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Q Update

lse:vsl

#1

Share Buybacks
Throughout the quarter, the company bought back 24,559,023 shares. These represented 6.42% of the company’s issued shares at an average price of 70.07 pence per share, resulting in an immediate, accretive return of 1.61% and a reduced share count going forward. While we have a significant amount of deal flow and portfolio funding activity across all our funds, the addition of gearing has allowed us to take advantage of buyback opportunities that are accretive to the company given recent market prices and the wide discount to NAV, while continuing to deploy capital into new and existing investments. There were significant trading volumes during the quarter, caused by events we believe to be unrelated to the fundamental performance of the company – e.g. investor fund redemptions and index changes. These presented a unique opportunity to buy back shares in sizeable amounts. The company funded these buybacks, in addition to other fundings during the quarter, with excess cash and by using the company’s upsized CapitalSource credit facility. Given the low cost of financing relative to the effective yield of our portfolio, and the overall moderate leverage of the company, we feel this was an extremely attractive investment for the company’s shareholders. The board has asked the company’s broker to adjust the buyback approach to be a more consistent buyer of shares in smaller amounts, but we and the board will also continue to evaluate block share purchases when they become available.

Macro Update
Despite the volatile end to 2018, the first half of 2019 continued to show strong economic performance in the US. The US consumer segment was particularly healthy. After ten years of economic expansion, it is somewhat surprising that we have not seen an increase in leverage (debt levels) of the US consumer, despite historically low interest rates during the period. Indeed, household leverage has continued to fall, even as housing prices climbed from their lows following the financial crisis. This is in stark contrast to US non-financial companies, which have steadily increased leverage to historically high levels.

DL


#2

Hi Devon,
Thanks for that. I saw the RNS as well. All good news in my opinion. As you highlight, they are now talking about a reduced share count. So those 58m shares in treasury are to all intents and purposes cancelled (from an EPS/DPS point of view).
Confirmation (again) that the buybacks have been completed with cash and debt but also confirmation (as we would expect) about the cost:
“Given the low cost of financing relative to the effective yield of our portfolio, and the overall moderate leverage of the company, we feel this was an extremely attractive investment for the company’s shareholders.”
That debt will have to be paid down but if there is a healthy margin over the cost of finance that shouldn’t be too much of a problem.
Looks to me like the buybacks will continue at a modest pace. Probably using excess cash more than debt. I doubt there will be another Woodford opportunity to buy back a big block of shares, but you never know.
Looking to the future, they’re making 10-12% return overall (10-12pps), so use this to pay down debt, keep the 8pps divis going and perhaps be in a position to increase it once debt is down, cash is up and they have built up a buffer to cope with a recession in the US as there has to be one coming eventually!
Guitarsolo