High yielding Merchants Trust secures cheap long-term debt


Originally published at: https://whichinvestmenttrust.com/high-yielding-merchants-trust-secures-cheap-long-term-debt/

In advance of soon to retire expensive debt the Board of the trust has secured new ultra long term debt at a seriously low rate of interest, which will benefit shareholders for decades to come. Simon Gerbel, manager of The Merchants Trust. The Merchants Trust (LON:MRCH) has secured a £35 million, 35 year duration debt,…


That’s a bloody good yield. I notice the previously wide discount has really come in, I wonder if the upcoming retirement of the debt has something to do with that.

One question I have is does Merchants illustrate the value of even expensive gearing? I don’t know the answer yet, and by that I mean, I don’t know if I am missing something, but on the surface it looks here like a decent manager can make good returns even when they need to service expensive debt, no?


I don’t know the answer to the question you pose either @matts but on the surface the answer appears to be yes. I hadn’t realised Merchants produced such a tidy yield - no wonder the discount has come in! Though I’m sure the retiring of that uber dear debt has helped too.


I note that as a result of the much cheaper debt financing arrangement that is now in place the Board is beginning to address the issue of inflation lagging dividend increases to shareholders that have been a feature of Merchants in recent years. Recently increasing the quarterly pay-out from 6p to 6.2p. While I applaud the Board for stoutly defending the dividend for the past 8 years, matching periodic increases to that of inflation have fallen well behind in real terms since 2011. As evident by the second performance graph below lifted from the Final Report & Accounts of 2016.

What rises there have been during this time have been just enough to maintain the trust’s claim to be ranked as one of leading members of the AIC’s much trumpeted league of dividend heroes.

Having been with us for 127 years, Merchants has become all about the above average dividend that it continues to pay. To the extent that the Board recognises the attraction and importance of such pay-outs to the growing number of DIY ISA and SIPP account holders of the baby-boom generation hungry for sustainable income sources. For it’s that target audience of investors that Merchants is hoping to attract.

While, because of the lighter debt burden, I expect the trust to make inroads with pay-outs in relation to catching up with inflation. There is still a further 5 years or so to go uphill until May 2023 before Merchants can hopefully do a cheaper deal on a remaining £54m of debenture debt on the balance sheet falling due for repayment. At which time the trust should be in a much more comfortable position to make meaningful dividend progress in my opinion for what it’s worth.


Perhaps prospective investors might want compare MRCH’s NAV total return figures against its sector peers rather than share price returns - especially over recent times. My view is that this trust is one for those that wish/need to boost their level of income - with the intention of spending that income - rather than re-investing for the total return.