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An “infrastructure” trust without political risk

03 December 2019

GCP Asset Backed Income offers investors high and reliable yields that are secured against assets, but “steers clear of anything Jeremy Corbyn might want to get his hands on”.

By Anthony Luzio,

Editor, Trustnet Magazine

Many income-starved investors tempted by the high yields available on infrastructure trusts may have been put off by rising political risk in the sector over the past few years.

Following the Labour party conference in 2017 when shadow chancellor John McDonnell pledged to bring billions of pounds’ worth of PFI projects back under government control, Winterflood Investment Trusts said the changing political climate necessitated a reappraisal of the sector.

However, Gravis Capital Partners’ David Conlon believes he may have a solution to the problem. Just like infrastructure vehicles, Conlon’s GCP Asset Backed Income trust offers investors high and reliable yields that are secured against assets, but because it “steers clear of anything Jeremy Corbyn might want to get his hands on”, the manager said it would have a low sensitivity to a wide-scale renationalisation plan were Labour to come to power.

GCP Asset Backed Income targets companies that have a proven concept but that are not yet at a scale where they can obtain cheap funding from the banks.

Conlon said that just like with infrastructure trusts, he takes a “project finance” approach, lending to “clean” special purpose vehicles (SPVs) that own an asset with a structural value. For example, a typical SPV in the portfolio owns a waste facility and all the revenues produced by this asset. However, it contracts out all of the services it requires (such as staff) to specialist providers.

Performance of sector over 10yrs

Source: FE Analytics

“What we’ve ultimately got is a very clean vehicle,” Conlon explained. “We’re not taking corporate risk of the operator, we’ve just got this vehicle which has got contracted income coming in and contracted outflows going out.

“It should be a lot more stable than most businesses, which can be quite up and down.

“And that’s what we’re looking to do – obviously it is not a perfect science, but in that way, we can actually better predict the cash flows that will arise in the next two to five years.”

One advantage the trust has over its infrastructure-focused peers is that it doesn’t just lend to companies that operate in one area of the market. Conlon said this diversity helps to suppress risk as there is a low correlation between the sectors the trust lends to – for example, a development that threatens the business model of a waste management facility is unlikely to have the same impact on a nursery.

“We don’t think there’s one systematic risk here other than being a UK business, with exposure to its rules and regulations,” he added.

“The diversification element is one of the things we really like about this fund. We’re not taking on huge exposure on an individual basis: where we have larger loans it’s against 19 different properties, for example. So therefore, considering some of that security is land, operating buildings, buildings in construction, it would take an awful lot to go wrong for that entire loss of value.”

Conlon said the first loan he ever made in the trust is “probably still my favourite”. The company in question (Gravis has a policy of not naming its holdings) installs boilers at no upfront cost, instead signing up the homeowner to a 10-year all-inclusive service agreement for “30-odd quid a month”.

The manager said a “clever” move by the company was to install boilers only in the homes of owner occupiers. It then puts a note on the Land Registry that says the boiler is not owned by the homeowner, but is under a lease contract.

“What that means is that it has always been paid out,” Conlon continued. “So whenever someone sells their house, because obviously that shows up on the Land Registry, the buyer will make them pay off the boiler contract. When a house is repossessed, the bank will pay off the boiler contract. So actually it never lost a single penny.”

When Conlon first lent to the company, it had already fitted 7,500 boilers, and has continued to install them ever since, meaning the loan looks even more secure now. Meanwhile, arrears are low at 0.7 per cent of customers, with this figure needing to hit 20 per cent for it to default.

The manager said the company also found a way to keep the cost of servicing the boilers to a minimum.

“It arranged to use Viessmann boilers which are one of the top brands, because its view was it wanted boilers that don’t have problems. ‘So let’s put some Germans in there’,” he explained.

He added: “Again, it’s something that we were able to do because we can sort of look into it and look at the risks.

“If you could imagine taking this to Santander or Barclays, where do you phone up, who will finance it? It would be hard to find people whose desk this will sit under, even though the credit would make sense.

“You know, we get to fund these little niche areas which offer great credit but they don’t actually fit with any commonality.”

Data from FE Analytics shows GCP Asset Backed Income has made 32.19 per cent since launch in October 2015, compared with gains of 6.86 per cent from its IT Debt Direct Lending sector.

Performance of trust vs sector since launch

Source: FE Analytics

The trust is yielding 5.69 per cent, has ongoing charges of 0.59 per cent and is not currently geared.

It is on a premium of 7.59 per cent compared with 6.43 and 5.81 per cent from its one- and three-year averages.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.