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 March2022 | |
| Total net assets | £1,634,909,636 | £1,777,042,832 |
| Net Asset Value (‘NAV’) per Ordinary Share1 | 93.64p | 100.50p |
| Ordinary Share price1 | 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
Copies of the Interim Report will shortly be available on the Company’s website 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 Share1 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 return2 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 loss | 6 | 117,439,357 | 17,490,664 |
| Net (losses)/gains on derivative financial assets at fair value through profit or loss | 8 | (187,934,965) | (25,433,938) |
| 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 profit or loss | 6 | (117,439,357) | (17,490,664) |
| Net (gains)/losses on derivative financial assets at fair value through profit or loss | 8 | 187,934,965 | 25,433,938 |
| 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 costs) | 26,180,002 | (19,026,951) | |
| 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 paid1 | 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 the period | 887,298 | (7,216) | |
| Cash and cash equivalents at end of period2 | 7,920,800 | 11,237,287 |
1. Excludes non-cash transactions.
2. Includes restricted cash of £2,909,147 (31 March 2022: £nil).