RM INFRASTRUCTURE INCOME PLC

HALF-YEARLY REPORT ANNOUNCEMENT

FOR THE SIX MONTHS ENDED 30 JUNE 2023

LEI: 213800RBRIYICC2QC958

ABOUT US

How we invest

RM Infrastructure Income plc (the "Company") aims to generate attractive and regular dividends through investment in secured debt instruments of UK Small and Medium sized Enterprises ('SMEs'), and mid-market corporates and/or individuals including any loan, promissory notes, lease, bond, or preference share (such debt instruments, as further described in the prospectus, being 'Loans') sourced or originated by RM Capital Markets Limited (the "Investment Manager") with a degree of inflation protection through index-linked returns where appropriate.

Where we invest

Having had a general sectoral lending approach since inception, the Company narrowed the sector focus since 2021 to investments within the social and environmental infrastructure sectors.

Our ethos

The Company aims to make a difference with the deployment of its capital and as such has adopted an impact framework allowing the measurement and reporting of impact from investments made. In addition to this the firm seeks to target investments directly linked to achieving outcomes linked to six Sustainable Development Goals ("SDGs").

PORTFOLIO AT A GLANCE

Financial information

Performance summary

1.        These are Alternative Performance Measures ("APMs").

2.        Total returns for the period to 30 June 2023, including dividend reinvestment.

3.        Total returns for the period to 30 June 2022, including dividend reinvestment.

4.        Source: The Company's Factsheet.

Alternative Performance Measures ("APMs")

The financial information and performance summary data highlighted in the footnote to the above tables represent are considered to represent the APMs of the Company. Definitions of these APMs together with how these measures have been calculated can be found within the Report.

Company highlights (as at 30 June 2023)

*Coronavirus Business Interruption Loan Scheme

** Recovery Loan Scheme

Portfolio Summary (as at 30 June 2023)

Largest 10 loans by drawn amounts across the entire portfolio

† Valuation conducted by external Valuation Agent.

* The Company's gross assets comprise the net asset value of the Company's Ordinary Shares and the Bank loan (the calculation can be found in the Interim Report).

CHAIR'S STATEMENT

Introduction

Dear Shareholders,

On behalf of the Board, I am pleased to present RM Infrastructure Income plc's ("RMII" or "the Company") Interim Report and Accounts for the first half of 2023 (the "Period"). The first six months of the year have been challenging for fixed income markets as we have seen a further material increase in UK government bond yields, especially at the front end of the United Kingdom yield curve, with two-year government bond yields rising circa 200bps over the Period. Despite this, it is pleasing that the Net Asset Value ("NAV") % Total Return has remained positive, albeit slightly behind target. The share price % total return has been -15.4% and whilst it is disappointing to report an absolute negative return there has been outperformance versus more traditional corporate bond funds and leveraged loan indices as well as the other listed peers. 

Overall, the short-dated nature of the portfolio has provided a certain measure of protection from rising interest rates, and this was strategically planned by the Board and Investment Manager who have been saying for several years that absolute levels of interest rates were too low and likely to rise. 

Credit spreads as measured by the Markit iTraxx Europe Crossover index have tightened from 475 to 400bps at the Period end. Given the shape of the UK yield curve, which is inverted, the tightest point for credit spreads in the near to medium term may have passed, with credit conditions set to deteriorate as financing becomes more expensive. 

As the shares were trading above an average discount of zero during the six-month period to 31 March 2023, the Company undertook a consultation with Shareholders to determine how they wished for the Company to continue. This consultation was undertaken in the later part of the Period, and it was pleasing to speak and hear from so many Shareholders. Whilst the feedback was overwhelmingly positive and supportive of our investment strategy, there is a common theme of Shareholder focus which is not just on investment performance but on other areas in particular liquidity, size and cost for Shareholders.

Robust NAV performance

The NAV % Total Return for the Period was 2.66% which is slightly behind our target, however, when set against the weaker backdrop for credit as described above, is not unexpected.

