Final Results

RNS Number : 9224R

Sequoia Economic Infra Inc Fd Ld

11 July 2022

 

SEQUOIA ECONOMIC INFRASTRUCTURE INCOME FUND LIMITED

(the "Company" or "SEQI")

RESULTS FOR THE YEAR ENDED 31 MARCH 2022

RESILIENT PERFORMANCE DESPITE CHALLENGING BACKDROP - DIVIDEND TARGET DELIVERED

ROBERT JENNINGS, CHAIR, COMMENTED

"The Company has remained resilient against the backdrop of significant market volatility. We successfully delivered our dividend target of 6.25p per share on a cash covered basis with a small increase in dividend cover, a position we expect to strengthen in the current year given the rising level of interest income we are now experiencing from our well diversified portfolio. For some time, we have focused on more defensive loans with stronger credit ratings and better ESG metrics, a pattern we expect to hold to for the foreseeable future. We believe our economic infrastructure portfolio is well positioned for a higher interest rate and potential stagflationary environment and we remain confident in the outlook for our Company."

HIGHLIGHTS

·     NAV per Ordinary Share cum-dividend 100.50p (31 March 2021: 103.18p)

·     Dividends totalling 6.25p per Ordinary Share (2021: 6.25p) paid during the year, in line with annual target dividend

·   Defensive, diversified portfolio of 76 investments across 8 sectors, 29 sub-sectors and 12 mature jurisdictions

o  95% of investments in private debt (2021: 97%)

o  50% floating rate investments (2021: 57%), capturing short-term rate rises

o  Short weighted average life of 4.1 years (2021: 4.5 years) creating reinvestment opportunities

o  Weighted average equity cushion of 33% (2021: 35%)

· NAV total return of 3.5% compared to the Company's prior year outperformance (2021: 13.5%)

· Share price total return of 4.5% (2021: 17.4%)

· Total net assets £1.78bn (31 March 2021: £1.8bn)

· Annualised portfolio yield-to-maturity of 8.4% (2021: 9.0%) as at 31 March 2022

· Ongoing charges ratio of 0.87% (2021: 0.87%) (calculated in accordance with AIC guidance)

· Dividend cash cover of 1.06x (2021: 1.04x)

· ESG score of the portfolio is on a long-term upward trend

ANNUAL REPORT

A copy of the annual report has been submitted to the National Storage Mechanism and will shortly be available at https://data.fca.org.uk/#/nsm/nationalstoragemechanism . The annual report is also available on the Company's website at https://www.seqifund.com/investors/financial-results-reports/

where further information on SEQI can be found.

INVESTOR PRESENTATION

The Investment Adviser will host a presentation on the annual results for investors and analysts at 10.00am BST on Monday, 11 July 2022. There will be the opportunity for participants to ask questions at the end of the presentation. Those wishing to attend should register via the following link: https://stream.brrmedia.co.uk/broadcast/62c40150fb4bba516c453bc0

For further information, please contact:

Sequoia Investment Management Company Steve Cook Dolf Kohnhorst Randall Sandstrom Greg Taylor Anurag Gupta	[phone]
Jefferies International Limited (Corporate Broker & Financial Adviser) Neil Winward Gaudi Le Roux	[phone]
Tulchan Communications (Financial PR) Elizabeth Snow Martin Pengelley	[phone]
Sanne Fund Services (Guernsey) Limited (Company Secretary) Matt Falla Katrina Rowe	[phone]

LEI: 2138006OW12FQHJ6PX91

Chair's statement

Dear Shareholder,

It is my pleasure to present to you the Annual Report and Audited Financial Statements of the Company for the financial year of operations ended 31 March 2022.

The first half of the financial year saw global economies emerging from lockdowns and improving market conditions despite continuing uncertainty. This uncertainty markedly increased over the course of the second half of the financial year with rising global inflation and interest rates concerns as well as the Russian invasion of Ukraine. Against the backdrop of increased market volatility, the Company has remained resilient and the Board and the Investment Adviser have remained focused on managing the portfolio and the deployment of capital into attractive new loans.

NAV AND SHARE PRICE PERFORMANCE

Over the financial year, the Company's NAV per Ordinary Share decreased from 103.18p to 100.50p, after paying dividends of 6.25p, producing a NAV total return of 3.5%, lower than the Company's target return of 7-8%. This is compared to the Company's prior year outperformance, when NAV per Ordinary Share increased from 96.69p to 103.18p, after paying dividends of 6.25p, producing a total NAV return of 13.5%, materially in excess of the Company's target return.

