In August 2015, SQN agreed a 5 year financing arrangement with a US solar cell manufacturing company (not named by SQN but almost certainly Suniva) that was secured against its manufacturing and production equipment and supported by a parental guarantee from a public company. In the NAV as at 28 February 2017, being the last published NAV, the amount outstanding to the Company was $29.9m (GBP24.1m), which represents approximately 6.8 per cent. of the net assets of the ordinary share class.
At the time of the investment, the manufacturer had been producing and selling solar cells at attractive price levels and was positioned to improve its margins even in an environment of predictably decreasing sale prices. However, there has been a rapid decline in the market price for solar cells driven by imports flooding the US markets in contravention of established international trade agreements and in circumvention of tariffs put in place to protect the US solar industry.
The scheduled payment on this investment due to the Company on 31 March 2017 has not been made and SQN was recently notified that, as a result of the impact of the falling solar cell prices and a temporary increase in the cost of production, the manufacturer has suspended production while it seeks redress from the United States International Trade Commission under the Trade Act of 1974, Import Relief for Domestic Industries (the “US Trade Act”).
A resolution has been put forward to SQN, pursuant to which, a petition would be made under Section 201 of the US Trade Act which would provide specific relief for a period of four years which, if granted, would enable the investee business to return to trading profitably and make it an attractive acquisition target. In such a scenario, it is expected that SQN would make a full recovery of its principal plus all current and future interest, as well as have an interest in the on-going enterprise.
The Company has reached an agreement with the manufacturer to enter into protective bankruptcy under Chapter 11 of the United States Bankruptcy Code in which SQN will provide an agreed amount of additional financing to the manufacturer under a ‘debtor-in-possession’ motion and have oversight of the manufacturer while the trade case is being pursued. There is a prescribed timeframe for action under a Section 201 petition which dictates that a resolution should be reached by the end of 2017. At the same time, the Company has made demand for payment under the guarantee from the parent company of the manufacturer.
While there can be no certainty that a favourable decision on the trade case will be reached, the Manager, the Company, the manufacturer, its advisors, its counsel, and certain members of the US government in relevant trade capacities all believe that there is a legitimate case and, as such, the Company believes this presents a more attractive option to pursue than seeking to enforce its security at this time. If a favourable decision is not reached, the Company could experience a principal loss in the event that the amount recovered through the parental guarantee and the proceeds received from the sale of the equipment are less than the outstanding exposure.
The Manager and the Board will continue to monitor the situation closely and review the need for any impairment as the trade case progresses.
Impact on income
It is expected that the Company will not receive income from this investment, which is exclusively part of the ordinary shares portfolio, for 9 to 12 months as this matter is resolved. However, in the absence of unforeseen circumstances, the Company should have sufficient excess income from other investments in the ordinary shares portfolio to maintain its dividend at the current level.
Further reading
Read more about the dispute here – this article suggests Suniva’s attempt to get redress from the could be the spark that ignites a trade war.
Suniva’s website
SQN warns on solar loan