The board of SDCL Efficiency Income (SEIT) has warned it may not recommend shareholders vote for the company’s continuation next year after a six-month period that has seen debt levels jump above a 65% limit, partly after a small fall in its portfolio, and its shares continue to trail on a steep discount to net asset value (NAV).
The £683m investor in energy efficiency infrastructure projects, in which activist Saba Capital took a 5% stake in September, has entered exclusive talks with a potential bidder for one of its assets and hopes to complete the sale around the end of its financial year in March.
This comes as its board prioritises disposals in order to reduce debt that half-year results show has hit 71.9% of NAV, nearly seven percentage points above the ceiling on total borrowing.
The shares tumbled 18%, or 11.4p, to 51.5p.
Although the portfolio is performing in line with expectations with earnings covering the 6.36p dividend per share target by 1.2 times, NAV dipped 3p to 87.6p per share in the six months to 30 September in response to difficult market conditions and regulatory upheaval in the US.
Before today’s fall, shares in the 10%-yielder languished on a 31% discount, and, at 63p at Friday’s close, stood at nearly half their peak in July 2022. Chair Tony Roper said: “Our priority remains to make disposals but also to take action to find an alternative to the status quo, whilst ensuring that we deliver value for all shareholders.”
At annual results in June, SEIT had said it was looking at “all strategic options“.
In a sign that the company is under pressure from Saba and other investors to take action, fund manager Jonathan Maxwell said while the investment trust was well positioned for growth, “given the discount to net asset value at which SEIT’s shares trade in the market and the sectoral constraints on accessing capital, we are also actively developing proposals to affect structural change to unlock value for shareholders”.
Roper underlined the short timeframe for the company to resolve its problems, stating that without “material success” in disposals, debt reduction and returning capital to shareholders, “the board is unlikely to recommend continuing in the current form” when investors vote at the company’s next annual general meeting in September.
He added: “In the current market environment, it takes time to find the right investors to acquire our investments at acceptable prices, and time is limited. The board will not wait until the AGM should we be in a position to present a solution with the investment manager beforehand or if we feel, acting independently, that alternatives serve the best interests of shareholders.”
Roper said the main factor in the recent debt increase was not the fall in NAV but the board’s decision to categorise the tax equity bridge loan facility at Onyx, a 6% US holding, as a form of borrowing that should be included in the company’s gearing ratio.
Roper said the board had issued a “clear instruction” to its manager Sustainable Development Capital (SDCL), where Maxwell is chief executive, that no further borrowings were to be incurred until gearing was reduced below 65% of NAV. The disposal underway would reduce gearing below this limit, he said.
Our view
James Carthew, head of investment company research at QuotedData, said: “There are many moving parts to SEIT’s business and much of the NAV reduction appears to relate to specific problems with individual investments. However, the caution expressed by the manager about the pressure to sell assets in a buyers’ market rings true for much of the renewable energy sector. Both the board and the manager seem committed to addressing SEIT’s wide discount, and that and the high dividend yield are my main reasons for holding the stock.”
