SQN’s premium expands although a number of accounts have required attention

SQN Asset Finance Income Fund (SQN) has announced its interim results for the year ended 31 December 2016. During the period, the company’s ordinary share NAV decreased by 0.01% but the ordinary shares are paying a monthly dividend equivalent to 7.25% of NAV annually and, in October 2016, the c-shares achieved a level of income allowing them to be converted into full ordinary shares. The share price increased by 7.0% to 114.5p per share, reflecting an expansion of the premium to 15.1%. In terms of performance, SQN says that there have been a number of accounts that have required attention but that is to be expected given the rates achieved and the project-finance structure of many of the transactions. It says that its underwriting process is designed to address these situations when they arise and that each investment is underwritten from a credit quality and asset security point-of-view. The primary analysis is cash flow coverage with the asset security being an additional enhancement. In the event that there is a disruption in cash flows, the business essential element of the assets creates opportunities to manage through.

SQN says that it continues to focus on business-essential assets and equipment in the £1 million to £50 million range, with a particular focus on transactions up to £30 million. It says that this remains an underbanked segment of the market which can be increasingly efficiently served as the fund continues to grow and maintains its position as a leading participant in that market. As at the end of 2016, SQN had invested approximately £343 million in equipment leasing and asset financing transactions spread over more than 15 different industries and asset classes.

The average investment size is now just short of £7 million, with a weighted average term of 91.46 months. The weighted average projected yield on investments remains in excess of 9.5% which SQN says should result in consistent incremental month on month capital growth for the ordinary shares. SQN says that its ongoing charges ratio was in line with expectations and is now forecast to decrease with the increased capital base and the management fee reducing further to 0.8% per annum on net assets over £500 million.

Anaerobic digestion plants, which SQN considers as agricultural industry, account for 18.06% of NAV and is the single largest asset class. SQN says that investments in this sector are slowing as government subsidies that support the economics of these projects are scheduled to be scaled back at the end of the first quarter of 2017. Projects certified prior to the scale back date will be eligible for the subsidies for 15 to 20 years which includes all such Group investments.

The portfolio continues to comprise primarily finance leases and secured asset financings with more than 95% of expected revenue from fixed, non-cancellable contracts. The current pipeline of transactions is anticipated to maintain this same proportion of full payout contracts. SQN says that, although the majority (71.1%) of the its assets are in Sterling, part of the portfolio (15.3%) is in US Dollars and (13.6%) in Euros where both the capital and known income streams are appropriately hedged. With Sterling weakening following the Brexit vote, there have been margin calls which have been adequately met and SQN says that it shall continue this strategy.

In terms of outlook, SQN says that its investment managers continue to find excellent deals in the marketplace and that it is going into 2017 with a strong cash position and the largest pipeline of transactions to date. SQN says that deal flow coming from advisors and consultants is increasing and no significant competitors have entered the market with banks remaining, for the most part, focused on pure credit lending. Rising interest rates should have a minimal effect on the pipeline in its view, but, to the extent that it does, SQN says that this should make its pricing relatively more attractive or result in slightly increased yields on new investments.

SQN’s premium expands although a number of accounts have required attention : SQN