Delivering stable income

Since inception there have been 25 quarterly distributions at or above target to Shareholders totalling 38.85 pence per Ordinary Share.

The Company paid the dividend for the first quarter of 2023 of 1.625 pence per Ordinary Share on 30 June 2023 and in addition the Board has declared a second interim dividend of 1.625 pence per Ordinary Share for Q2 2023, which will be payable on 29 September 2023 to Shareholders on the register at the close of business on 8 September 2023.  Therefore, the aggregate dividend in respect of the Period is 3.25 pence per Ordinary Share.

As of 30 June 2023, the issued share capital of the Company consisted of 117,586,359 Ordinary Shares with voting rights and 4,638,222 Ordinary Shares held in Treasury and the closing mid-price was 69.00 pence per Ordinary Share. The NAV per Ordinary Share was 91.68 pence, correspondingly the share price to NAV was a circa 24.74% discount. The Board has been hampered in its option to address this discount due to the approaches made by third parties but we expect any solution will help to narrow the discount from its current extreme levels.

Portfolio

The portfolio size reduced as the Revolving Credit Facility ("RCF") was largely paid back during the Period. The number of loans remained roughly stable during the Period, from 38 at year end to 37 at Period end. Invested assets totalled £123m (£126m at year end). Overall private debt investments represent circa 96% of the portfolio holdings and 4% within equity (unlevered ownership of investment reference 68, student accommodation asset Coventry.)

Compared to the position on 31 December 2022 ("year-end") the average yield on investments at 10.02% is 87 basis points higher and the expected average life of the portfolio is 1.91 years.

Outlook

As Shareholders will be aware, the Board, the Investment Manager and Singer Capital Markets, our corporate broker, have been evaluating the future strategy of the Company. Having consulted widely with Shareholders and received various approaches from third parties, as an alternative to a managed wind-down, the Board is currently assessing a proposal from GCP Infrastructure Income Limited regarding a potential partial combination with RMII in conjunction with its proposed merger with GCP Asset Backed Income Fund. Once the proposal has been assessed in full, including further consultation with our Shareholders, the Board will make an announcement on the future course of the Company.

Since this process started Shareholders have been very generous in giving their time and in showing patience in what has turned out to be a much more complex process than first imagined. In every complex situation where those involved have very differing views, it will be impossible to "please all of the people, all of the time" but we expect that whatever decision is made on the future of the Company will be in the best interests of our Shareholders as a whole and any proposals tabled will be put to a shareholder vote.

The Board is grateful for the support of Shareholders from such a broad investor base. Please do not hesitate to contact me through Singer Capital Markets if any additional information is required.

Norman Crighton

Chair

17 August 2023

INVESTMENT MANAGER'S REPORT

Overview

Income Performance & NAV % Total Return

RM Funds ("RM" or the "Investment Manager") is satisfied with the Company's continued positive performance in the Period, in which the portfolio delivered a steady net interest income with two further dividends declared for the Period totalling 3.25 pence per Ordinary Share. Overall, since inception there have been 25 distributions totalling 38.85 pence per Ordinary Share to Shareholders.

The NAV % Total Return for the Period was 2.66%. Whilst slightly behind the Company's target, the portfolio's performance versus the observable credit peer group is favourable, as outlined below:

Share Price

The share price has been disappointing with the Company's shares opening the Period at 85.00 pence and closing the period at 69.00 pence, delivering a negative total return of 15.20%.  This has entirely been driven by the share price discount to NAV increasing from 8.10% to 24.74%. There were some share buybacks which occurred at the beginning of the Period, however discounts have opened up not just across investment trusts focused on private debt strategies but across the whole closed ended Investment Trust and REIT market. Sadly, RMII is not immune from this and in the view of RM Funds, caused largely as a function of the shape of the UK yield curve which has one year Sterling Overnight Interest Average ("SONIA") at over 6% at the Period end. The target remains to continue to reduce this discount and the steps that the Investment Manager and Board are undertaking at the moment with regards to consulting with Shareholders seek to address this discount.