The Company's share price also declined over the year, from 104.20p to 102.80p, a share price total return of 4.5%, once dividends are taken into account. The slight fall in the share price reflects the decline in the NAV, offset slightly by improvement in the Company's premium, which increased from 1.0% at the beginning, to 2.3% by the end of the year.

Against the backdrop of rising interest rates across the yield curve, particularly over the final quarter of our financial year, this is a solid performance. We have once again outperformed the liquid credit markets and are now experiencing a pick up in income on our floating rate assets. In time we anticipate that the same will occur in the fixed rate section of our portfolio, as existing fixed rate loans repay and are replaced by new loans reflecting higher market interest rates.

DIVIDEND

Pleasingly, despite the volatility experienced over the year, we achieved our target of paying a fully cash ‑ covered dividend of 6.25p per Ordinary Share. It is our intention for now to hold the payout at its current level, notwithstanding that our interest income is increasing and we anticipate a further strengthening in our dividend cash cover ratio .

PORTFOLIO PERFORMANCE

Most of our portfolio has performed well  over the course of the year, with many sectors previously adversely affected by COVID-19 improving materially. Specifically, the Company's exposures to the transportation sector (excluding aviation), student accommodation and midstream assets all improved in credit quality, while other sectors such as telecommunications and healthcare infrastructure remained robust.

Of the four underperforming investments identified a year ago, three have improved to the point where they are no longer of concern and their increase in valuation contributed 0.70p per share to the NAV performance. Unfortunately, two other investments have experienced difficulties over the last 12 months, namely Bulb Energy and Salt Lake Potash. The effect of writing down the valuation of these underperforming investments (together with the loan backed by a school in Washington, D.C.) to their current fair values was to reduce NAV by 2.50p per share.

However, our experience has been that, upon eventual recovery from these types of situations, the fair values of the investments tends to exceed the valuations assigned to them during the restructuring or work-out phases.

Sequoia Investment Management Company Limited (the "Investment Adviser") discusses these specific transactions in more detail in its report.

Credit losses are a natural part of running a loan portfolio. It would be naïve to imagine that the Company could keep lending money in perpetuity without experiencing some bad debts. Now that the Company has been operating for seven years, in both economically benign and challenging times and through a period of macro ‑ economic stress, it is instructive to assess the portfolio's historic loss rate, i.e. annualised credit losses, expressed as a percentage of the loan book. To be conservative we include losses arising not just from loans that default, but also from situations where we sell a loan (at a loss) to avoid further deterioration. Intuitively, the loss rate can be thought of as a reduction in the yield of the portfolio.

In our case, the loss rate is 0.15% if we just look at realised losses, or 0.36% if we include potential, but as yet unrealised, losses on the credit-impaired loans. We consider this to be exceptionally low. For comparison, research by Moody's implies that the loss rate for bank lending to infrastructure projects has historically been 0.1% to 0.15% per annum. However, that is in the context of investment grade, or borderline investment grade, loans, on which the typical yield is c.2.5% over LIBOR/SONIA or less. Our portfolio has yielded about 3.5% more than that, with similar credit losses, resulting in a high level of relative outperformance.

During the financial year, the Investment Adviser has had a highly selective approach to new investments. In general, we have prioritised investments in lower-risk parts of the infrastructure market, which typically have only a moderate or low correlation to the economic cycle, such as businesses with a high degree of contractual income. We have also avoided drawing too much on the Fund's revolving credit facility ("RCF") - in part, because having no or little net leverage is clearly prudent in turbulent markets.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE ("ESG")

This year has seen continued progress on the development of the Company's approach to ESG. We have focused on applying the comprehensive ESG policies which we published in June 2021 across our portfolio including on all new loan reviews. We are currently further developing these and expect to publish an update of our policies shortly. Our policies already set out in detail our approach to asset selection and portfolio construction, as well as broader themes such as how we can engage with our borrowers on ESG ‑ related matters. We also continue to report under Article 8 of the EU Sustainable Finance Disclosure Regulation ("SFDR") directive.

For the second year running we have mandated KPMG LLP to provide independent limited assurance of our portfolio's overall ESG score, which we believe is indicative of our intention to raise standards of rigour in the qualification of ESG credentials across portfolios of loans.

Overall, the portfolio has shown progression from an average score of 60.59 to 61.88. A significant number of the lowest-scoring loans have been sold or allowed to roll off at their maturity, and new investments generally score higher than the ones they replace. We expect this trend to continue, and believe that our scoring framework will allow us to continue to allocate more capital towards sectors and borrowers who demonstrate appropriate environmental, social or governance characteristics.

