we look at loans, we are do­ing se­cured lend­ing. We look at a) can the com­pany pay?; b) if they can’t, do I have the le­gal right to take the as­set?; c) How cer­tain am I that I can con­vert that as­set to cash?

‘If you are mak­ing con­sumer loans, ev­ery loan that de­faults you will lose a high per­cent­age. If you are mak­ing se­cured loans, you will lose a very small per­cent­age if you are prop­erly struc­tured. If you look at data over many years, se­nior se­cured bank loans tend to re­cover about 80%, un­se­cured might re­cover 50%.’

A LOAN SIT­U­A­TION IN PRAC­TICE

The in­vest­ment trust now has nearly 20 loans in its port­fo­lio. The weighted aver­age life of a loan is al­most four years.

Among its port­fo­lio is a £5.5m loan to the owner of petrol sta­tions and mini-marts lo­cated in places where there is no im­me­di­ate com­pe­ti­tion from large su­per­mar­ket op­er­a­tors. The owner wanted to buy back two sites they built 10 years ago, plus they were also build­ing a new site.

‘A bank would eas­ily lend against a petrol sta­tion and a mini-mart, but they would want to see two to three years’ fi­nan­cial per­for­mance be­fore they would lend. In our sit­u­a­tion, the banks would only lend against two of the three prop­er­ties as the third was too new. So we got the loan in­stead as we were pre­pared to lend against all three sites. These are nice cash flow op­er­a­tions.’

Hadrian’s Wall is of­ten a bridge to fu­ture bank lend­ing. In the petrol sta­tion ex­am­ple, it recog­nises that the owner is likely to re­fi­nance the loan at a much cheaper rate with a bank once they have three years’ worth of fi­nan­cial per­for­mance from the newly-de­vel­oped site.

It uses bro­kers and ar­rangers to source new loans rather than em­ploy a large sales­force of its own.

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