Foresight Environmental Infrastructure (FGEN) has provided a portfolio update on the announcement that German green hydrogen project developer, HH2E is expected to enter insolvency.

FGEN made an initial investment into the green hydrogen sector in January 2023 and has since been working with management at its partner, HH2E AG, to progress the development of several green hydrogen production sites across Germany.

The company has invested a total of €22.3m into HH2E (£19.3m), representing 2.6% of net asset value as at 30 June 2024. The investment into HH2E to date has principally been used to secure orders for long lead time equipment and develop HH2E’s first two green hydrogen sites at Lubmin and Thierbach, which are now both at a stage of requiring further capital to fund construction in line with the development consortium’s original business plan.

HH2E has recently undertaken a process to source additional third-party funding for ongoing development of the pipeline and construction of Lubmin, the most progressed of the sites. However, due to the nascence of the green hydrogen sector and challenging current global funding environment, the process has not led to a financing partner being secured within the required timeframe and at the required scale, and there is now material uncertainty over whether adequate funding will be achieved.

FGEN, along with its investment manager, Foresight Group, has given consideration to providing further funding to HH2E to allow it to continue to meet its commitments and requirements under German law. However, the board does not believe that it is appropriate to do so at this time, reflecting the company’s approach to portfolio construction, risk and capital allocation in the context of the current market environment.

Therefore, without the guarantee of third-party funding and as required by German insolvency law, HH2E management are expected to take the decision to file a petition for insolvency and enter administration. The board and the investment manager are disappointed by this development, particularly given the potential for green hydrogen to play an important role in decarbonising heavy transport, industry, and other hard-to-abate sectors of the economy and the opportunity that remains at Lubmin and Thierbach.

HH2E’s administration process will focus on an outcome in the interests of all creditors. FGEN is an indirect creditor via its shareholding in Foresight Hydrogen HoldCo GmbH, which has provided shareholder loans to HH2E. Under German insolvency law, shareholder loans are subordinated to other creditors and as such it is expected that there will be no recovery of the invested amount.

The outcome of the administration process is not yet known, but the company will update the market at the appropriate time.

The investment in HH2E is the only development-stage investment in the FGEN portfolio. FGEN’s dividend target for FY 2024/25 is 7.80p per share and the board reasserts that target with expected dividend cover in the range 1.2-1.3x. The company will publish its interim results for the six months ended 30 September 2024, on Thursday 21 November 2024.

[Stubborn, and in our view, irrational discounts across the renewable energy sector have meant many of these companies have been starved of the capital needed to optimise their growth. This is particularly disappointing given the valuable role that company’s like HH2E play in the effort to decarbonise our energy systems. It’s hoped that with interest rates heading down, and the regulatory backdrop providing further support, these situations will become much less frequent and companies will be able to capitalise on the wealth of opportunities which exist across the sector.]