High-yielding leasing fund hit this week by damaging writedown in loans starts strategic review that is likely to see it wind up and begin lengthy process of returning money to shareholders.
SQN Asset Finance Income (SQN ), the high-yielding leasing fund hit this week by a damaging writedown in loans accounting for 39% of its assets, has announced a strategic review likely to lead to the company winding up and returning money to shareholders.
A statement by the company this morning said the review would be wide-ranging and include the ‘provision of investment management services’.
Although this suggests the board could replace the fund manager, SQN Capital Management, and carry on, or seek a merger with another investment company, analysts said an orderly wind down was more probable.
With the shares having lost around a quarter of their value this week and standing more than a third below their launch price in 2014, the company was viewed as unlikely to survive a continuation vote this November.
However, analysts warned shareholders faced a long wait to recover all their money as winding down the £338m loan portfolio would be difficult.
‘The portfolio maturity profile would create a possible issue for the company if it did move towards a realisation process. The weighted average remaining term on the loans is 7.8 years,’ Liberum analyst Conor Finn said.
A further complication is SQN is still chasing £25m from the Chinese parent of Suniva, the former bankrupt US solar panel manufacturer whose loans account for 7% of the assets owned by ordinary shareholders.
US courts have suggested the two sides seek mediation to settle the dispute. ‘Going to mediation suggests there is a case for both sides and a full recovery from this avenue looks less certain,’ said Anthony Stern of Stifel.
On Monday SQN revealed it was seeking an independent valuation of six of its 11 loans to anaerobic digestion facilities used in the production of biogas. Delays in reaching production and higher feedstock costs meant the fund manager was considering a wide range of write downs in their valuation that could knock between 5% and 14% off net asset value (NAV).
The shares plunged 15% on the day and continued to fall this week, although they are up over 1% to 63.8p today.
Investors in the fund were already unhappy with earlier problems with other investments where halts in loan repayments meant their dividends were only 60% covered by earnings in the last financial year.
Finn said recent history showed investors had little appetite to persist with lending funds once major problems emerged with RDL Realisation (RDL ) and SME Credit Realisation (SCRF ) both in run-off and Hadrian's Wall (HWSL ) facing the same fate after writing down the value of two big loans in November.
Problems with direct lendings have taken some of the gloss of the investment company sector’s successful expansion into alternative assets, with investors pouring money into infrastructure and renewables funds listed on the London Stock Exchange.