Investment Manager aligned with Shareholder interest

RM Funds purchased 12,500 Ordinary Shares in the Company during the Period. This takes the direct investment in the Company to 1,329,125 Ordinary Shares. The Investment Manager continues to believe this is the best way of demonstrating its alignment with the interests of Shareholders.

Market environment

Fixed income markets continue to be dominated by the inflation story and in the UK, we have seen the yield curve not only move higher but start to invert as well. Front end UK-Government bonds have increased materially over the Period with 2-year gilt yields at 5.25% at the Period end versus 1.75% on 30 June 2022 - 350bp higher. Over the same period 40-year gilts have moved from 2.3% to 4% which is roughly half of the widening seen in the 2-year part of the curve. 

Overall, the inverted shape of the curve is the key takeaway. It shows credit conditions are tightening, the market environment for credit is deteriorating and it is probably signalling a recession in the UK is due within the next twelve months.   

Portfolio Update

As at the Period end, the capital available for investment was fully deployed with a small drawing under the RCF. The average yield on investments of 10.02% was slightly higher by 87bps than at year end and reflects the yield widening during the Period. The portfolio remains well diversified with 37 investments across 12 sectors. RM Funds continues to believe that the CBILS and the Recovery Loan Scheme ("RLS") investment loans, which benefit from a UK Government partial guarantee, also offer a material credit enhancement for the portfolio.

Overall, income generation of £5.52m was similar to the first half of 2022 (£5.3m H1 2021), split between cash and Payment in Kind ("PIK") 85%/15%, which is down from 86%/14% during the same period last year. For the Period, there were five drawdowns to existing facilities, one new investment, 11 partial repayments and two full repayments, which again further demonstrate the successful execution of the business strategy as the Company makes loans, receive interest from borrowers and continues to get repaid. 

As at 31 December 2022, there was one loan which was under enhanced monitoring by the investment team and at the end of the Period there were three additional loans added to the enhanced monitoring list.  The key developments during the Period for each of these loans is detailed below: 

1.   Hotel development & contractor, Glasgow (Loan References 58, 79, 80 & 92)

Overview: This hotel was scheduled to open in June 2022 and will be operated by Virgin Hotels under a 35-years Hotel Management Agreement. The total market value exposure that is correlated to the outcome of this asset is currently c£12.2m representing 11.3% of Company net assets.

Update: The Clyde Street Virgin Hotel, Glasgow, received its temporary occupational certificate post Period end. This essentially means that the hotel is now ready to start trading, with the first paying guests expected to be welcomed before the end of August 2023.

As a reminder, most of the exposure has been funded by CBILS and / or RLS loans and to date the loans have been marked near their guaranteed level of c.80p. This was to reflect the uncertain opening date as well as the increased risk due to cost overruns. Consequently, we believe the risks are appropriately reflected in the marks, with limited downside given the partial government guarantee provided by such CBILS and / or RLS facilities.

2.   Accommodation, Student Accommodation (Loan Reference 84)

Overview: £4m senior secured CBILS loan to a UK-based Purpose-Built Student Accommodation ("PBSA") developer and operator.

Update: The Borrower was scheduled to received c.£3.5m of proceeds derived from the sale of two operational PBSA assets in a JV structure which were to be used in repayment of RM's outstanding debt. Significant disagreements have arisen between the JV partners which have led to the above-mentioned proceeds not yet being transferred to the Borrowing entity. In H1 2023, a total of c.£3.25m of fresh subordinated capital was injected in the borrowing company by the borrower. This is a CBILS loan and benefits from a UK government guarantee covering up to 80% of capital outstanding.

3.   Accommodation, Student Accommodation (Loan References 74 & 89)

Overview: RM has two investment loans; £930k junior secured - Loan Reference 74 and £5m CBILS junior secured - Loan Reference 89, secured against a portfolio of 5 operational & performing PBSA properties in the UK.

