Sequoia Econ Infra - Half-year Report
· Annualised portfolio yield-to-maturity of 8.4% as at 30 September 2018
· Dividends of 3p per Ordinary Share paid during the period
· Raised gross proceeds of £75.7 million through an over-subscribed Placing of Ordinary Shares in May 2018
· Diversified portfolio of 58 investments made across 8 sectors, 25 sub-sectors and 13 mature jurisdictions
o 87% of investments in private debt
o 66% floating rate investments, capturing short-term rate rises
o Short weighted average life of 5.0 years creating re-investment opportunities
o Weighted average equity cushion of 32%
· Ongoing charges ratio of 1.06% (calculated in accordance with AIC guidance). The ongoing charges ratio against the average gross value of the portfolio in the period is 0.98%.
· Announced an additional capital raise in August 2018 which closed, significantly over-subscribed, in October 2018 with gross proceeds of £253.0 million
o Proceeds have been used to repay the outstanding balance of approximately £116.0 million of the £150.0 million multi-currency revolving credit facility ("RCF")
o Remaining proceeds will be deployed into the strong pipeline of attractive investment opportunities
Financial Highlights at 30 September 2018
Total net assets
Net Asset Value ('NAV') per Ordinary Share *
Ordinary Share price *
Ordinary Share premium to NAV
Robert Jennings, Chairman of the Company, said:
"The Board is pleased with the Company's continued progress in the first half of this financial year. Economic infrastructure debt remains an underinvested and attractive asset class, given its low correlation to the volatility of the wider equity markets and high recovery rates.
"The balance of floating rate and shorter term fixed investments means that the portfolio is also well positioned to benefit from a rising interest rate environment. We remain confident in the Investment Adviser's ability to grow the diversified portfolio and source high quality, stable, cash generative economic infrastructure debt investment opportunities that will enable us to maintain portfolio yield at 8% or higher and an annual dividend of 6p per share."
Sequoia Economic Infrastructure Income Fund Limited (the "Company") invests in a diversified portfolio of senior and subordinated economic infrastructure debt investments through its subsidiary Sequoia IDF Asset Holdings S.A. (the "Subsidiary", together the "Group" or the "Fund"). The Company controls the Subsidiary through a holding of 100% of its shares.
The Company's investment objective is to provide investors with regular, sustained, long?term distributions and capital appreciation from a diversified portfolio of senior and subordinated economic infrastructure debt investments. This objective is subject to the Fund having a sufficient level of investment capital from time to time and the ability of the Fund to invest its cash in suitable investments.
The Company's principal investment policy is to invest in a portfolio of loans, notes and bonds where all or substantially all of the associated underlying revenues are from business activities in the following market sectors: transport, transportation equipment, utilities, power, renewable energy, accommodation and telecommunications infrastructure. The revenues should derive from certain eligible jurisdictions, as defined in the Company's Prospectus. In addition, once fully invested, in excess of 50% of the portfolio should be floating rate or inflation-linked debt, and not more than 10% by value of the Fund's investments (at the time of investment) should relate to any one individual infrastructure asset.
In the absence of any significant restricting factors, the Board expects to pay dividends totalling 6p per Ordinary Share per annum for the foreseeable future. The Company pays dividends on a quarterly basis.
It is my pleasure to present to you the Interim Report of Sequoia Economic Infrastructure Income Fund Limited (the "Company") for the six month period of operations ended 30 September 2018.
Consistent growth and performance
Since the Company's initial public offering ("IPO"), in March 2015, the Company's market capitalisation has grown from approximately £150 million to £908.1 million, with a net asset value ("NAV") of approximately £837.1 million as at 30 September 2018. This growth meant that the Company entered the FTSE 250 Index in September 2017.
The Company's shares have consistently traded at a premium to its NAV, averaging 9.2% over the last six months and standing at 8.5% on 30 September 2018. The Board of Directors of the Company (the "Board") believes that this is a re?ection of the Company's strong and consistent dividend policy and the uniqueness of its investment proposition to investors.
Investors in the IPO have received total dividends of 18.5p per share and have seen the share price increase from 100.0p to 110.5p, representing a total gain of 29.0p per share and an annualised return ("IRR") of 7.9% (6.4% calculated on a NAV basis, based on a day-one NAV of 98.0p per share).
Net Asset Value performance
Over the first half of this ?nancial year, the Company's NAV per share has increased modestly from 101.32p to 101.86p. Over the same period, the Company has paid dividends of 3p per share, resulting in a total return of 3.5%. This performance is predominantly the result of three factors: the portfolio consists of stable, cash generative assets which generate an annual return of over 8%; costs and expenses are moderate with an ongoing charges ratio of just over 1%; growing fee income resultant from originated investments; and positive market movements on many of the Company's investments.
