Description
Marble Point Loan Financing Ltd. (LSE: MPLF LN (USD)) represents an asymmetric opportunity to buy into a diversified portfolio of collateralized loan obligations (“CLOs”) at a material discount to fair value:
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Marble Point Loan Financing Ltd. (“MPLF”) trades at $0.6450, a 13% discount to Net Asset Value (“NAV”). Relevant domestic comps, including Eagle Point Credit Company (NYSE: ECC) and Oxford Lane Capital Corp (NASDAQ: OXLC), are trading at 13% and 19% premiums, respectively.
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MPLF’s share price and NAV declined 45% and 50%, respectively, peak to trough in 2020 as economic shutdowns increased default expectations drastically and companies were downgraded by rating agencies. While defaults ticked up modestly, projections never fully materialized. Over the past 12 months, MPLF’s stock price increased by 49% compared to 21% for the Credit Suisse Leveraged Loan Index and 65% for the S&P 500 Index.
Background
Marble Point Loan Financing Ltd. is a London-listed closed-ended investment company managed by Marble Point Credit Management LLC. The company invests in CLOs and related vehicles, providing diversified exposure to U.S. dollar denominated, broadly syndicated floating rate senior secured corporate loans. A CLO is a security backed by a pool of underlying loans. The underlying loans are typically to corporations or are taken out by private equity firms as they conduct their investment processes. With a CLO, an investor receives the regularly scheduled debt payments from the loans while assuming most of the risk if a borrower defaults. In exchange for taking on default risk, the investor is provided greater diversity and the potential for upsized returns.
Valuation
Prior to 2020, MPLF traded relatively close to NAV. After the company’s share price collapsed in March 2020 amidst severe default expectation, its share price disconnected from NAV, falling to a 13% discount despite convincingly outperforming expectations over the past 12 months. The company’s NAV has recovered to pre-pandemic levels, more than doubling from its pandemic trough as the company reinvested excess proceeds into new CLOs at distressed prices (as shown in Figure B). MPLF is currently trading at a 13% yield (relative to OXLC and ECC at 12% and 5%, respectively), providing a compelling investment opportunity and is well-positioned to increase its dividend or continue to grow NAV through reinvestment. The company has struggled to garner investor interest, trading infrequently, which likely explains its lackluster valuation relative to comps.
Performance Expectations
MPLF’s go-forward performance will largely depend on its ability to continue to grow NAV or increase its distribution via excess cash flow. Historically MPLF’s underlying portfolio cash flows have been stable, and the two most recent quarterly distributions were the highest since its Initial Public Offering (“IPO”), representing an 18% annualized yield. MPLF is committed to reinvesting spare cash flow to build NAV (as shown in Figure A) and has done so successfully. The current distribution rate is well-covered (2.5x) by distributions received and should be sustainable barring another extreme macroeconomic event. Forward 12-month yield expectations are conservatively 13%, with upside optionality from investing in new CLOs at discounted pricing and the potential to trade at a premium (or closer) to NAV. If MPLF’s NAV grows by 10% (lower end of CLO equity return expectations), the stock starts trading at a 6% discount to NAV (13% at present), and the current yield remains static, investors should receive a roughly 31% total return.
Net returns for CLO equity have traditionally been in the low-to-mid teens while MPLF’s performance has lagged, generating a 1.3% return since its IPO in early 2018. It appears their underlying positions are performing well given that defaults did not materialize as expected and the majority of companies continue to pay their outstanding obligations on schedule. MPLF’s value proposition appears to be under appreciated by the market despite the relative strength of its portfolio, as the stock’s performance since inception is relatively flat, in contrast to the typical mid-teens IRRs generated by the underlying assets.
Risks & Mitigants
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Liquidity: The stock is illiquid and only 315,000 shares traded in April (202,716,892 shares outstanding)
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Mitigant: Given the attractive relative performance of the company’s underlying CLOs, and its share price lagging the broader market rally, the emerging discount could likely be explained by its illiquidity and lack of investor awareness
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Mitigant: Illiquidity premium is more than reflected in the forward return expectations
Conclusion
Previous market conditions (the COVID-19 global pandemic) sparked a sell-off in MPLF. Despite the resilient and compelling performance of the company’s cash flows, its share price continues to lag broader markets and peers. Assuming the company maintains its current distribution and trades in line with NAV over the next twelve months, the opportunity would generate returns in excess of 27% over a one-year hold with zero NAV growth. By reinvesting spare cash flow into new CLOs at depressed prices, MPLFs NAV could climb higher, generating returns greater than 30% - a compelling risk-return opportunity. There may be considerable upside available given the strength of the portfolio, which will likely continue to enhance NAV or evolve into a greater distribution.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
- Monthly NAV estimates increasing as excess distributions are re-invested
- Increasing the quarterly dividend