Update: In April 2023, the lending group moved to a recovery process. Accordingly, the principal outstanding for Loan Reference 89, which is RM's most junior position in the capital structure, was written down to its CBILS guarantee level of 80p. We expect the receivership process to be concluded during the course of Q3 2023.

4.  Healthcare - Aged care (Loan References 88, 82 & 83)                                                                       

Overview: RM has three investment loans: £12.8m/£5m CBILS /£2.8m secured over two separate purpose-built aged care homes.  During Q1 2023 a valuation report was received that triggered a Loan To Value covenant breach. Since then, a second valuation report providing a second opinion has satisfied the loan covenant.

Update: By the period end there was an accrued balance on interest which was paid post period end in cash. These loans have now been removed from the watchlist.

Outlook

Overall, we see interest rates are now at or near their peaks. The curve inversion within the UK gilt market is creating a compelling story for valuations across the front end of the fixed income curve. There will probably be no better time to be investing into short-dated credit and closed-ended real asset funds than now, as the high levels of short-dated SONIA have driven down valuations and increased share price discounts to NAV, which in our view are unlikely to be maintained. The market is behind the curve as the inflation story is now moving into the background and the outlook will be driven by systemic risks that have arisen by the velocity and extent of the interest rate rises within the United Kingdom. 

RM Capital markets Limited

17 August 2023

INTERIM MANAGEMENT REPORT

The Directors are required to provide an Interim Management Report in accordance with the Financial Conduct Authority ("FCA") Disclosure Guidance and Transparency Rules ("DTR"). The Chair's Statement and the Investment Manager's Report in this half-yearly report provide details of the important events which have occurred during the Period and their impact on the financial statements. The following statements on principal and emerging risks and uncertainties, related party transactions, going concern and the statement of Directors' responsibilities, together, constitute the Interim Management Report for the Company for the six months ended 30 June 2023. The outlook for the Company for the remaining six months of the year ending 31 December 2023 is discussed in the Chair's Statement and the Investment Manager's Report.

Principal and emerging risks and uncertainties

The Board has a dynamic risk management register in place to help identify principal and emerging risks in the business and oversee the effectiveness of internal controls and processes. The principal and emerging risks and uncertainties facing the Company are as follows:

·    Market risk - rates of inflation (counterparty affordability), rates of interest

·    Liquidity risk - liquidity opportunity and discount control

·    Leverage and borrowing risk - the Company's investment policy involves the use of leverage, which exposes the company to risks associated with borrowings

·    Credit / counterparty risk - counterparty default, borrower default, loan non-performance and collateral risk

Emerging risks are considered by the Board at its quarterly meetings and by the Audit and Management Engagement Committee as part of its risk management and internal control review. Failure to identify emerging risks may cause reactive actions rather than being proactive and the Company could be forced to change its structure, objective or strategy and, in worst case, could cause the Company to become unviable.

A detailed explanation of the principal and emerging risks and uncertainties to the Company are detailed in the Company's most recent Annual Report for the year ended 31 December 2022, published on 26 April 2023, which can be found on the Company's website at https://rm-funds.co.uk/rm-infrastructure-income/investor-relations/.  The Board is of the opinion that these principal and emerging risks are equally applicable to the remaining six months of the financial year as they were to the six months being reported on.

Since the publication of the 2022 Annual Report and Accounts, there continues to be increased risk levels within the global economy. The Investment Manager believes the key risk factors that have increased during the period are:

Interest rate risk - due to a material increase in the Sterling Overnight Interest Average ("SONIA") which could make the refinancing of loans due for repayment over the next two years more challenging for borrowers given the increased cost of the "risk free" rate. These SONIA rates are predicted to remain high given the shape of the SONIA curve which currently rises over the next 12 months. This causes specific risk in two areas: portfolio borrowers seeking refinancing, as the materially higher funding cost could affect the interest cover on the loan thus making new funding difficult to obtain. On portfolio exposures where a borrower is seeking to refinance a third-party debt ranking senior to RMII, this could also increase the likelihood of any RMII Mezzanine loan covenants being breached.

