Shares in Ranger Direct Lending (RDL) have slumped after the investment trust was forced to write down 4% of its portfolio following the collapse of US peer-to-peer lending platform Argon Credit.

Shares in the trust are trading at 996p, down 6.9% since the write-down was announced yesterday, languishing at a 17.3% discount to net asset value.

The £172 million trust holds a position in Princeton Alternative Income, which gives the trust indirect exposure to $28.3 million of a $37.5 million credit facility Princeton has supplied to Argon, which went bust in December.

In an announcement to the stock exchange, the trust said due to the bankruptcy Princeton had decided to take a ‘reserve of $11.7 million against the Argon portfolio due to a decline in recent cash flows attributable to the portfolio’. This means Princeton has written down the value of its Argon holding by $11.7 million.

Ranger said it was now ‘urgently seeking additional information from Princeton in connection with this notification, including in respect of the basis on which the reserve has been made’ but said the impact on the trust would be an ‘approximate decrease of 4% in the NAV per ordinary share calculated as at 28 February 2017’.

However, it is ‘unable to confirm the precise impact of the reserve on the NAV at the current time’.

Ranger has previously indicated it expected to make a full recovery on the Princeton investment, but investors have been more wary, with the shares sliding from an 8% discount in November before news of Argon's bankruptcy to today's heavy double-digit level.

Numis analyst Charles Cade said the entire position in Princeton represented 12.1% of net assets in December and as Ranger could not determine the exact impact ‘we would not be surprised to see further writedowns’.

‘We believe this transaction raises questions about Ranger’s due diligence process given the platform failure and the complicated structure of the transaction,’ he said.

‘In light of the uncertainty over the NAV, we would still avoid the shares, even though they trade on a c.14% discount to the February NAV adjusted for the writedown.’

Cade added that the timing of the announcement would be particularly disappointing for investors in the C share issue, which raised £16.1 million in December last year, the same month as the Argon bankruptcy.

‘The C shares converted into ordinary shares on 7 April and therefore will also take a hit on the exposure to Argon because of the conversion,’ he said.

‘We question why the C shares were converted when there was uncertainty over the outcome of the Argon bankruptcy, even if it was performing at the time.’

Liberum analyst Conor Finn said the problem facing Ranger was the lack of information from Princeton.

‘The concern for Ranger is that the company does not appear to be getting much visibility from Princeton on the reason for the reserve, despite being the largest investor in the fund,’ he said.

The bankruptcy of Argon could have wider implications for the peer-to-peer lending sector, as Cade said the company was ‘an important bellwether’ for how the sector coped with a platform failure.

‘As a result, it is worrying to see the writedown, although the situation was confused because Argon, in breach of terms, assigned a portion of the underlying collateral to an unapproved special purpose vehicle (SPV) controlled by a former employee,’ he said.

By assigning a portion of the collateral to the SPV, Argon introduced a counterparty risk.

Cade said he was not a fan of lending platforms that made high risk/return loans and for that reason he was also ‘wary of VPC Speciality Lending (VSL)’, which has a £288 million market cap and currently trades on a 20% discount to NAV.

‘Overall we favour platforms with strong financial backing, governance and high levels of transparency,’ said Cade.

Numis’ favoured fund in the direct lending sector is £170 million Funding Circle SME Income (FCIF), which is predominantly UK focused and has no management or performance fees. It currently trades at a 3% premium to NAV.

‘Unlike most of its peers, the fund has delivered on its return targets to date,’ said Cade. ‘Funding Circle has indicated that the unlevered expected return on all loans originated through its marketplace in [the six months to the end of September] was 6.8%. The return profile supports [the trust’s] target return of c.8%.’