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Anaerobic warning ‘last straw’ for SQN investors as leasing fund slides to record low

20 January 2020

SQN Asset Finance Income faces uncertain future after shares in the high-yielding leasing fund plunge 15% after company warns of further writedowns on loans to biogas plants.

SQN Asset Finance Income (SQN) faces an uncertain future after shares in the high-yielding leasing fund plunged 15% after its board warned of further damaging writedowns on its extensive loans to anaerobic digestion (AD) plants.

Analysts believe the Guernsey-based company, which has suffered from long-running problems with its loans to US solar panel manufacturer Suniva, will now struggle to convince shareholders to extend its life for another three years at a continuation vote in November.

In an unscheulded update SQN said six of its 11 investments in AD facilities, which generate biogas fuel and fertiliser from the breakdown of organic matter in big tanks, had been hit by further delays in reaching production or by higher feedstock costs.

The investments involved accounted for just under 39% of SQN’s net asset value of £329m at the end of November. As a result, between 5% and 14% of NAV could be threatened, potentially wiping off 4.6p to 13.2p of NAV per share.

Last September SQN took a £3.2m writedown on its AD loans after reporting that the ‘ramp-up’ phase to reach production was taking longer than expected.

Today the board said it would appoint a third-party valuer to provide an independent valuation of the six assets, previously worth £127.7m, given the wide-range of outcomes over their 20-year lives. This will delay the publication of the NAV of its ordinary shares for 31 December.

Stifel analyst Anthony Stern called the AD impairments the ‘last straw’ and downgraded the stock to ‘negative’ from ‘positive’.

The shares tumbled 13p to just over 71p, an all-time low since the fund listed in 2014 at 100p and doubling their 8.5% discount to NAV on Friday.

SQN pays monthly dividends and closed last week on a high yield of 8.6%, although in its last financial year to June 2019 the payments were only covered 61% by earnings.

SQN C-shares (SQNX), a separate £134m pool of money issued three years ago, have no exposure to the AD investments but fell 4.3p or 5% to 81.7p at the additional blow to the company’s reputation. Their NAV will be published this week.

SQN has invested in 15 AD plants in total. It said it had exited four at a profit on yields of between 11% and 20% with the highest-returning investment in a company that had defaulted on its loan and ‘required a complicated workout’, something its fund managers are experienced in.

‘The investment manager will continue to work with the asset operators to achieve optimisation of each of the AD plants with the intention of monetising these assets in due course, together with the five AD plants operating in-line with expectations,’ SQN said.

The board said it would consult with shareholders in due course before the vote in November.

‘Given this development, we think there must be a high chance that investors will suggest that the portfolio is put into run-off over a number of years and cash returned to investors,’ Stern said.

According to Refinitiv, the company’s top five shareholders are wealth managers Investec and Rathbone with 13% and 5% and fund managers Schroders, Sarasin and BMO on 11.5%, 6.4% and 4.25% respectively.

AD subsidised but complex

Last October Sitfel highlighted the pros and cons of AD investments, saying while they enjoyed higher government subsidy than wind and solar power from the renewable heat incentive (RHI), they were vulnerable to movements in foodstock prices and were more complex to build and link to the national grid.

At the time of Stifel's report SQN was one of three investment companies invested in AD. GCP Infrastructure (GCP), another debt investor, had made a small number of impairments but had only 6% exposure. JLEN Environmental Assets (JLEN) had a 21% weighting but had reported no problems, investing in operational companies rather than projects under construction.

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