Since the Company's IPO, the NAV per share has increased from 98.0p to 101.86p, delivering, with dividends paid, an IRR of 6.4%. Whilst this is slightly lower than the target of 7-8%, the underperformance is largely the result of the signi?cant cash drag in the ?rst eight months of the Company's life: the IRR of NAV since October 2015 has been 8.3%, compared to -2.3% over the initial "ramp up" period.
A diverse and cash-generative portfolio
The Board continues to be pleased with the progress made by the Investment Adviser in building a portfolio of attractive infrastructure debt investments. As at 30 September 2018, the invested portfolio comprised 58 investments, diversi?ed by borrower, jurisdiction, sector and sub-sector, and generating an average yield-to-maturity of 8.4% from a portfolio of loans and bonds with an average equity cushion of 32%. The yield on the portfolio has the potential to increase if LIBOR increases, since 66% of the assets have ?oating-rate interest income.
In constructing the portfolio, the Investment Adviser is mindful of a number of factors. Paramount is credit quality, with each investment subject to rigorous scrutiny and due diligence. In addition, the yield on investments needs to be attractive both in relative terms (when compared to assets of a similar quality) and in absolute terms (to ensure the Company can meet its target of paying a dividend of 6p per share). Finally, a range of other criteria must also be met, including compliance with concentration limits to ensure a well-diversi?ed portfolio, and targeting ?oating rate investments for at least half the portfolio.
Pleasingly, approximately 87% of the portfolio consists of private debt investments, exceeding the three-year target of 75%. This is important as private debt typically enjoys a higher yield (an "illiquidity premium") compared to rated, listed bonds. Since the Company's fundamental strategy is buy-and-hold, as opposed to a debt trading strategy, it makes sense to capture this illiquidity premium. At the same time, having infrastructure bonds within the portfolio provides the Company with considerable liquidity, and the Directors believe there is value in having the flexibility to raise liquid funds at short notice, should the need arise.
The portfolio is also highly cash generative, the benefits of which are perhaps under-appreciated. The cash arises from not just the investments' regular, contractual and therefore predictable interest payments, but in many cases from either periodic amortisation payments (i.e. the borrower repaying the loan or bond over its life in instalments) or short investment maturities.
The Investment Adviser estimates that the portfolio will, over the next twelve months, generate over £147 million of free cash (c.18% of NAV), after payment of its operating expenses and a dividend of 6p per share. The practical benefit of this cash generation is that, in a rising interest rate environment, the Company will be able to redeploy this cash at new, higher, interest rates.
The Investment Adviser will continue to update you on the Company's progress by way of the monthly Investor Reports.
Interest rate risk and currency risk
The Company has positioned itself defensively for a rising rate environment to reduce NAV volatility, with 66% of the portfolio comprising ?oating rate investments at 30 September 2018, and an overall portfolio modi?ed duration of 1.4. As LIBOR rates rise in the Company's eligible jurisdictions, the average cash-on-cash yield of the portfolio will increase. It is worth noting that this potential growth is not relied upon to pay fully-covered dividends, and the Investment Adviser calculates investment yields on a constant LIBOR basis.
The effect of currency exchange rates on the NAV also deserves further explanation. Currently, only about 22% of the portfolio consists of UK assets denominated in Sterling, with the balance diversi?ed across assets denominated in US Dollars, Australian Dollars, Euros and Norwegian Kroner. In order to reduce the potential for NAV volatility arising from movements in the exchange rates, the Company has a large currency hedging position, which is designed to rise in value when Sterling strengthens and fall in value when Sterling weakens. The net effect is that the NAV behaves as though 99% of the Company's assets were denominated in Sterling.
Since the Company's listing three-and-a-half years ago, the portfolio has faced bouts of volatility in global capital markets resulting from circumstances including the Brexit vote, uncertainty in US politics, the rise of populist political movements in Europe, and heightened tensions in East Asia and the Middle East. Many of these risks continue to be present, but it is in such periods of volatility that the stability of infrastructure debt has historically demonstrated its real value to investors. Moreover, some macro-economic and political themes may be advantageous to the Company, such as the gradual global unwinding of quantitative easing, which is likely to increase central bank base rates and the yield on debt investments, and a strong US economy in which the Company holds nearly 39% of its investments.
The Board believes that the Company's portfolio and investment pipeline will continue to deliver an attractive risk-adjusted return with a relatively low correlation to the broader ?nancial markets.
I continue to be delighted with the way in which the Board and our advisers have pulled together as a well-balanced team and with how our approach has evolved over the ?rst three-and-a-half years in our Company's life. This has helped the Company to achieve its target dividend yield while also protecting the NAV per share. We see our duty going forward as being to remain as actively focused as we have been to date so that we can sustain the target yield while also advancing NAV per share. In turn this should help to support the premium at which our shares have traded over the period since our admission to listing on 3 March 2015.
I would like to close by thanking you for your commitment and support.
12 December 2018