Octopus Renewables Infrastructure Trust launches £10m buyback, rethinks debt

In 2023, Octopus Renewables Infrastructure Trust launched a capital recycling programme.

In December 2023 the trust completed the sale of the Krzecin and Kuslin wind farms (totalling 59MW) in Poland, realising net proceeds of about £92m (7% of the total value of all investments as at 30 September 2023) – a 21% premium over the holding value of the assets at the time of sale. The sale resulted in a 2.8p uplift in the NAV and crystallised an IRR of around 30% on that investment. It had acquired these assets in the construction phase in October 2021, before managing the construction and bringing the wind farms into operation in 2022.

In addition, in December 2023 the trust elected to terminate its option to acquire 175MW of ready-to-build solar projects in Spain. The trust had originally entered into a conditional acquisition agreement over the sites in 2020, however, it reassessed the risk/reward of building these against the backdrop of the new capital recycling programme and decided that exiting the option at a value above the holding value was a more attractive proposition. The sale realised a net gain of £3.0m over the €2.0m (c.£1.7m) initial deposit, or approximately £1.5m over the £3.2m holding valuation before exit.

The money has been used to reduce short-term borrowings. However, the board is looking at the discount (currently about 30%) and has decided it will use £10m to fund share buybacks.

With further sale proceeds from the capital recycling programme expected to be received during 2024, the board will continue to consider all options for further capital allocation, including share buybacks and selected investment into the existing portfolio, depending on prevailing market conditions. Repayment of short term debt remains a strong capital allocation priority. Alongside this, the company has been progressing discussions with its existing revolving credit facility lenders regarding the potential to put in place a new debt facility against some of the UK operational assets that have long-term fixed and contracted revenue streams. Any such new debt facility would be expected to benefit from a lower interest rate than the revolving credit facility borrowings it would replace.

[The end March factsheet for the trust shows that total leverage (debt as a percentage of gross asset value) was 47% at that date, equivalent to a conventional gearing ratio (debt/NAV) of 88.7%. That might have been manageable had it all been fixed at low interest rates. However, at end December 2023, £130m of ORIT’s £381m of debt was on its revolving credit facility which we believe was all floating rate. The borrowing has been done by a subsidiary and is repayable in 2026. The margin on the debt was said to be 2% – which will be on top of a reference rate such as SONIA (currently 5.2%, so 7.2% in total). Given the sales in December, it isn’t clear to us why the leverage went up in the first quarter of the year from 39% to 47% (correction – see below*). I would be happier if the debt was a lot lower. On that basis, I am wondering whether prioritising buybacks over debt repayments is a good idea.]

* It has been pointed out to us that ORIT did explain this in their announcement on 7 May: “As at 31 March 2024, ORIT had total gearing (total debt drawn as a % of gross asset value (GAV) of 46.6% (39.1% as at 31 December 2023). The increase in leverage during the quarter is following completion of the acquisition of four out of the five Irish solar sites from Statkraft Ireland.”

ORIT : Octopus Renewables Infrastructure Trust launches £10m buyback, rethinks debt