The research team at JN Fund Managers (JNFM) led by Ramon Small Ferguson has advised its clients that “Sygnus Credit Investments Ltd (SCI) seems to present an attractive value proposition to investors”.

Based on the information provided in the prospectus, SCI intends to pay out up to 85% of the earnings as dividends on a quarterly basis which they target to translate to a dividend yield of at least 7.0 per cent. Further, investors have the opportunity to invest in the IPO in either US dollars or local currency.

In regard to the SCI investment process and strategy, JNFM notes that SCI targets lending through customised credit instruments to medium-sized companies in Jamaica and other Caribbean territories. It says:

“The company’s investment strategy is based on direct origination through its investment advisor which focuses on leading the negotiation and structuring of the instruments it invests in. SCI has indicated that the average investment size per transaction ranges from US$500,000 or its equivalent to a maximum of US$5 million or its equivalent. To ensure diversification, the company’s maximum lending limit per sector is 35 per cent, while its maximum exposure limit to any single group of companies is 25 per cent. SCI limits the tenor of its investments to five years, with a maximum of seven years on an exceptional basis. The company anticipates that the average tenor of its investments will typically be around three to five years.

“The customised nature of SCI’s private credit instruments also allows the potential for earnings potential in addition to interest income which includes profit participation and convertibility to common equity with a subsequent exit at initial public offering. After providing for an appropriate reserve to cover expenses and providing for contingencies, the company intends to pay out up to 85 per cent of the earnings as dividends on a quarterly basis which they target to translate to a dividend yield of at least 7.0 per cent.”

For investors seeking a benchmark to analyse SCI, JNFM offers this. “Given the specialised nature of SCI’s operations, the entity has no direct comparable listed on the local stock exchange. We believe the closest comparable to SCI is Eppley Ltd.

JNFM continues, “For the six months to December 2017, SCI generated net profits of US$661K which translated to an Earnings Per Share of US$0.01.”

Further analysis reveals the investing strength and risks associated with this IPO.

Strong corporate governance and experienced management: SCI’s investment decisions are subjected to a rigorous multilayered credit approval process with final investment decisions being made by the Credit Risk and Investment Committee (CRIC) which is comprised of a majority of independent directors. The core team of the investment advisor also boasts substantial combined experience in investment banking, credit underwriting and deal structuring of over 50 years.

High relative dividend yield: The company intends to pay out up to 85 per cent of its net income as dividends to shareholders, payable on a quarterly basis with a targeted dividend yield of at least 7.0 per cent in USD which is higher than all the comparables on the USD market.

Access to private credit market: An investment in SCI offers investors pure play access to the rapidly expanding private credit market which is not offered by any other investment option currently available on the local stock exchange.

Diversification: SCI offers investors diversification benefits by asset class, sector, region and currency diversification which should enhance the resilience of portfolio returns under different market conditions.

Tax efficient structure: SCI is an international business company incorporated in St Lucia that benefits from the Caricom double taxation treaty and will have corporate income tax of 1.0 per cent. The firm will be listed on the JSE and therefore share transactions will be exempt from transfer tax or stamp duties.

INVESTMENT RISKS

Start-up risk: As a start-up business, there is a risk associated with the lack of a performance history. This risk is somewhat mitigated by the significant experience and successful track record of the company’s management as well as the company’s strong governance structure.

Credit risk: This risk is inherent in the company’s core operations and is mitigated by its robust underwriting, due diligence and risk management processes, diversification, collateral (in some instances) and the experience of management.

Interest rate risk: This risk is also inherent in the company’s lending operations and is mitigated by its low duration targeting strategy.