SQN Secured Income Fund (SSIF) has provided an update on plans to increase its size significantly. The fund’s manager, SQN Asset Management, sees this as an opportune time to increase the size of the fund and proposes to do this via a capital raise.
The opportunity
SQN Asset Management says that, anticipating a period of political and market instability, it sees this as an opportune time to increase the size of the fund and capitalise on an expanding opportunity set as cracks start to develop in the portfolios of non-traditional underwriters and volume driven platforms. It expects this to lead to either the sale of quality segments of seasoned portfolios or a reduction in competition around attractive risk adjusted high-yield transactions as other non-traditional investors shift their focus to portfolio maintenance.
Preparing for a market dislocation
SQN Asset Management says that it has spent the last 18 months restructuring and balancing SSIF’s portfolio in preparation of a widely forecasted market dislocation among alternative lenders. During this period, it says that it has implemented a robust traditional underwriting regime, reduced exposure to platforms that did not maintain the same underwriting standards, increased the direct investment segment of the portfolio, established a healthy pipeline of new business, and increased the dividend to 7p per share which represents a yield of 7.69% annually based on the last published NAV.
Growth Strategy is now a key focus
SSIF’s announcement says that growth by way of a capital raise is now a key focus. It says that this is in order to take advantage of these attractive opportunities (with or without a market dislocation), further enhance the direct investment portion of the portfolio, increase liquidity for shareholders, and lower the overall cost ratio for the Company.
Proposed Equity Issue in Q1 2019 with application for premium listing
SSIF proposes an equity issue in the first quarter of the 2019. It expects that this will be either a tap issue or a larger target capital raise (of between £50 million to £100 million) sized according to the number of opportunities at hand. SSIF says that, with the growth of the asset base, it will seek to maintain its current dividend level of 7p per share per annum with the aim of moving towards delivering its target total return of 8% per annum over the medium term.
The details of the proposed equity issue are subject to final determination by the SSIF Board and also shareholder and regulatory approval. However, it is SQN Asset Management’s current expectation that the proposed equity offering will be an issue of Ordinary Shares and/or C Shares and, concurrently, SSIF will apply for a Premium Listing on the Official List of the London Stock Exchange.
Somerston Sell Down
In further support of SSIF’s relaunch and growth plan, Somerston (owner of c.28% of SSIF) has agreed to make up to 11,780,000 of its shares available to new investors at a price of 95p per share (a 2.2% discount to the last published NAV in October). These “Option Shares” represent approximately 80% of Somerston’s entire shareholding in SSIF. The Investment Manager and the SSIF Board say that they see this as an important step in further broadening SSIF’s investor base and it is expected that any increased free float of SSIF’s shares will boost liquidity in the market.
To the extent that Somerston retains any Option Shares at 31 March 2019, the Investment Manager has agreed to buy any such residual shares at 95p per share with a view to making such shares available to new investors as SSIF’s growth strategy takes its course. The number of Option Shares has been agreed such that the Investment Manager can at most hold shares representing 29.9% of SSIF’s voting rights and as such no obligation under Rule 9 of the Code will be triggered.
A unique investment vehicle that is well positioned for changing market dynamics
Commenting on the announcement, Dawn Kendall, Managing Director of SQN Asset Management, said, “We are delighted to announce this relaunch and growth plan for SSIF. This fund has tremendous potential and in the face of significant economic and political uncertainty, offers a unique investment vehicle that is well positioned for changing market dynamics, in addition to providing a significant source of uncorrelated dividend income for investors.”
“Although much work has already been successfully achieved, this relaunch will transform the size of the fund, improve liquidity, provide our shareholders with the benefits from being invested in a larger fund with a more significant critical mass and the opportunity to invest in our considerable pipeline of new transaction underwritten by our credit team.”
About SQN Secured Income Fund
The SQN Secured Income Fund aims to provide shareholders with attractive risk-adjusted returns predominantly through investment in a range of SME loan assets and secured lending opportunities, diversified by way of borrower, sector, duration and geography. It seeks investments collateralised by a broad range of assets including receivables, income streams, subsidies, grants, real property, tax credits and rebates, loan portfolios and other pools of financial assets. Investments are originated directly and through third-party relationships, including alternative finance platforms addressing underserved segments of the market. The Fund has been specifically constructed to provide downside protection by way of structured collateral packages for each individually underwritten investment.