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Research: Investment Companies
Riverstone Credit Opportunities Income (RCOI) reported an FY23 NAV total return (TR) of 6.0%, with continued steady income from its fully invested portfolio, though with some headwinds from the valuation of warrants. RCOI paid three quarterly dividends of 2.0 US cents per share for 9M23, and is therefore on track to deliver at least the lower bound of its targeted dividend yield of 8–10% on its IPO price of US$1.00. At the current 18.2% discount to NAV, RCOI’s last 12-month dividend translates into an annualised dividend yield of c 10%.
Riverstone Credit Opportunities Income |
Continues to deliver an 8–10% dividend yield |
Investment companies |
30 January 2024 |
*As at 31 December 2023.
Bull points
Bear points
Analyst
Riverstone Credit Opportunities Income is a research client of Edison Investment Research Limited |
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Riverstone Credit Opportunities Income (RCOI) reported an FY23 NAV total return (TR) of 6.0%, with continued steady income from its fully invested portfolio, though with some headwinds from the valuation of warrants. RCOI paid three quarterly dividends of 2.0 US cents per share for 9M23, and is therefore on track to deliver at least the lower bound of its targeted dividend yield of 8–10% on its IPO price of US$1.00. At the current 18.2% discount to NAV, RCOI’s last 12-month dividend translates into an annualised dividend yield of c 10%.
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RCOI trades at a wide discount to NAV, offering an attractive dividend yield |
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Source: RCOI. Note: Calculated based on NAV including income. |
Playing on net zero transition in the energy sector
Close to 100% of RCOI’s investment portfolio consists of senior secured, floating rate loans (with interest rate floors) that are either structured as sustainability-linked loans (which tie loan economics to meeting specific sustainability performance targets) or green loans (used to fund new green energy infrastructure or the conversion of older assets to more sustainable use). The mid-market segment remains underserved by the banking sector, providing good opportunities for direct lenders with specialist knowledge such as RCOI to fill the gap. RCOI is therefore well-placed to benefit from the transition to ‘net zero’ within the mid-market energy sector.
Successful exit and A&E in December 2023
RCOI highlighted that, based on existing portfolio commitments, the company was nearly fully invested as at end-September 2023. In December, RCOI announced the successful realisation of the Clean Energy Fuels loan, achieving a 14.9% gross internal rate of return (IRR) and a 1.14x gross multiple on invested capital (MOIC). A successful redeployment of the proceeds would facilitate RCOI’s sustained income generation potential. We also note that in December 2023, RCOI announced the amendment and extension of the Blackbuck loan, with its economic terms adjusted for an all-in yield to maturity (YTM) of 17%. RCOI’s total portfolio was held at a 1.22x MOIC at end-December 2023, slightly above the 1.18x MOIC on its realised investments since inception.
Outperforming peer average over three years
RCOI posted an FY23 NAV TR of 6.0% in US dollar terms (based on unaudited end-December 2023 data). This is below the weighted average all-in coupon across RCOI’s portfolio of 12.3% at end-December 2023 (with a weighted average spread of c 700bp), even after accounting for RCOI’s ongoing charges. The primary reason for this is the write-down of its Imperium3NY warrants of US$2.7m (or c 2.7% of RCOI’s end-2022 NAV), which at end-December 2023 were valued at nil. Moreover, the valuation of RCOI’s investment in Seawolf Water Resources (which is a combination of a first-lien term loan, preferred stock and common equity) was also marked down during the year. Finally, we note that the SOFR rate increased gradually in 2023 from 4.30% at end-2022 to 5.38% at end-2023 and the coupon rate of most of RCOI’s loans is reset (based on the prevailing benchmark rate) on a quarterly basis.
RCOI’s one-year NAV TR in sterling terms to end-December 2023 was 0.5%, negatively affected by the c 5% y-o-y depreciation of the US dollar against sterling. This is below two out of three UK-listed debt funds we consider most appropriate peers for RCOI (see Exhibit 1). That said, RCOI’s three-year NAV TR of 36.2% in sterling terms (c 11% pa) is ahead of the peer average.
Exhibit 1: Selected investment peer group at 29 January 2024* in sterling terms
% unless stated |
Market cap £m |
NAV TR |
NAV TR |
Premium/ |
Ongoing charge** |
Performance |
Net gearing |
Dividend |
Riverstone Credit Opportunities |
62.5 |
0.5 |
36.2 |
(18.2) |
1.5 |
Yes |
100*** |
10.3 |
BioPharma Credit |
942.8 |
3.2 |
39.2 |
(6.3) |
1.1 |
Yes |
100 |
7.4 |
GCP Asset Backed Income |
293.7 |
3.7 |
11.9 |
(26.4) |
1.2 |
No |
105 |
9.2 |
VPC Specialty Lending Investments |
172.5 |
(5.6) |
17.5 |
(30.3) |
2.1 |
Yes |
124 |
12.9 |
Peer average |
469.7 |
0.4 |
22.9 |
(21.0) |
1.5 |
110 |
9.8 |
|
Rank |
62.5 |
3 |
2 |
2 |
2 |
3 |
2 |
Source: Morningstar, Edison Investment Research. Note: *Performance to end-December 2023 or latest available NAV (end-November for VPC Specialty Lending Investments and BioPharma Credit, end-September for GCP Asset Backed Income). **Excluding performance fee. RCOI’s last 12 months ongoing charge ratio including profit share expenses to end-June 2023 stands at 3.1%. RCOI’s investment manager does not charge a base management fee. ***Calculated at the holding level based on the fair value of investments in special purpose vehicles, which had US$5m in drawn credit and US$2.8m in cash balances at end-June 2023. TR, total return in sterling terms. Net gearing is total assets less cash and equivalents as a percentage of net assets (100 = ungeared).
Exhibit 2: Discrete performance table
12 months ending |
Total share price return (%) |
Total NAV return (%) |
Morningstar Leverage Loan Index (%) |
High Yield Corporate Bond Energy Index (%) |
Energy Bond Index (%) |
31/12/20 |
(21.2) |
11.0 |
3.1 |
0.3 |
6.1 |
31/12/21 |
38.9 |
4.8 |
5.2 |
12.2 |
3.3 |
31/12/22 |
15.4 |
14.4 |
(0.8) |
(6.2) |
(13.6) |
31/12/23 |
4.1 |
6.0 |
13.3 |
11.6 |
9.5 |
Source: Refinitiv, Edison Investment Research. Note total returns in US dollar terms.
We note that Riverstone (Riverstone Holdings LLC and its affiliate Riverstone Investment Group) recently entered into a sub-management agreement for all credit vehicles managed by Riverstone (including RCOI) with Breakwall Capital. The latter is a newly formed, Securities and Exchange Commission-regulated Registered Investment Advisor owned and operated by the former RCP team, including Christopher Abbate, Jamie Brodsky and Daniel Flannery. Under this agreement, Riverstone remains the manager of RCOI on the terms of the existing management agreement, with no increase in fee payable by RCOI. Based on our discussion with the management, we understand that RCOI does not have an agreement to invest alongside Breakwall funds at this stage (still, it technically can be a co-investor). Moreover, the RCP II fund’s investment period has already ended. We also note that RCOI will be subject to a continuation vote at the AGM this year.
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