The board of the Woodford Patient Capital Trust has been urged to “seriously consider” a run-off of the portfolio in an analyst note raising concerns about the investment trust’s leverage.
Gearing in WPCT currently sits at 19% of net asset value, just shy of the 20% limit on the bank overdraft credit facility and manager Neil Woodford is no longer able to make any transactions without permission from its lender Northern Trust.
In an analyst note, issued on Wednesday, Stifel said: “Given the current inability to make new investments and difficulties in making follow-on investments due to the trust being close to its leverage upper limit, we think the board should seriously consider adopting a ‘run-off’ strategy where investments are gradually realised over a number of years and cash is returned to investors, once the bank debt is repaid.”
The Woodford Patient Capital Trust did not wish to respond to Stifel’s suggestion.
Alternatively, if a new manager is appointed Stifel said “it would be helpful for portfolio companies if some of the existing management team transfer over to any new manager, in order to maintain continuity and knowledge of portfolio investments”.
Unquoted exposure ‘effectively’ reaches 102%
The trust is currently engaged in several negotiations to address gearing.
Firstly to renew its credit facility with Northern Trust, which expires in January, and secondly to sell holdings in order to free up cash.
“As 2019 draws to a close, if neither of these developments materialise, this would be a cause for significant concern,” said Stifel.
Outstanding debt was £111m at the end of September, according to the trust’s half-year results. That was down from £116m at the end of June due to the sale of two unquoted investments, ADV and Ultrahaptics.
But a fall in the trust’s NAV meant in percentage terms gearing went up.
On a geared basis, 102% of the portfolio is in unquoted or “effectively unquoted” companies, according to Stifel calculations. That is due to 79% being in unquoted companies and 23% in quoted companies that do not trade.
Stifel also noted that while it is essential for WPCT to sell holdings this would potentially be premature and therefore result in no uplift or a loss.
The bull case for WPCT
While the Stifel note described the concentrated and leveraged portfolio as high risk, it still set out the bull case for the shares, on which it has a hold rating.
The maturing unquoted companies should be coming up through the J-curve with the scope for realisations, it said. Although it noted some of the unquoteds are more venture capital than private equity in nature and may need follow-on funding.
Several investments have reached “demonstrable” milestones in the last year or two, the note said.
Additionally, a 38% discount to NAV is high, although “considerable” uncertainty exists on unquoted valuations, and the ongoing charges ratio is low at 0.18%.
