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James Carthew: Riverstone, Aquila energise IPO market

21 May 2019

Investment company flotations have been thin on the ground this year but Riverstone Credit Opportunities Income and Aquila European Renewables Income are now raising money with initial public share offers (IPOs).

After an extended period where investment company flotations have been thin on the ground we have signs of life with two funds, Riverstone Credit Opportunities Income (RCOI) and Aquila European Renewables Income (AERS), announcing plans to raise money with initial public offers (IPOs).

RCOI wants $200 million (£157 million) to invest in loans made to entities in the energy sector. It would be a sister fund to Riverstone Energy (RSE). Riverstone is a significant investor in the energy sector and has lent through its credit platform since 2014.

The new company is applying for a listing on the specialist fund segment of the London Stock Exchange and, as such, is not offering its shares to private investors. Nevertheless, with a target dividend yield of 8%-10% for next year, I would expect many individuals to be eyeing it up in the secondary market. 

Fund managers Christopher Abbate and Jamie Brodsky believe there is an opportunity to lend to lower and middle-market companies that don’t suit traditional lenders – hence the ability to achieve high yields.

Generally, investing in debt rather than equity is a less risky place to be in the capital structure. However, it is not risk free. The collapse of the oil price in the second half of 2014 sparked a big rise in bad debts to energy companies. S&P Global Ratings reckoned that the energy and natural resources sector accounted for 39% of all non-performing loans in 2015 and 50% of defaults in 2016.

Gyrations in the oil price are not the only thing to worry about. RSE has suffered of late, despite the recovery in the oil price from its end-of-December lows. There has been a big reduction in the valuation of its two largest investments, Hammerhead and Centennial, which fell by by $143 million and $34 million in the first quarter, knocking about 173p per share or 12% off RSE’s net asset value. Even after these falls, the two account for around 40% of RSE’s assets.

By contrast, RCOI aims to diversify its portfolio with a maximum 15% exposure to any borrower. It will aim to take security over assets so that it has a better chance of recovering its money in the event of a default. Notably, the prospectus says that the Riverstone credit team has no realised losses to date across the $2.1 billion it has lent and it has made an annualised return of 12%.

Aquila advantage

While this fund focuses on hydrocarbons Aquila European Renewables Income (AERS) will invest in solar, wind and hydropower.

It is looking for €300 million (£260 million) and its offer is available to private investors. Shareholders may opt to hold shares denominated in but not hedged into sterling. 

The company has an advantage over the Riverstone fund in that it has a portfolio of assets to buy soon after launch. The fund manager, Germany’s Aquila Capital, which has €8.2 billion under management, has lined up nine assets for sale to AERS and a further seven assets it is in negotiations to buy. This should mean the fund can start paying dividends earlier. 

However, the payouts to shareholders are targeted at much lower levels than Riverstone. The aim is to pay out 1.5% of the issue price for this year, rising to 4% in 2020 and 5% for the following year. The dividends will form the bulk of targeted total returns of 6%-7.5% a year.

Investors looking to diversify their renewables exposure outside the UK already have the options of US Solar Fund (USF); Greencoat Renewables (GRP), which is focused on wind; and, to some extent, Renewables Infrastructure Group (TRIG), which has been snapping up large wind farms in Sweden. Both TRIG and John Laing Environmental Assets (JLEN) also have some exposure to French wind farms. 

However, AERS’s diversified, pure Europe portfolio will exclude the UK, which would differentiate it from existing funds. The pipeline encompasses wind, solar and hydro projects across Sweden, Norway, Finland, Denmark, Germany, Spain and Portugal.

The system for promoting the growth of renewables through subsidy varies from country to country within Europe. Subsidies are being phased out, reflecting the increased ability of renewable energy projects to compete with fossil fuel plants without them.

Most of the fund’s revenues will come from sales of power: between 50% and 70% in the short term and growing to between 60% and 80% in the medium term. Its projects will secure long-term power purchase arrangements, that run for at least 15 years, with utilities and companies that are heavy users of power.

As with USF, therefore, a key concern is the creditworthiness of the counterparties to the power purchase agreements. 

Aquila might also be exposed to some energy price risk because the amount of electricity produced by renewables is unpredictable and some agreements might require that any shortfall in production is covered in the spot market. 

I should also point out that the company will be able to use gearing, or borrowing, of up to 100% of NAV to double its investment capacity and shareholder returns. This is a limit not a target but the prospectus talks about up to 50% leverage on three Nordic wind farms and a Portuguese hydro project, and up to 70% on two German wind farms.

As always, if you are considering these and any other new issues, read the prospectus before making an investment.

James Carthew is a director at Marten & Co, operator of the QuotedData website. The views expressed in this article are his and do not constitute investment advice.

Investment company news brought to you by Citywire Financial Publishers Limited.

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