However, this is not always the case. We are a facilitator of change and as such are willing to support borrowers with programmes to improve their ESG performance, including transition measures to reduce their carbon emissions. This can take the form of having ESG requirements as a condition to making a loan, and including appropriate ESG covenants in our loan agreements. We also provide capital with the explicit goal of driving change - such as financing energy efficiency investments, or projects to reduce the greenhouse gas emissions of existing assets. It should be noted that in some cases this might mean that we are making investments with quite a low ESG score to begin with, but on the expectation that our capital will be used to improve the borrower's ESG profile over time.

As noted in my review last year, the Board wrote to all the Company's key service providers to request information about the management of their carbon footprints and the steps they are taking to reduce these over time. We were greatly encouraged to discover that the majority of our larger key service providers have already set up impressive programmes to monitor and reduce their carbon intensity.

But our engagement revealed that some of our smaller key service providers have not yet developed comprehensive net zero plans. Moreover, even though as a company we have no employees and no office and engage only non ‑ executive directors and consultants, the fulfilment of these roles involves activities such as air travel to and from Guernsey, which undoubtedly causes carbon emissions, albeit emissions that are unavoidable at this time.

We have therefore felt it appropriate to undertake an exercise to quantify the Company's carbon footprint. We estimate this at just under 180 tons of CO₂ per annum. This estimate allows for the emissions arising from our Directors and Consultants and from personnel in our smaller service providers whose carbon reduction plans are less developed in the fulfilment of their respective duties for the Company. We have also allowed for the full estimated emissions of our Investment Advisory team notwithstanding that they have their own programmes for monitoring, mitigating and offsetting. We therefore consider that our estimate of 180 tons in reality overstates our true carbon footprint.

Using measures which are independently verified as incremental, measurable, permanent and closely monitored by industry leading practitioners, we have committed to invest £15,000, which should be sufficient to offset the Company's estimated emissions for our financial years to 31 March 2022, 31 March 2023 and the first part of the year ending 31 March 2024. To finance this commitment, our Investment Adviser has agreed to donate half of the cost, and our Directors and Consultants each agree to forego on a continuing basis one per cent of fees due to each of them with effect from 1 April 2022.

The Company is currently in discussion with its smaller key service providers and we anticipate that they too will agree to make a contribution to our carbon offsetting initiative. Going forward, it is the strong intention of the Board, with full support from our Investment Adviser, that the Company should remain a carbon neutral organisation.

Particulars of the initiatives we have chosen to support in order to offset our estimated emissions are provided in the ESG section of our website. We also explain there how we have estimated the level of our emissions and why we consider that our estimate exceeds the likely true level of these.

Overall, I continue to believe that in the context of an infrastructure debt ‑ focused fund the policies that our Investment Adviser is operating and is developing further place us at the forefront of ESG thinking.

BOARD SUCCESSION PLANS

I would like to thank Jon Bridel and Jan Pethick, who have diligently served as Directors of the Company since before the IPO, and who are now both stepping down at this year's Annual General Meeting ("AGM").

They have brought many years of experience to the Board and they have contributed significantly to the Company's success.

In previous Chair's statements, I have discussed Board succession planning and I would now like to introduce James Stewart and Tim Drayson, who both joined the Board in January 2022, having previously had distinguished careers in infrastructure and the debt capital markets respectively. James was Vice Chair of KPMG LLP and chair of its Global Infrastructure Practice; before that he was the Chief Executive of Infrastructure UK and of Partnerships UK. And in the early part of his career in investment banking, he gained considerable experience as a leading Project Finance practitioner.

Tim was the Global Head of Corporate Sales, and Deputy Head of the European Corporate Debt platform at BNP Paribas. Tim arrived on the Board with significant prior knowledge of the Company, as he was previously an independent consultant to the Board. Replacing him in that role is Andrea Finegan, who until recently was the Chief Operating Officer of Greencoat.

In order to ensure a sensible degree of continuity, we have taken the view that in our approach to succession we should allow a period of time for new Directors to familiarise themselves fully with our situation, governance and culture before retiring Directors step down. Accordingly, over the last six months we have operated with a larger Board during the transition period. Going forward, given the growth of our portfolio since launch, we consider a five to six person Board more appropriate, as it allows us to draw on a wider experience base and it offers additional resources and offers greater scope to promote diversity.

