On 11 July 2023, ThomasLloyd Energy Impact received a requisition on behlf of ThomasLloyd Cleantech Infrastructure Fund SICAV and ThomasLloyd SICAV – Energy Impact Credit Fund. It asks that the three resolutions which were not voted on at the AGM on 30 June 2023, including the continuation vote, be put before shareholders. The company is now required to convene a general meeting for the purpose of allowing shareholders to consider and vote on those three resolutions.
The board wanted shareholders to have the opportunity to make a fully-informed decision on the company’s future once the delayed annual report for 2022 had been published. Uncertainties about the Solar Arise project in India are still holding that up.
This announcement highlights a number of reasons why the board is unanimously recommending that shareholders vote against the continuation resolution at both the requisitioned general meeting and the adjourned AGM (for legal reasons the AGM stil has to be concluded). The board says that this is not a recommendation that it makes lightly because, like many shareholders, it believes in the value of the impact strategy the company was established to deliver.
Some introductory remarks from the board
The board, with complete independence and with no pre-set agenda, is assessing the position of the company and whether the board believes that shareholders should vote for the company to continue in its present form. It is the board’s duty to deliver effective governance and oversight of the company’s investment manager, ThomasLloyd Global Asset Management (Americas) LLC, on behalf of shareholders.
The board has been engaging with shareholders following the suspension of listing and trading of the company’s shares on 25 April 2023 and understands fully that an end to the suspension is one of shareholders’ highest priorities. In order for this to be achieved, the financial statements for the financial period ended 31 December 2022, annual report and audit for the financial period ended 31 December 2022 must be completed and the annual report and financial statements published.
The holding of a continuation vote is not a precondition to the ending of the suspension and the outcome of the vote on the continuation resolution will not prevent or further delay the financial statements, annual report and the 2022 audit being completed or the suspension being lifted.
When the board first became aware of the serious issues facing the company in relation to the 200 MW DC solar PV to-be-constructed project in Rewa Ultra Mega Solar Park in India (the RUMS Project), the board resolved that it was not in the interests of the company and its shareholders to have a public dispute with the manager and the board wished to work constructively with the manager to seek to ensure that the board and shareholders have a full understanding of the position and resolve the situation as quickly as possible.
The board’s recommendation to adjourn the AGM on 30 June 2023 prior to voting on the continuation resolution was primarily based on its judgement that it was simply not sensible or realistic at that time to expect anyone to form a considered view on the financial position and prospects of the company (i) whose valuation is uncertain, (ii) whose principal construction asset is economically unviable and where the non-completion penalties may be substantial, (iii) whose financial statements, annual report and 2022 audit cannot currently be completed, (iv) whose shares are suspended from trading and (v) where there is no clear strategy for the future of the company.
The board’s secondary motivation was to work privately with the manager to ensure that the board, its advisers and the auditor (Deloitte LLP), could establish with confidence what had happened with the RUMS Project and to undertake other significant workstreams required to get the company back on track, if possible. The requisition means that is not possible.
The board’s reasons to vote against
Continued delay in finalising valuations
The board is keen to get to the bottom of:
- who at the manager was aware the RUMS Project had become economically unviable and at what time;
- why the economic unviability was not disclosed to the board or the auditor until 17 April 2023; and
- why the liabilities relating to non-completion of the RUMS Project provided to the board on 21 April 2023 were estimated to be only $5m whereas subsequent analysis has revealed they could be up to $33.5m.
In addition, it says that material information has only very recently been provided to the board in relation to Talettutayi Solar Projects Eight Private Limited, a Solar Arise subsidiary, which on 5 December 2022 won 100 MW AC of capacity in a reverse auction for a solar PV project with an estimated cost of $69m to be constructed in the State of Maharashtra. Information on this project should have been provided to the board and the auditor for the purposes of evaluating the 31 December 2022 valuations – it was not. In addition, the potential cash equity requirements included in the investment deployment of existing cash resources and cashflow projections for the company provided to the board and the auditor did not include this project.
The board says “The issues set out above, as well as the other valuation issues referred to below, illustrate the challenges that the board and the auditor now have in being able to satisfy themselves about the quality and reliability of the information being given to them by the investment manager.”
Against this backdrop:
With respect to the need for a comprehensive investigation into what happened and who knew what and when, the board figured it needed to work jointly with the manager to expedite the conclusion of the investigation.
However, the manager (or one of its affiliated companies) has appointed an investment operations and risk advisory services firm to investigate some matters on its own behalf. The manager has refused to give the board the opportunity to approve or input into, or even access to, that consultant’s scope of work. The manager has shared a copy of the scope with the auditor but prohibited the auditor from sharing the scope with the board.
The board has also been informed by the manager that neither the board nor the auditor will be given access to the consultant’s final report. Instead, the manager has proposed that its own summary of the findings of its consultant’s report is presented only to the auditor, again prohibiting the auditor from sharing that information with the board. [As the board points out, prohibiting the auditor from sharing information with the board is not acceptable – the board can’t take responsibility for something it is not aware of].
The board is concerned that the investigation might not be independent. It says that the manager’s Chief People Officer [yuck] was present throughout the consultant’s interview of at least one of the manager’s employees.
