GCP Infrastructure Investments has announced its interim results for the half year ended 31 March 2016. During the period, the company advanced loans totalling £46.4msecured against UK renewable energy, social housing and PFI projects, with a further £11.5 million advanced post period end. The company also made a profit of £21.9m and has paid a dividend of 3.8p per share. £20m was raised through a significantly oversubscribed share issue and the company’s portfolio was valued by a third party at £687.4m. The company finished the period end with an NAV per share of 107.68p, up 2.8% from 104.74p due to investment revaluations and the accretive nature of the share issuances. The share price fell 3.1% over the period but the company trading at an average 9.1% premium to NAV.
The company’s board say that the inflow of capital into the UK infrastructure sector continued unabated during the period with investors attracted to the perceived stability and dependability of UK infrastructure investments, particularly in a volatile and uncertain market and a low interest rate environment. However, they say that the supply of new assets has not matched this investor appetite (in their view the volume of projects procured under PFI and PF2 over the last five years has not reached the levels expected by the industry) and this restricted pipeline has resulted in a highly competitive secondary market.
In terms of outlook, the board say that this imbalance between supply and demand, combined with the very low interest rate environment, has driven down yields on UK infrastructure assets with dependable UK public sector backed cash flows, continuing a movement in pricing that has been going on for several years. They say that institutional investors in particular tend to be restricted to opportunities larger in size and profile, with additional parameters limiting investments to specific types of project technology, security and with overall limits to construction exposure. In response to these challenging market conditions, the Company has focused on working with existing borrowers where strong relationships have enabled it to lend at what they describe as attractive rates against well-performing operational assets. However, the board say that the Company remains well positioned to achieve attractive returns in respect of opportunities relating to smaller infrastructure projects in areas that are poorly served by the broad lending market. Particular areas of focus are social housing for vulnerable adults, small scale PFI and established areas within the renewable energy sector.
In terms of portfolio activity, the Company made eight investments totalling £46.4m during the period, five of which were made under existing facilities. The Company’s GCP Onshore Wind 2 Limited loan was repaid during the quarter. Since the repayment was unscheduled, the amount repaid included a fee and was greater than its valuation. Post period end, the Company advanced £11.5 million under existing facilities.
In terms of operational performance, the company says that its PFI and social housing projects have experienced no material operational or construction issues. However, it also says that, whilst the operation and construction performance of the renewable energy projects against which the Company has made loans has been materially as expected, a number of macro-economic and policy factors have negatively impacted forecasted net cash flows. The removal of the Climate Change Levy exemption, lower than anticipated power prices and the continuing low inflation environment have all reduced the predicted income generated. However, the company also says that it is the current expectation of the Investment Adviser that the cash flows expected to arise from such projects in the form of debt service payments will not be affected. With regard to asset specific issues, the company says that cash flows generated by two biomass projects have been lower than expected due primarily to delays in grid connection and slower than predicted operational ramp up. However, they say that, in one of these cases, action has been taken to support the borrower and ensure that the Company’s investment is protected. As a result no material concerns have arisen in relation to the performance of the Company’s loan. With respect to the other biomass project, the company says its advisers have worked closely throughout the period to consider alternative actions available to address the continuing underperformance of the plants. The Board has conducted an ongoing evaluation of the cost of remedial capital works and refinancing options, and as a result concluded in November 2015 that the valuation of the loan should be reduced by 0.35% of the Company’s NAV and further in March 2016 by 0.44% of the Company’s NAV. The aggregate impact of these revaluations was a reduction of 0.79% in the Company’s NAV as at 31 March 2016.
In the period there has been a continued tightening of yields available on operational renewables assets, in November 2015 certain wind assets were revalued upwards by the Valuation Agent and subsequently, in March 2016, certain solar assets in the portfolio were revalued upwards. The aggregate of these revaluations was an increase of 0.4% in the Company’s NAV as at 31 March 2016.
GCP infrastructure benefits from revaluations and accretive share issuance : GCP