The Woodford Patient Capital Trust (LSE: WPCT) share price rose slightly in early trade on Friday, after the board issued a statement revealing plans to cut debt.
After seeing the WPCT share price fall by 30% over the last year, shareholders will probably be hoping that today’s news marks a turning point for the trust’s fortunes. I’ve been taking a closer look at today’s statement and will share my view in this piece.
Debt worries
The concept behind WPCT is that it offers investors a long-term opportunity to make money from unlisted, early-stage companies. However, in the short-term the value of assets like these can fluctuate. Using debt in an effort to boost returns can be risky, as borrowing is secured against the value of the trust’s assets.
That appears to be the situation here. According to today’s update, WPCT has withdrawn £126m of the £150m available on its overdraft. Measured against the trust’s net asset value (NAV), this gives gearing of 16.8%. The maximum level of gearing allowed is 20%.
My reading of this situation is that the trust has very little headroom. The board appears to agree. They’ve agreed a plan with Mr Woodford to reduce gearing to below 10% of NAV within six months, and to approximately zero within 12 months.
Cash from asset sales and more mature investments will be used to fund debt repayment and future investments. This seems a sensible plan to me, although I’m not sure how easy it will be to raise cash for the initial debt repayment.
Valuation risk
In my opinion, the most likely reason why WPCT’s gearing may rise is that the value of assets held in the trust could fall.
What’s particularly worrying is that the troubled Woodford Equity Income Fund (WEIF) holds some of the same companies as the Patient Capital Trust. If the WEIF sells its investments at a discount, then logically, this could push down valuations of equivalent assets held in WPCT.
In today’s statement, the board has tried to address this concern. It says that if sales by WEIF are considered to be “forced transactions“, then these valuations won’t be applied to the matching WPCT holdings. But if WEIF sales are considered to be “orderly transactions”, then the WPCT holdings will probably be revalued accordingly.
I should add that this is all in accordance with regulatory guidelines for valuing unlisted companies. There’s nothing amiss here. But in my view, there is a risk that sales by WEIF could affect the valuations of some holdings in WPCT.
Buy at a 36% discount?
In fairness, some of this risk is already reflected in the share price of the Woodford Patient Capital Trust. Shares in the trust currently trade at a 36% discount to their last-reported net asset value of 89.6p per share.
If you have a patient outlook and are happy to wait a few years, buying shares in this trust could be a profitable decision.
The problem is that Neil Woodford’s record as an investor in small, early-stage companies is mixed, at best. I don’t feel I have enough understanding of the companies held in the WPCT portfolio to want to invest ‘blind’ in this way.
For me, the risks are greater than the potential rewards. I won’t be buying shares in this trust.