The board sent the manager a list of critical questions for it to answer on 19 June 2023, with follow-up emails sent on 27 June and 13 July 2023 and, to date, the board has not received any meaningful answers to them.
In short, some three months since the suspension, the board still does not have the full picture of what happened with the RUMS Project and, in particular, has no information regarding who at the manager knew what and when in relation to the economic viability of the project and why material matters were not brought to the board’s attention until April 2023 [that alone justifies standing with the board and voting against continuation, we think].
In the face of this, the board is commissioning extra work by the auditor, which add extra cost and delay to getting the suspension lifted.
Continuing uncertainty over the company’s financial position
In May 2023, the board appointed PricewaterhouseCoopers LLP to assist the AIFM and the board with the finalisation of the valuation of the portfolio as at 31 December 2022. As announced on 12 July 2023, the board has received a draft report from PwC. Based on the issues being considered, the board believes that the portfolio valuation as at 31 December 2022 could reflect a material downward movement relative to the 30 September 2022 valuation and to the draft valuations as at 31 December 2022 provided to the board in February 2023.
Shareholders should also note that the 31 December 2022 valuations will also reflect: (i) a leading independent power consultancy’s price forecasts for the Philippines wholesale electricity spot market price, which was commissioned by the board in December 2022 and were below the forecasts previously used by the manager; and (ii) amendments to the manager’s valuation models following an external audit of them commissioned by the board in January 2023.
The board is currently considering several matters, which are wider ranging and more concerning than just the macro-economic factors which have driven valuation revisions across the infrastructure sector, including whether revenue, operating cost and tax projections were unrealistically optimistic [our emphasis – this is deeply worrying and raises a lot of questions].
In addition to the above and, as previously announced, $8.2m of costs are expected to be written off if the RUMS Project does not proceed and a further reduction in the fair value as at 31 December 2022 is expected to be required due to the contingent liability risk associated with non-completion penalties for the project and legal costs which are estimated to be up to $33.5m on the basis that the project would not have gone ahead at that date.
The price of solar modules has fallen in recent weeks and the manager has determined that there are circumstances where it could now be in shareholders’ interests to proceed with construction and is currently assessing this option with the board. If the RUMS Project does proceed, which the Board expects would be subject to prior FCA and shareholder approval for a material change to the country limit in the company’s investment policy, the project would still be expected to have a material negative net present value at the current time.
In short, therefore, the company’s financial position is hard to ascertain based on the information currently available but is likely to show a material downward adjustment in the NAV.
Lack of a plan from the manager to assist in the potential relaunch of the company
The board asked for an updated fund model from the manager to confirm whether the company’s target returns are still realistic and whether changes to the investment strategy or policy should be considered. Despite repeated requests for this information, it has not been received by the board. An investment proposal promised by the manager by end-July had not arrived by the time that the statement was published. [Honestly, we cannot envisage how investors might be persuaded to put up additional money for the fund given this dispute and its track record. That is another reason to discontinue the fund].
Conclusion
In summary, the board has been working tirelessly to provide shareholders with full information on the company’s position, facilitate the completion of the 31 December 2022 valuations and the 2022 audit and enable trading in the company’s shares to resume. The Board was seeking to work privately with the investment manager and present shareholders with a full picture prior to asking them to vote on the continuation resolution, but the board’s hand has been forced by the requisition.
The board considers that there are serious and currently unanswered questions regarding the valuation of the company’s investments and the approach taken by the investment manager. The board therefore has no alternative but to recommend that shareholders vote against the continuation resolution at each of the meetings.
What happens if continuation is not approved
First, the board will consult shareholders with a view to establishing the most appropriate way forward. Unsurpisingly, many shareholders believe that the original idea of the fund is still worth supporting. The board says it would consider a relaunch of the company [presumably with another manager] as well as an orderly managed wind-down. Proposals would be put to shareholders within four months of the vote. A vote against continuation entitles the company to terminate its investment management agreement without further payment in respect of the manager’s initial five-year term of appointment [this is very good news for shareholders]. In the circumstances, the board believes that it is in the interests of shareholders to have that option to terminate.
The board points out that some shareholders are under the impression that the company’s listing will be cancelled automatically by the FCA if the suspension lasts for more than six months. This is not the case [as the Home REIT saga has ilustrated]. The FCA has the right to cancel the company’s listing after this deadline, but in practice is unlikely to do so while the company continues to take active steps towards the publication of the anual report.
Details of the meetings are here
Message from the chair
Sue Inglis, chair of ThomasLloyd Energy Impact Trust said: “The board is extremely disappointed that the investment manager has failed to explain who knew what and when about the economic unviability of the RUMS Project. The investment manager’s approach is forcing us to commission due diligence reports to ensure we have complete and reliable information on the company’s investments, further delaying publication of the annual report and lifting the suspension. Combined with the significant loss arising from the RUMS Project, an expected material downward adjustment to the valuation of other investments, and the lack of a forward-looking plan from the investment manager, this leaves us with no option but to recommend voting against continuation.”
TLEI : ThomasLloyd Energy Impact board calls for vote AGAINST continuation