Sequoia Economic Infrastructure Income achieves ‘solid performance’

Sequoia Economic Infrastructure Income achieves ‘solid performance’ – Sequoia Economic Infrastructure Income (SEQI) has posted its final results for the year to 31 March 2022.

During the period under review, SEQI’s NAV per Ordinary Share decreased from 103.18p to 100.50p, after paying dividends of 6.25p, producing a NAV total return of 3.5%, lower than its target return of 7-8%. Meanwhile, its share price also declined over the year, from 104.20p to 102.80p, a share price total return of 4.5%, once dividends are taken into account. The slight fall in the share price reflects the decline in the NAV, offset slightly by improvement in the company’s premium, which increased from 1.0% at the beginning, to 2.3% by the end of the year.

Despite the volatility experienced over the year, SEQI achieved its target of paying a fully cash‑covered dividend of 6.25p per Ordinary Share. It plans to hold the payout at its current level, notwithstanding that its interest income is increasing and it expects a further strengthening in the dividend cash cover ratio.

The company said against the backdrop of rising interest rates across the yield curve, particularly over the final quarter of the financial year, that this is a solid performance, having outperformed the liquid credit markets and now experiencing a pick up in income on its floating rate assets. 

Chair’s outlook:

We are taking full account of the risks – and opportunities – that higher inflation may present. In general, a moderate amount of inflation is helpful for the credit quality of the companies that we lend to. This is because in many cases these companies are able to increase their revenues more or less in line with inflation, while their debts remain the same in nominal terms. In other words, inflation reduces the real amount of leverage that our borrowers have. There, however, is a risk, currently exacerbated by high energy prices and the ongoing consequences of Russia’s invasion of Ukraine, that central banks decide to address inflation aggressively, reducing growth in the economy or even triggering a recession and a period of stagflation.

While we do not welcome recessionary pressures in any of the countries where we hold investments, the resilience of our borrowers to recession is one of the most important factors that our Investment Adviser evaluates in its loan assessment processes.

We are also mindful that interest rates are increasing and are likely to continue to do so. As noted above, an increase in short-term interest rates is positive for the portfolio, given the high level of floating rate debt held. While increases in longer-term interest rates are likely to have the effect of temporarily decreasing NAV, since the values of fixed-rate loans decline, they too should eventually be positive for the Company, since reinvestment opportunities will offer higher interest rates, and prices of existing fixed-rate loans will pull to par as they get closer to maturity. We therefore believe that overall the portfolio is well positioned for an increasing interest rate environment.

SEQI : Sequoia Economic Infrastructure Income achieves ‘solid performance’