Sequoia Econ Infra - Half-year Report
25/11/2022 07:00
For best results when printing this announcement, please click on link below:
http://newsfile.refinitiv.com/getnewsfile/v1/story?guid=urn:newsml:reuters.com:20221125:nRSY5649Ha&default-theme=true
RNS Number : 5649H Sequoia Economic Infra Inc Fd Ld 25 November 2022
25 November 2022
SEQUOIA ECONOMIC INFRASTRUCTURE INCOME FUND LIMITED
(the "Company" or "SEQI")
2022 INTERIM RESULTS
RESILIENT PERFORMANCE DESPITE CHALLENGING BACKDROP - TARGET DIVIDEND INCREASED
WELL-POSITIONED IN HIGHER INTEREST RATE ENVIRONMENT
The Board of SEQI, the specialist investor in economic infrastructure debt, is
pleased to announce the Company's results for the period ended 30 September
2022.
ROBERT JENNINGS, CHAIRMAN, COMMENTED:
"The Company has continued to demonstrate its resilience against a backdrop of
considerable uncertainty and market volatility, driven by macroeconomic and
geopolitical challenges. The underlying performance of our investment
portfolio has been robust and once again we have outperformed the wider credit
markets.
"The era of ultra-low interest rates is ending. Combined with the resilient
performance of our portfolio, this makes it appropriate and timely to increase
our target dividend by ten per cent.
"We are focused on investing in defensive loans to economic infrastructure
assets with strong credit ratings and better ESG metrics and we remain
confident in our ability to deliver attractive and increasing returns for our
shareholders."
KEY HIGHLIGHTS
· Robust underlying portfolio performance, outperforming credit
markets
· Most of NAV decline due to increasing interest rates and credit
spreads, which contributed to 7.77p per Ordinary Share of NAV decline
· Total return on NAV of -3.8% reflects higher discount rates applied
to portfolio assets which are expected to accrete back to par as loans
approach their repayment dates
· Well positioned to benefit in higher interest rate environment
· Short weighted average life of c.3.9 years creating reinvestment
opportunities
· 57% floating rate investments, capturing short-term rate rises and
reducing interest rate sensitivity
· Diversified portfolio invested in highly stable and defensive asset
class
· Highly defensive sub sectors that provide essential services with
high barriers to entry
· No single investment accounts for more than 3.9% of NAV
· Weighted average equity cushion of 34%
· Increased dividend target with substantially strengthened cash
cover
· Dividends per Ordinary Share of 3.125p (30 September 2021: 3.125p)
· Strengthened dividend cover from 1.06x to 1.40x
· Target annual dividend per share increased to 6.875p p.a. with
immediate effect
· ESG is core to our investment strategy
· Regular TCFD disclosures are published
· ESG score fell slightly due to the impact of valuation changes
· Ongoing disposal of lower-scoring assets in favour of opportunities
that better align with ESG policy
· Attractive pipeline of investment opportunities, focused on credit
quality
· Senior and mezzanine debt opportunities
· Defensive sectors, or borrowers with a high degree of contractual
or predictable income
· Operational projects
FINANCIAL HIGHLIGHTS
30 September 2022 31 March
2022
Total net assets £1,634,909,636 £1,777,042,832
Net Asset Value ('NAV') per Ordinary Share(1) 93.64p 100.50p
Ordinary Share price(1) 81.90p 102.80p
Ordinary Share (discount)/premium to NAV (12.5)% 2.3%
ESG score of the portfolio 61.59 61.88
(Loss)/earnings per share (3.82)p 2.87p
Dividends declared 3.125p 3.125p
1. Cum dividend.
INVESTOR PRESENTATION
The Investment Adviser will host a presentation on the Interim Results for
investors and analysts at 10:00am GMT on Friday, 25 November 2022. There will
be the opportunity for participants to ask questions at the end of the
presentation. Those wishing to attend should register via the following link:
https://stream.brrmedia.co.uk/broadcast/636b9c33aad758108bbd9038
(https://stream.brrmedia.co.uk/broadcast/636b9c33aad758108bbd9038)
Copies of the Interim Report will shortly be available on the Company's
website www.seqifund.com (http://www.seqifund.com) and on the National Storage
Mechanism.
