R&M’s objective in this regard is to generate a much higher absolute return on investment than those one would ordinarily expect from similar term investments in the major asset classes; and to offer an exposure to the alternative asset class of unlisted debt securities.
R&M’s target market
The target market will be well-established companies, listed and unlisted, with maintainable EBITs from about A$ 2.0 million to about A$ 10 million (“Target Market”).
The financial problems faced by companies within the Target Market are generally threefold:
- They are underserviced by the banking sector relative to their much larger peers:
- They have much greater difficulty securing equity capital than their larger peers and pay a significant premium for it: and
- They are generally not offered capital that ranks between bank (senior) loans on the one hand and equity capital on the other.
The target market accordingly presents investors with an opportunity to provide capital that ranks between bank (senior) loans on the one hand and equity capital on the other hand, and in so doing charge higher rates as the nature of the additional capital moves from senior debt to equity.
The value proposition
R&M’s private debt product offers companies within the Target Market access to capital they are not able to secure from the banking sector, capital which does not require shareholder dilution through an issue of ordinary shares and capital that is priced on a step-up basis from a respectable premium over bank (senior secured) loans to the cost of equity for these companies. Companies that would otherwise have forgone business opportunities will, with R&M’s private debt product, be able pursue them.
The approach / strategy: While the primary focus of the banking sector in lending to the Target Market is the value of the secured interest, the primary focus of the R&M’s Private Debt Product will be on the strength of the prospective borrower’s cash flows.
Indicative interest rates – For any loan amount up to achieved annual EBITDA multiplied by up to 2.0, the interest rate is expected to be 12% to 15% pa. For any up to 2.5 times, about 15% pa; up to 3.5 times, about 20% pa and up to 4.5 times, about 25% pa.
The instrument – Corporate Bonds (or syndicated loans) of up to 3 years if ‘interest only’, up to 5 years if there is material amortization.
The security – While the R&M Private Debt Product is essentially ‘cash flow based’ (one relying primarily on the strength of the borrower’s cash flows, rather the value of the secured assets, for repayment and serviceability) R&M will endeavor to take a security interest over any assets or over the residual value of the secured assets behind the bank as senior secured lender.
R&M’s General (minimum) lending criteria –
- Five (5) or more years in business
- EBITDA in each of the past 3 years to be over $2.0 million
- Expected maintainable EBITDA to be in excess of A$ 2.0 million per annum
- Clear credit reports on the business and the executive shareholders
- General exclusions: R&D, biotechnology, mining exploration, property developers, ‘turnaround plays’ and highly speculative businesses. Although retail is not generally excluded any investment in this sector will be treated with extra caution.
R&M’s Risk control
Assessment process – An R&M business development person will be the first gatekeeper. If willing to recommend the investment, he or she will prepare an Investment Application (which will include summaries of both historical (the past 3 years) and forecast financials) and present it to the R&M Investment Committee. Investments will have been approved by R&M’s Investment Committee after operational and financial due diligence.
Management and reporting – Borrowers will be required to provide monthly management reports to R&M and present half-year and annual financial statements – with annual audited accounts for the larger investments and others as deemed appropriate.
Legal rights – Bondholders will rank ahead of the shareholders. In the event the borrower fails to meet its interest payments and principal repayments in full and on time or fails to satisfy the interest cover and other covenants, R&M (as Manager) will have the right to appoint an administrator and thereby replace the incumbent management team. Restrictions will generally be placed on the borrower’s ability to pay dividends, return capital or increase the salaries or bonuses of executive shareholders.
Liquidity event – Each Corporate Bond will be provided for a pre-agreed period, with repayment generally required to be made in full on the maturity date. Recognizing that an interim liquidity capability could be desired by bondholders, R&M will provide or list the Corporate Bonds on a secondary sales platform. Prospective bondholders should however regard the Corporate Bonds as illiquid for the period of the instrument.
Distributions – Interest will be paid monthly by the borrowers and will be paid monthly to the various co-investors.
Fees and Costs
- Management fee – The borrower concerned will pay R&M (as the Manager) a fee of up to 1.0% pa of the face value of the Corporate Bonds, payable quarterly in advance. No management or similar fee will be payable by the bondholders to R&M.
- Registrar of bondholders – The borrower concerned will be responsible for maintaining the register of bondholders. and the costs of any secondary sales platform.
- Secondary sales platform – R&M will (from its management fee) pay for the costs of accessing the secondary sales platform. The operator of the platform may change the bondholders a ‘buy / sell’ spread.
- Establishment fees – Lenders generally charge ‘establishment fees’, which amounts are payable by the borrower on commencement of the facility but are usually capitalized (i.e. included in the loan amount). These are intended to cover the legal and due diligence costs associated with providing the loan as well as any brokerage (or other introduction fee) that may be payable. R&M will also charge the borrower such fees and apply the income to meeting associated costs, including internal business development and credit assessment.
- Late payment fees – Borrowers will be charged late payment or similar fees by R&M and will be required to reimburse R&M for any costs incurred in the collection of outstanding debts or otherwise in enforcing its rights against the borrower.)
The Investment Case
The expected returns (interest income) on each corporate bond investment (loan) are high relative to both the associated risk (i.e. the borrower’s gearing level at commencement) and the long-term returns generated across the major asset classes.