Aquila European Renewables (AERI ) has signed a €50m (£43.1m) loan secured on its Spanish solar assets which could release capital for share buybacks as the board mulls the fund’s future following a merger approach from Octopus Renewables Infrastructure (ORIT ).

The new five-year debt facility is 26% geared on the solar photovoltaic portfolio, which consists of 180 MWp of unlevered operating assets with long-term contracted power purchase agreements. The debt is 90% hedged through an interest rate swap over the life of the loan and is partially amortising, meaning there is a larger repayment on its maturity with smaller repayments throughout.  

Terms of the loan from ING Bank Sucursal en España were not disclosed but the borrowing rate is below the investment trust’s revolving credit facility (RCF). The proceeds will be used to repay the RCF, giving it up to €70m (£60m) it could draw down on the arrangement.

The board said the refinancing provides ‘significant flexibility’ for the company and could be used to continue its share buyback programme that saw the company purchase €25m in shares last year up until mid-September.

Following the deal, AERI’s overall gearing remained at 34% of gross asset value of £330m at 30 September.  The debt facility can be expanded through an accordion option – an option that a company can buy that gives it the right to increase its line of credit with a lender – of €18m and two 12-month extensions, subject to the lender’s consent.

Fighting back

The move comes as Aquila European fights to prove it is delivering for shareholders after ORIT’s advance. On the last working day before Christmas ORIT issued a stock exchange announcement stating after several approaches to the AERI board about a potential merger with no response it had taken the deal to some shareholders and received their support.

Aquila’s board noted the announcement on the day and today said the debt financing was ‘one of a number of initiatives’ to demonstrate value in the portfolio. It added that it will consult with shareholders and is ‘considering broader options’ for the future of the company.

Chair Ian Nolan said obtaining the loan at ‘such attractive terms’ fulfils ‘one of the key initiatives announced in May 2023 prior to the company’s inaugural continuation vote’.

The company passed its continuation vote on 14 June 2023, with 74% of voting shareholders agreeing to its extension. Another continuation vote is scheduled for September this year.

‘We are working with our advisers to evaluate how the incremental capital can be most appropriately allocated for the benefit of shareholders,’ Nolan added.

However, Alex O’Hanlon, an analyst at Liberum, believes the deal with ORIT makes sense as it would create ‘a much larger diversified renewables player’ with a market value of £769m and a combined net asset value of £940m.

‘With 22 investment trusts in the renewable infrastructure sector, we believe that further wind-ups and consolidation are required, if the sector is to address the supply/demand imbalance that currently exists in the companies’ shares,’ he added.

At 80 euro cents AERI shares trade on a 22% discount to NAV, while ORIT stands 15.8% below asset value. The Association of Investment Companies’ Renewable Energy Infrastructure sector is on an average discount of 15.6% following a derating last year in response to rising interest rates and falling energy prices.