For further information, please contact:
Sequoia Investment Management Company Limited +44 (0)20 7079 0480
Randall Sandstrom
Steve Cook
Matt Dimond
Jefferies International Limited +44 (0)20 7029 8000
Neil Winward
Gaudi le Roux
Tulchan Communications (Financial PR) +44 (0)20 7353 4200
Martin Pengelley
Lisa Jarrett-Kerr
Faye Calow
Sanne Fund Services (Guernsey) Limited (Company Secretary) +44 (0)1481 755530
Matt Falla
Shona Darling
About Sequoia Economic Infrastructure Income Fund Limited
The Company seeks to provide investors with regular, sustained, long-term
distributions and capital appreciation from a diversified portfolio of senior
and subordinated economic infrastructure debt investments. The Company is
advised by Sequoia Investment Management Company Limited.
Chair's statement
The era of ultra-low interest rates is ending. Combined with the resilient
performance of our portfolio, this allows us to increase our target dividend
by ten per cent
Robert Jennings
Chair
It is my pleasure to present to you Sequoia Economic Infrastructure Income
Fund Limited's (the "Company" or "SEQI") Interim Report for the six-month
period of operations ended 30 September 2022.
The half year was a time of considerable uncertainty and market volatility,
which has continued in the subsequent weeks to date. You can take your pick as
to the reasons for this: domestic politics, inflation, the war in Ukraine,
weakness in the collective leadership of the G7, labour shortages, big swings
in currencies, and energy shortages. Whatever the cause, a key consequence has
been an extraordinary increase in sovereign rates in the final weeks of our
half year which had a negative impact on our net asset value and, to a much
more notable extent, on our share price.
However, in line with our relative outperformance in the last six months, as
reflected by our decision, announced today, to increase our target dividend by
ten percent to 6.875p per share per annum, I believe there are a number of
reasons to be positive:
· the era of ultra-low interest rates, in which we have operated
since launch in 2015, finally appears to be ending. Most commentators do not
expect a return to such circumstances any time soon;
· the underlying performance of our investment portfolio has been
robust over the period, especially when compared to other credit markets such
as leveraged loans or high yield bonds;
· the loans we make are quite short - on average we expect to get our
money back within four years. This allows us to be nimble and market‑facing,
able to redeploy capital quickly to take advantage of market conditions such
as higher fixed rate loans or lending to sectors where attractive
opportunities arise. For a lender such as ourselves, market volatility can be
a benefit and a competitive advantage as we can rapidly redeploy capital;
· over half of our portfolio consists of floating rate debt, which
means that in today's inflationary and rising interest rate environment our
portfolio income is now rising rapidly;
· infrastructure is acknowledged to be a relatively safe investment
class, as infrastructure projects are often stable over the economic cycle,
since they often provide essential services with high barriers to entry.
Moreover, the highly diversified nature of our portfolio reduces the impact of
unexpected events.
These matters have played and continue to play to our advantage. We finished
the half year with our portfolio in good shape overall, with the yield on our
invested portfolio having increased from 8.4% to 11.2% over the period. For
some time, we have flagged that although rising rates reduce the value of our
fixed rate loans in the short term, over time the pull to par on this part of
our portfolio becomes stronger. In combination with recent increases in
centrally determined interest rates, particularly in the UK, given the hedged
position we maintain into Sterling, we have now experienced a rise in cash
income from our floating rate loans sufficient to increase our dividend
pay-out target by ten percent, while maintaining dividend cover at an
appropriate level.
NAV AND SHARE PRICE PERFORMANCE
Over the first half of this financial year, the Company's NAV per Ordinary
Share(1) has decreased from 100.50p to 93.64p. Most of the NAV decline is
simply due to increasing interest rates and credit spreads, which also present
an opportunity for the Company, as discussed below. Over the same period, the
Company has paid dividends of 3.125p per Ordinary Share, consistent with our
historic full year target dividend of 6.25p, resulting in a total NAV return1
of -3.8% (not annualised).
Total return(2) over the six-month period
SEQI NAV -3.8%
Leveraged loans -8.0%
High yield bonds -11.5%
Gilts -17.2%
2. Leveraged loans: S&P European Leveraged Loan Index. High Yield
Bonds: Bloomberg Pan-European High Yield Index. Gilts: 10-year benchmark Gilt.
This performance compares well with other debt investments, as shown in the
table above. Infrastructure debt has again shown itself to be resilient in the
face of economic adversity, while the diversity and high level of floating
rate debt within the portfolio reduce our sensitivity to interest rates.
