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Riverstone targets 8-10% yields with oil and gas loan fund

17 May 2019

US fund manager behind Riverstone Energy, the London-listed North American oil and gas private equity fund, looks to raise up to $200 million (£157 million) for a new investment trust focused on loans to mid-sized energy explorers.

The US fund manager behind Riverstone Energy (RSE), the London-listed North American oil and gas private equity fund, is looking to raise up to $200 million (£157 million) for a new investment trust focused on loans to medium-sized energy explorers.

Riverstone Credit Opportunities Income (RCOI) will aim to generate an annual dividend yield of 8-10%, paid quarterly from 2020, with an initial target of 2.2 cents per share for the period ending 31 December 2019.

Riverstone International, the fund manager which has raised around $39 billion in private energy investments since opening its doors in 2000, will not charge investors an annual management fee but will take a performance fee of 20% of annual distributable income over 4% of the assets it raises at launch.

According to the company’s key information document, the performance fee could add 0.3% to annual ongoing charges to investors. These are forecast to be 0.6% if the trust hits its upper target or 1.3% if it attracts $100 million, its minimum for the launch to proceed.

Christopher Abbate and Jamie Brodsky, co-heads of Riverstone's credit team which manages around $2.1 billion, said: ‘The energy sector is large with substantial financing needs which are not being met by traditional lenders.'

One reason they believed the supply of loans was not keeping up with demand was that commercial lenders had stepped away from offering credit to small and medium-sized energy companies following the financial crisis.

Another reason, they said, was that debt capital markets had grown in size, making it harder to price smaller illiquid and unrated credit, limiting its ability to fulfill the needs of this end of the energy market.

They added: ‘We see this as a very attractive opportunity to make senior secured loans to well capitalised mid-sized energy companies that generate compelling risk-adjusted returns. We have made over 40 loans since 2015 and our recent private fund RCP I is generating a double digit net rate of return.’

Riverstone expects spending in the global energy sector to exceed $650 billion in 2020, 26% higher than 2016 levels.

Despite fluctuations in commodity prices, capital demand in the energy sector remains strong. In almost every year since 2013, the energy industry has attracted more commercial bank lending globally than any other sector, Riverstone pointed out.

Average loan default rates in the energy sector have been nearly half that of other sectors, with recovery rates up to 25% higher, say the managers.

Riverstone Credit Opportunities Income will be able to invest up to 15% in any single borrower and at least 85% of the portfolio will be exposed to first or second-line secured lending. It will also invest in companies where debt represents less than 60% of assets and loans will have a maximum term of seven years.

The performance of the £741 million Riverstone Energy trust, which has been run by Ken Ryan since its launch in 2013, has been marred by the shares's wide discount to net asset value (NAV), currently 22%. 

This has meant that while the portfolio has achieved an underlying total return of 47% in the past five year, beating the MSCI World Oil and Gas index gain of 8%, shareholders have received a total return, including dividends, of just 0.9%.

With this in mind, the new trust will seek to implement a tight discount control policy, pledging to use up to half of its capital and income to buy back shares if it trades at an average discount of more than 5% over three months.  

If the average discount exceeds 10% over a rolling six-month period, it will use up to 100% of its assets for share buybacks, potentially returning all the capital to shareholders.

The trust will be able to borrow, or gear, on up to 30% of its net assets but will aim to repay this debt within a year.

The offer closes on 22 May.

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