Bluefield Solar to remove trust status after being starved of capital

A capital drought and normalisation of interest rates is forcing Bluefield Solar Income (BSIF ) to reconsider its future as an investment company.   

The £1.2bn portfolio of UK solar assets has warned that maintaining its high dividend yield – currently 10.6% - without access to fresh capital will starve the fund of growth and see it eventually cannibalise its assets.

Chair John Scott, said that while ‘business as usual’ could be maintained, shareholders should be aware that ‘in the absence of access to additional equity and the cheap debt we enjoyed for many years, continuing to operate with the current capital structure will necessitate the sale of development and prospectively operational assets’.

This will consequently ‘starve’ the fund of growth opportunities and there will be a ‘steady erosion of the company’s net asset value (NAV), reflecting attrition of our capital base, with returns delivered only in the form of income’.

Instead, BSIF is proposing a switch to an ‘integrated business model’ that would see the fund merge with its manager Bluefield Group and integrate with the latter’s 140-person platform covering the development to operation of solar assets.

The result would be a ‘UK-focused green independent power producer’ that would operate under a self-funded model.

Scott said there is greater value in bringing together the BSIF operating portfolio and its ‘sizeable near-term development pipeline’ with the ‘proven development and operating capability that exists within the Bluefield Group’.

Shares down

However, the market was not as optimistic about the plan, which will be put to shareholders in a vote, with shares dropping 5% after the announcement.

The disappointment at the news could be a reflection of the impact the company overhaul would have on its chunky dividend, which is currently 8.9p.

Scott said the change to an integrated power producer would require an assessment of the income ‘we would be able to distribute if we are to fund our pipeline from retained earnings and additional borrowings’.

James Armstrong, who is one of the managers of the fund, said the board undertook a review of the fund due to its persistent discount, which currently sits just shy of 30%.

The board and the manager had to decide whether paying a high dividend was ‘the best way of creating value for shareholders’.

Armstrong added that BSIF was in the ‘unique position’ of being linked to a management group that has a platform from which development and operation of solar assets can be run which gave the board ‘the opportunity to reimagine a BSIF in a different guise’.

‘You are able [by becoming an independent power producer] to look at your capital structure, debt, dividend and self-funding,’ said Armstrong.

‘You are not caught in this loop where you cannot do anything [because there is no capital flowing in]…We are thinking hard about what the next decade means for our shareholders.’

Tough market

BSIF’s success over the years has been due to the platform providing ‘value creation’. Over the past 10 years, the share price has grown 57.5%, above the 48.4% return from the average trust in the AIC Renewable Energy Infrastructure Sector, while its NAV is up 122% versus a 111.9% average.

Over the past year, the fund has managed to inch its NAV up 0.4% against a wider 1.5% fall, but this has not been reflected in the share price, which is down 15.6% over the past 12 months, blowing the discount out.

The market for renewables has been hard – as have all alternative investment companies – by rising interest rates, with investors opting for lower-risk forms of income.

Armstrong said the poor sentiment and large discount is ‘nothing to do with the underlying assets’ and more to do with a lack of transaction market and downbeat sentiment, which is ‘frustrating’.

‘It is nothing to do with BSIF, it’s a great company, but it is in the wrong vehicle at the moment,’ he said.

‘The investment company space is struggling generally, if you look at the wide discounts, they are nothing to do with the fundamentals.’

He added that BSIF was set up in 2013 with a NAV of £130m in an era of low interest rates and ‘that has changed’ but he said renewable energy was a ‘fantastic sector’ to be in considering the electrification of the economy, and the rise of artificial intelligence (AI) and data centres which need an enormous amount of electricity.

‘We are in a structural bull market and that will continue over the next 10 years,’ said Armstrong.