Less pleasingly, the Company's share price had declined to 81.90p on
30 September 2022 from 102.80p on 31 March 2022 and the share price
premium to NAV therefore declined from 2.3% to a discount of 12.5%. After
taking account of dividends, this resulted in a total return over the six
months to 30 September 2022 on the Ordinary Shares of -17.5%. After the
period end, our share price dropped even further but has since recovered to
around 90p.
While the share price decline clearly reflects the wider malaise in the
financial markets, the Company has not been complacent. We have strategically
bought back shares in the market, and the Directors and certain members of our
advisory team have demonstrated their faith in the business by also buying
shares. We do not believe that the levels of discount to NAV that we have seen
reflect the Company's long-term prospects, the resilience of its investment
portfolio, or its ability to generate attractive returns for our Shareholders,
and we anticipate that if unwarranted levels of discount were to reoccur, we
would continue to buy in shares in the market as appropriate.
PORTFOLIO PERFORMANCE
As explained above, the decline in NAV over the period was predominantly
driven by rising long-term interest rates and higher spreads, which together
contributed 7.77p per Ordinary Share to the NAV decline. It is important to
stress that this is an unrealised loss that will naturally reverse itself over
time (the so‑called "pull to par"). The average loan in the portfolio is now
marked at a price of about 91p in the Pound, a level which is unprecedentedly
and materially lower than at any point in the Company's history since its
formation in 2015, and which is a reflection of the higher interest rate
environment that we find ourselves in. Absent any credit events, this price
will trend upwards to 100p in the Pound as each loan approaches its maturity
date.
In fact, the short maturities of our loans mean that this will happen quickly
- we estimate that over the next three years alone, the pull to par should be
worth 5.9p per Ordinary Share.
The Investment Adviser continues to make good progress on resolving and
recovering value from the three previously identified problem assets in the
portfolio, having successfully exited one and made meaningful progress on the
remaining two. These loans now make up only a very small percentage of our
portfolio. Clearly in any debt portfolio there is always likely to be a small
number of under-performing loans and, although our portfolio experienced a
"blip" during the COVID‑19 pandemic (driven by a near shutdown in the
transport sector, and the disruption to energy markets), the number and value
of such loans across our widely diversified portfolio has diminished to more
expected levels.
MARKET OUTLOOK
The economic outlook in the US, UK and other developed economies where the
portfolio is invested has taken on a more challenging tone, with inflation
proving to be more resilient than central banks publicly expected, growth is
negligible or negative, and consumer spending also relatively weak.
It is in such situations that the highly defensive characteristics of economic
infrastructure, and especially lending to economic infrastructure, as opposed
to taking all the risks of equity ownership, should be most valuable to
investors.
The Investment Adviser has for several years now been positioning the
portfolio cautiously. We have targeted an increasing percentage of our
portfolio in senior secured loans, backed by projects with highly defensive
characteristics, such as long-term contractual income from creditworthy
counterparties. Our lending to more volatile infrastructure projects, such as
aviation, container ports or refineries, is negligible.
Our view is that weak economic conditions are likely to persist, therefore we
will remain cautious in our lending that we do. In today's environment, with
higher interest rates and also higher lending margins, we do not need to take
excessive credit risk. Our strategy is to continue to earn a good return for
our investors while targeting the higher quality, more defensive sectors of
the infrastructure market.
DIVIDEND
Portfolio interest income has grown strongly, as the interest earned on our
floating rate loans has increased, and recent capital investments reflect
today's higher interest rate environment. This has resulted in a substantial
strengthening of our dividend cover from 1.06x in the year ended
31 March 2022 to 1.40x over the first half of this financial year. The
transformed cover position supports the significant increase in our target
annual dividend.
The significant increase now apparent in our interest income looks to be more
than temporary. Accordingly, the Board has resolved that the Company's
dividend target should now be increased by 0.625p to 6.875p per Ordinary Share
per annum with a stable dividend cover. This increase will be reflected in our
next quarterly dividend payment, which will amount to 1.71875p per share.
The Board will continue to review the dividend. Our expectation is that
portfolio income will continue to grow, as existing loans mature and the
proceeds are redeployed in today's higher rate environment. If this
transpires, the Board will be in a strong position to consider further
dividend increases in the future.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE ("ESG")
Despite the recent market volatility, and the ongoing economic uncertainty, we
have not taken our eye off the ESG ball. Investing the Company's capital in a
responsible way and engaging on ESG topics with the companies that we lend to,
remains a core part of our investment philosophy.