Collateral risk: real estate values as evidenced by price performance within the Real Estate Investment Trust ("REIT") segment have reduced over the period. Whilst these price falls have not been reflected fully by these REITS or other real estate indices the Investment Managers believe that the probability has increased that the realisable market valuations are lower at the end of the period than the beginning of the period. Given that the RMII portfolio has extensive security over real estate this could negatively affect recoveries in any enforcement scenarios.

Availability of credit: the Investment Manager believes that credit is less available at the end of the period than the start of the period and this will potentially negatively affect borrowers who are seeking refinance. Given the RMII portfolio is exposed to loans with a final maturity date this will increase the refinancing risk.

The Board closely monitors and assesses these continued uncertainties as to how they could impact and affect the Company's trading position with regards our investment objective, portfolio and thus our Shareholders and where appropriate endeavour to mitigate the risk.

The Investment Manager and other key service providers provide periodic reports to the Board on operational resilience. The Board is satisfied that the key service providers have the ability to continue their operations efficiently in a hybrid working environment.

Related party transactions

The Company's Investment Manager, RM Capital Markets Limited is considered a related party under the Listing Rules. Details of the amounts paid to the Company's Investment Manager and the Directors during the Period are detailed in the Notes to the Financial Statement.

Going concern

The Directors have adopted the going concern basis in preparing the financial statements. The following is a summary of the Directors' assessment of the going concern status of the Company.

The Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for at least twelve months from the date of this document. In reaching this conclusion, the Directors have considered the Company's portfolio of loan investments of £116.2 million (30 June 2022: £126.5 million; 31 December 2022: £120.0 million) as well as its income and expense flows and the cash position of £0.9 million (30 June 2022: £0.7 million; 31 December 2022: £3.0 million). The Company's net assets at 30 June 2023 were £107.8million (30 June 2022: £110.4 million; 31 December 2022: £108.8 million). The total expenses (excluding finance costs and taxation) for the period ended 30 June 2023 were £1.1 million (30 June 2022: £1.1 million; 31 December 2022: £2.2 million). At the date of approval of this document, based on the aggregate of investments and cash held, the Company has substantial operating expenses cover.

As part of their assessment, the Directors have fully considered each of the Company's loans, giving careful consideration to the consequences for the Company of continuing uncertainties in the global economy.

Income obligations have been met by borrowers and there is a diverse portfolio of Loan investments; Directors see an increase in the risk to the income from the Company loans within the portfolio as the outlook is uncertain. However, these loans have a number of specific lender protections (such as loan to value covenants and cashflow or earnings covenants) which are being monitored.

Given the level of market volatility experienced, the Investment Manager has performed stress tests on the Company's income and expenses and the Directors remain comfortable with the liquidity of the Company. As part of their assessment, the Board have fully considered and assessed the Company's portfolio of investments, giving careful consideration to the consequences for the Company of continuing uncertainties in the global economy. The Russian invasion of Ukraine has created significant supply chain disruption and the subsequent rise in global energy prices, inflation and rising interest rates worldwide have led to a more uncertain investment environment. The Directors continue to review the processes in place to mitigate geopolitical and market risk; and to ensure that these are appropriate and proportionate in the current market environment.

STATEMENT OF DIRECTORS' RESPONSIBILITY

for the Half-yearly Report

The Directors confirm to the best of their knowledge that:

>     The condensed set of financial statements contained within the Half-yearly report has been prepared in accordance with IAS 34 Interim Financial Reporting.

>     The Interim Management Report includes a fair review of the information required by 4.2.7R and 4.2.8R of the FCA's Disclosure Guidance and Transparency Rules.

Norman Crighton

Chair

 17 August 2023