Sequoia Economic Infrastructure Income hits dividend target following challenging year – Sequoia Economics Infrastructure Income (SEQI) has published its results for the year ended 31 March, during which time it achieved a NAV total return of 13.5% and a share price total return of 17.4%.
SEQI also hit its target of paying a fully cash-covered dividend of 6.25p per ordinary share and confirmed it is maintaining the dividend target for the 2021/22 financial year, believing this will provide scope for its cash cover ratio to strengthen somewhat over the course of the year.
Statement from the chairman:
The last financial year was challenging for many parts of the economy, including some infrastructure sectors such as transport, aviation, student accommodation and electricity generation. However, overall the Company’s portfolio has performed robustly over this period. Some sectors, such as telecoms infrastructure, have actually had a strong year, as they have benefited from the various COVID-19 lockdowns around the world; other assets, in sectors that are more exposed to COVID-19, have by and large been robust enough to “weather the storm”. In fact, we have had remarkably few borrowers who have shown material levels of financial distress. This speaks to the resilience of infrastructure as an asset class.
Most of the transactions which required closer monitoring this time last year have materially improved in credit quality since then. Only one transaction, a loan in the mid‑stream sector in the US, needed to be comprehensively restructured: in return for a reduction in debt, that borrower granted the Company an equity stake in its business. Although this equity stake is illiquid and difficult to value, the significant increase in oil and gas prices since the restructuring has without doubt led to an increase in its value.
We estimate that as at the end of the financial year, the restructuring has resulted in an unrealised loss to the Company of 1.14p per Ordinary Share. However, this loss may decrease in the future, potentially to nil or better, if the price of oil and gas remains elevated and the value of our equity stake in the business continues to increase.
Partially offsetting this, the Company made a substantial realised gain of approximately 1.36p per Ordinary Share, following the repayment at par of a loan (backed by a German toll road) that it had previously bought in the secondary markets at a weighted average price of 57.1% of par. In addition, the Company collected significant fee revenues of circa £7.3 million over the course of the year, which also helped to support the NAV performance.
During the financial year, the Investment Adviser has had a highly selective approach to new investments. This was in part the consequence of a high level of monitoring and credit management of the portfolio over a turbulent year, but also reflected prudence in light of uncertainty about the speed of the economic recovery. In general, we have prioritised investments in lower‑risk parts of the infrastructure market, which typically have only a moderate or low correlation to the economic cycle, such as, for example, businesses with a high degree of contractual income.
Current state of markets
Overall, the infrastructure debt markets are in a much healthier position than they were 12 months ago. Credit quality is improving as economies have emerged from lockdown and uncertainties in different parts of the market have abated.
In particular, we are seeing excellent opportunities in several parts of the market. The first of these is the infrastructure required for the transition to a lower carbon world, such as renewable energy and related projects, electric vehicles, battery storage, and various mass transport projects. Secondly, infrastructure in the telecoms sector remains attractively priced, including assets such as mobile phone towers, data centres and broadband. We have been able to find attractive opportunities to lend in these sectors where traditional bank lenders are unable to provide the required capital. Thirdly, infrastructure projects still find it difficult to source mezzanine or subordinated debt from lenders, and the shortage of this type of capital provides the Company with attractive lending opportunities across a wide range of sectors.
The Investment Adviser has assembled a strong pipeline of potential infrastructure loans, which have attractive yields and good credit quality, and will also further diversify the portfolio and increase its ESG score. Importantly, we continue to have a highly selective approach to investment, with the vast majority of potential loans being rejected.
Whilst a benign economic environment cannot be taken for granted, the signs currently are that each of the jurisdictions in which we are invested are going to experience strong economic growth over the coming year. This should be positive for the credit quality of the portfolio. A moderate level of inflation is also, in general, positive since in most cases our borrowers have revenues that directly or indirectly link to inflation, and therefore moderate inflation helps them to de-lever.
We are mindful of the risks of increasing interest rates from the current abnormally low levels. Although we would not welcome inflation rising significantly or becoming persistent, in general, an increase in short-term interest rates (i.e. policy rates) is positive for the portfolio, given the high level of floating rate debt held. In contrast, an increase in longer‑term interest rates is likely to have the effect of decreasing NAV in the short term, since the value of fixed‑rate loans will decrease. But, in the medium term it too should be positive, since reinvestment opportunities will offer higher interest rates, and moreover prices of existing fixed-rate loans will pull to par as they get closer to maturity. We therefore believe overall the portfolio is well positioned for an increasing interest rate environment.
SEQI : Sequoia Economic Infrastructure Income hits dividend target following challenging year