Each investment that we make is carefully assessed against a broad range of
ESG criteria. Results are then processed to produce an asset-specific ESG
score. Our goal over time is to use our findings from this aspect of our due
diligence process to identify target investments that increase the average ESG
score of assets in our portfolio. In all prior periods subsequent to the
adoption of this methodology, we have successfully done so.
Unfortunately, during the current period, our ESG score fell slightly, as
discussed in the sustainability report. This is principally a consequence of
exchange rate changes that have inflated the value of lower-scoring US
Dollar-denominated loans relative to higher-scoring loans in other currencies,
and is not a reflection of the importance we ascribe to ESG.
In the most recent Annual Report, we published our Task Force on
Climate‑Related Financial Disclosures ("TCFD") disclosures for the first
time. Over the coming years we will see an increasing level of disclosure and
reporting, under a range of frameworks, on ESG matters. This is an exciting
opportunity for the Company, but not one without challenges for a debt fund.
We invest internationally, and are discovering that the quality of ESG
reporting is not consistent across different geographical areas. However we
are working with our borrowers to gather the necessary quantitative data that
will be required in the future. We aspire to be a pioneer in the listed debt
fund sector in the quality and accuracy of our ESG reporting to investors.
CLOSING
I would like to close this year's statement by thanking my fellow Board
members, the Investment Adviser, Investment Manager, our Broker, our
independent advisers, and all other critical service providers who continue to
manage the Company prudently and who have collectively positioned us well to
deliver attractive and increasing returns. Thank you also to our Shareholders
for your continued commitment and support through a difficult period for
markets. We are delighted that the moment has finally come where it is
appropriate for us to increase our target dividend pay-out as just reward to
you for your patience and endurance in the face of the challenging environment
in which we have operated over the last two and a half years.
ROBERT JENNINGS
Chair
24 November 2022
Unaudited condensed interim statement of comprehensive income
For the period from 1 April 2022 to 30 September 2022
Period ended Period ended
30 September 30 September
2022 2021
(unaudited) (unaudited)
Note £ £
Income
Net gains on non-derivative financial assets at fair value through profit or 6 117,439,357 17,490,664
loss
Net (losses)/gains on derivative financial assets at fair value through profit 8 (187,934,965) (25,433,938)
or loss
Investment income 9 27,837,490 68,708,224
Net foreign exchange (losses)/gains (12,011,438) (298,335)
Total income (54,669,556) 60,466,615
Expenses
Investment Adviser's fees 10 6,176,304 5,945,053
Investment Manager's fees 10 183,668 174,573
Directors' fees and expenses 10 189,726 130,800
Administration fees 10 212,125 234,773
Custodian fees 129,013 124,934
Audit and related non-audit fees 97,452 109,065
Legal and professional fees 1,304,816 271,963
Valuation fees 397,400 424,200
Listing and regulatory fees 42,067 73,101
Other expenses 191,039 286,657
Total operating expenses 8,923,610 7,775,119
Loan finance costs 14 3,806,112 2,001,715
Total expenses 12,729,722 9,776,834
(Loss)/profit and total comprehensive (loss)/income for the period (67,399,278) 50,689,781
Basic and diluted (loss)/earnings per Ordinary Share 13 (3.82)p 2.87p
All items in the above statement derive from continuing operations.
