GCP ASSET BACKED INCOME: Trust aims to generate steady income

The core mission of GCP Asset Backed Income is to generate steady income for investors. The Investment Trust launched nearly seven years ago and has done just that to date. The trust pays a quarterly dividend that has increased each year. In good times there is also an occasional special dividend.

The £437m fund provides this income by lending to companies at an average interest rate of 8 per cent. It has 62 ongoing loans across 22 sectors including football clubs, student accommodation, care homes and childcare, most of them in the UK.

The fund collects money from its shareholders and lends it to companies much like a bank or peer-to-peer lender might. But unlike other types of lenders, GCP Asset Backed Income is an investment trust, meaning it is listed on the stock exchange where its shares can be bought and sold.

According to manager David Conlon, companies turn to the trust for credit thanks to word of mouth and because it offers a rare level of credit. He says: “Loans are typically between £5million and £20million. That’s too big for a peer-to-peer lender, but too small for most banks to be interested in, as they tend to lend around the £40m mark.

The loans can be for expansion, building new premises or even bridging a company – if you are confident that better days are ahead. All loans are secured by assets such as buildings. This means if a borrower is unable to repay the loan, the asset can be sold and some value returned to the trust. On the other hand, if a trust buys shares in a company that goes bust, chances are it will be left with nothing. However, if GCP Asset Backed Income shareholders worry that lending could falter, the stock price could fall.

The Trust has made approximately 100 loans and there have been two defaults. Trustees are very interested in borrowers being successful, so work hard to avoid a loan going awry. Conlon says, “It’s a pretty boring fund. You won’t get big growth from us, but you will get a nice steady income. The nature of the loans we make is very diverse, so we’re not overly dependent on any particular sector.’

The numbers prove it. An investment of £1,000 three years ago would be worth £1,033 today. Investors have consistently received quarterly payments: the dividend yield is 6.75 percent.

A little less than half of the trust’s loans are protected against rising inflation because interest rate protection is built into the loans: if inflation rises, the interest paid will rise as well. Conlon says: “For example, we make loans to nursing homes, which tend to increase fees in line with inflation. This allows them to increase the interest rate they pay us.’

When a borrower cannot pass on cost increases, trust can be compromised. For example, if inflation is 8 percent but the company can only pass 3 percent of that on to clients, the trust may only accept a 3 percent increase in the interest rate received. GCP Asset Backed Income does not disclose the names of most of the companies to which it lends due to terms in contracts it signs with borrowers and agreements with other lenders.

However, Conlon reveals that a number of borrowers are football clubs in the UK and Spain. These loans are backed by sponsorship or television deals, so revenue should be guaranteed.

The Trust also makes loans to care home and childcare providers. These two industries are struggling with staff shortages and wage increases. But Conlon says it only lends to big providers with good, modern rooms that are better able to weather the difficulties. One of these is childcare provider N Family Club.

The exchange ID code is BYXX8B0 and the annual fee is 1.18 percent. It is currently trading at a small discount, meaning that the value of the fund’s underlying assets is higher than the total value of its shares.