Listed renewable infrastructure funds could see their dividend cover come under pressure as they need to refinance their typically high levels of debt against a backdrop of higher-for-longer interest rates.

While the ability to borrow money to invest has always set investment trusts and investment companies apart from their open-ended peers, debt levels have become a concern for investors as interest rates have risen rapidly in the UK, US and Europe, and now look likely to stay elevated for longer.

Iain Scouller, investment company analyst at Stifel, highlighted concerns around ‘interest rates and availability of debt at a time when equity issuance is not possible’, with the problem being particularly acute in the renewable sector where debt levels have increased over recent years.

He said this could be one of the reasons renewable funds have derated in recent months, with closed-end funds in the sector trading at an average 23% discount below net asset value. 

So far, the fixed rate nature of most renewable trusts’ debt means that the past year’s rising interest rates have failed to impact dividend cover but this won’t be the case when the companies are forced to refinance.

This refinancing risk could impact dividend cover, or the measure of how many times the company can afford to pay the most recent full-year dividend.

Scouller found nine renewables funds will have to refinance between 2024 and 2026 and calculated the impact this will have on their dividend cover.

He said Greencoat UK Wind (UKW ), the £3bn portfolio of wind farms run by Stephen Lilley and Laurence Fumagalli, would see its dividend cover fall from 3.2 times to a still very healthy multiple of 3.07%, while £876m stablemate Greencoat Renewables (GRP ), which invests in renewable infrastructure, would see its dividend cover reduce from 3 to 2.7 times.

Higher rates would also reduce the cover of Renewables Infrastructure Group (TRIG ), a £2.4bn portfolio of solar and wind projects, from 1.55 times to 1.44. Higher debt costs would see £467m NextEnergy Solar (NESF ) fund’s dividend cover fall from 1.39 to 1.24 and Octopus Renewables Infrastructure (ORIT ) cover from 1.77 to 1.52, the analyst estimated.

Scouller added higher interest rates were not the only souce of concern.

‘As well as higher debt cost we also believe a continued fall in power prices and power purchase agreement (PPA) pricing together with generation below budget due to weather conditions could squeeze revenues an reduce what are currently healthy dividend covers,’ he said.

However, Scouller said he is taking ‘some comfort’ from the fact that much of the debt held by renewable trusts is long-term at fixed rates.

‘Most of the debt requiring repayment or refinancing in the next three years is primarily in the form of revolving credit facilities and many of the funds are only using part of their RCFs available,’ he said.

The next three years is the period that is most important for Scouller when it comes to debt as borrowing will be significantly higher than it has been in the past over the timeframe.

‘While we think it is likely that the cost of new debt from 2027 onwards will also be more expensive than debt put in place in recent years, we think the important period to focus on for now is the next three years,’ he said.