Unaudited condensed interim statement of changes in shareholders' equity
For the period from 1 April 2022 to 30 September 2022
Share capital Retained losses Total
For the period from 1 April 2022 to 30 September 2022 (unaudited) Note £ £ £
At 1 April 2022 1,837,390,531 (60,347,699) 1,777,042,832
Total comprehensive loss for the period - (67,399,278) (67,399,278)
Share buy-backs 12 (19,552,003) - (19,552,003)
Dividends paid during the period 5 - (55,181,915) (55,181,915)
At 30 September 2022 1,817,838,528 (182,928,892) 1,634,909,636
Share capital Retained losses Total
For the period from 1 April 2021 to 30 September 2021 (unaudited) Note £ £ £
At 1 April 2021 1,831,856,145 (12,725,764) 1,819,130,381
Issue of Ordinary Shares during the period 3,520,509 - 3,520,509
Total comprehensive income for the period - 50,689,781 50,689,781
Dividends paid during the period 5 - (55,125,965) (55,125,965)
At 30 September 2021 1,835,376,654 (17,161,948) 1,818,214,706
Unaudited condensed interim statement of financial position
At 30 September 2022
30 September 31 March
2022 2022
(unaudited) (audited)
Note £ £
Non-current assets
Non-derivative financial assets at fair value through profit or loss 6 1,842,784,530 1,770,022,999
Current assets
Cash and cash equivalents 7,920,800 8,759,040
Trade and other receivables 7 116,436,226 143,092,101
Derivative financial assets at fair value through profit or loss 8 3,172,164 17,536,684
Total current assets 127,529,190 169,387,825
Total assets 1,970,313,720 1,939,410,824
Current liabilities
Trade and other payables 15 4,607,397 3,855,430
Derivative financial liabilities at fair value through profit or loss 8 137,840,495 37,143,642
Total current liabilities 142,447,892 40,999,072
Non-current liabilities
Loan payable 14 192,956,192 121,368,920
Total liabilities 335,404,084 162,367,992
Net assets 1,634,909,636 1,777,042,832
Equity
Share capital 12 1,817,838,528 1,837,390,531
Retained losses (182,928,892) (60,347,699)
Total equity 1,634,909,636 1,777,042,832
Number of Ordinary Shares 12 1,746,023,939 1,768,238,998
Net asset value per Ordinary Share 93.64p 100.50p
The unaudited condensed interim Financial Statements were approved and
authorised for issue by the Board of Directors on 24 November 2022 and signed
on its behalf by:
SARIKA PATEL
Director
Unaudited condensed interim statement of cash flows
For the period from 1 April 2022 to 30 September 2022
Period ended Period ended
30 September 30 September
2022 2021
(unaudited) (unaudited)
Note £ £
Cash flows from operating activities
Profit for the period (67,399,278) 50,689,781
Adjustments for:
Net losses/(gains) on non-derivative financial assets at fair value through 6 (117,439,357) (17,490,664)
profit or loss
Net (gains)/losses on derivative financial assets at fair value through profit 8 187,934,965 25,433,938
or loss
Net foreign exchange losses 12,011,438 298,335
Investment Adviser's fees settled through issue of Ordinary Shares - 578,340
Loan finance costs 14 3,806,112 2,001,715
Decrease/(increase) in trade and other receivables (excluding loan finance 26,180,002 (19,026,951)
costs)
Increase/(decrease) in trade and other payables 92,721 (30,125)
45,186,603 42,454,369
Cash received on settled forward contracts 12,016,690 29,872,681
Cash paid on settled forward contracts (84,890,282) (3,568,266)
Purchases of investments 6 (227,862,945) (262,100,275)
Sales of investments 6 272,540,771 232,600,275
Net cash inflow from operating activities 16,990,837 39,258,784
Cash flows from financing activities
Proceeds from loan drawdowns 14 118,712,919 6,000,000
Loan repayments (60,000,000) -
Payments of loan finance costs (2,695,376) (1,848,674)
Share buy-backs (19,552,003) -
Dividends paid(1) 5 (55,181,915) (52,183,796)
Net cash outflow from financing activities (18,716,375) (48,032,470)
Net decrease in cash and cash equivalents (1,725,538) (8,773,686)
Cash and cash equivalents at beginning of period 8,759,040 20,018,189
Effect of foreign exchange rate changes on cash and cash equivalents during 887,298 (7,216)
the period
Cash and cash equivalents at end of period(2) 7,920,800 11,237,287
1. Excludes non-cash transactions.
2. Includes restricted cash of £2,909,147 (31 March 2022: £nil).
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact
rns@lseg.com (mailto:rns@lseg.com)
or visit
www.rns.com (http://www.rns.com/)
.
RNS may use your IP address to confirm compliance with the terms and conditions, to analyse how you engage with the information contained in this communication, and to share such analysis on an anonymised basis with others as part of our commercial services. For further information about how RNS and the London Stock Exchange use the personal data you provide us, please see our
Privacy Policy (https://www.lseg.com/privacy-and-cookie-policy)
. END IR FLFSTLLLSFIF
Recent news on Sequoia Economic Infrastructure Income Fund
See all newsBrief: Sequoia Economic Infrastructure Income Fund's NAV Per Share Decreased To 90.43 Pence As At Sept 30, 2026
Sequoia Econ Infra - Holding(s) in Company
RCS - Sequoia Econ Infra - QuotedData's In The HotSeat Special
Sequoia Econ Infra - PDMR / PCA Shareholding
Sequoia Econ Infra - Director/PDMR Shareholding