OUTLOOK

We are taking full account of the risks - and opportunities - that higher inflation may present. In general, a moderate amount of inflation is helpful for the credit quality of the companies that we lend to. This is because in many cases these companies are able to increase their revenues more or less in line with inflation, while their debts remain the same in nominal terms. In other words, inflation reduces the real amount of leverage that our borrowers have. There, however, is a risk, currently exacerbated by high energy prices and the ongoing consequences of Russia's invasion of Ukraine, that central banks decide to address inflation aggressively, reducing growth in the economy or even triggering a recession and a period of stagflation.

While we do not welcome recessionary pressures in any of the countries where we hold investments, the resilience of our borrowers to recession is one of the most important factors that our Investment Adviser evaluates in its loan assessment processes.

We are also mindful that interest rates are increasing and are likely to continue to do so. As noted above, an increase in short-term interest rates is positive for the portfolio, given the high level of floating rate debt held. While increases in longer-term interest rates are likely to have the effect of temporarily decreasing NAV, since the values of fixed-rate loans decline, they too should eventually be positive for the Company, since reinvestment opportunities will offer higher interest rates, and prices of existing fixed-rate loans will pull to par as they get closer to maturity. We therefore believe that overall the portfolio is well positioned for an increasing interest rate environment.

Considering this outlook for interest rates, the Board and Investment Adviser have reflected on how best to take advantage of the opportunity that this gives us.

For now we consider our priorities to be:

· to maintain our dividend payout at its current level while increasing our cash cover ratio;

· to continue to invest in new loans with somewhat higher credit quality metrics and/or somewhat stronger ESG credentials than our current portfolio averages; and

· to retain a significant level of head room on our revolving credit facility.

We believe that this cautious approach is appropriate given current pessimism regarding the outlook for OECD economies and that it will position us well to continue delivering attractive and sustainable returns for Shareholders. We will also monitor our share price closely and, if appropriate, may from time to time engage in limited buy backs when there seems to be an unwarranted level of discount to NAV.

I would like to end by noting that the Company has demonstrated its resilience throughout the challenges of the last two years and that with our well diversified portfolio, growing interest income and disciplined approach to capital deployment, we believe we are well positioned for the future.

ROBERT JENNINGS

Chair

8 July 2022

Investment Adviser's report

We have seen a meaningful improvement in the credit quality of the portfolio

THE INVESTMENT ADVISER'S OBJECTIVES FOR THE YEAR

Over the course of the financial year ended 31 March 2022, Sequoia Investment Management Company Limited ("Sequoia") has had a number of objectives for the Company:

Goal	Commentary	Achieved
Gross portfolio return of 8-9%	The Company is fully invested with a portfolio that yields 8.4%	Yes
Manage the portfolio responsibly through an inflationary and rising interest rate environment	Anticipating hawkish central bank policies, the Company has targeted and achieved a low-duration portfolio consisting of 50% floating rate assets and implemented increased monitoring on potentially negatively affected assets	Yes
Follow a sustainable investment strategy	The Company has improved the overall ESG score of its portfolio by allocating capital to higher-rated opportunities and selling off lower-rated legacy investments. ESG engagement with borrowers has increased to improve reporting	Yes
Timely and transparent investor reporting	Factsheets, commentary and the full portfolio are provided monthly for full transparency	Yes
Continue implementation of ESG-linked benefits for the company	Renewal and increase of the Company's RCF in November 2021 with the inclusion of a sustainability-linked interest margin	Yes
Cash-covered dividends of 6.25p per share	The Company paid 6.25p of dividends per Ordinary Share during the year. Cash cover of 1.06x on the dividend	Yes

THE INVESTMENT ENVIRONMENT DURING THE YEAR

The first half of the year saw mostly benign financial market conditions, with stable interest rates and, overall, credit spread tightening, albeit at a slower pace compared to the previous year. Credit spreads in some sectors, such as telecommunications and renewable energy, dropped to below pre-COVID levels. Other sectors, such as aviation and non-sustainable power, did not see significant credit spread tightening, driven in part by their lacklustre economic performance and in part by their poor ESG profile, which is increasingly deterring investment in some sectors.

During the second half of the fiscal year, financial markets were both weaker and more volatile, as a result of inflation and interest rate concerns, hawkish central bank policies and Russia's invasion of Ukraine. In addition, energy prices (specifically the electricity, oil and gas markets) rose very significantly, benefiting some parts of the infrastructure market (for example, renewable energy), whilst hurting other parts (for example, transportation).

Overall, this has been a challenging economic environment, and many asset classes - including high yield bonds, leveraged loans and the listed equity markets - have struggled. In our report we will discuss how the Company has fared and how the investment portfolio is positioned for some of the challenges and opportunities.

SHARE PERFORMANCE

As at 31 March 2022, the Company had 1,767,397,442 Ordinary Shares in issue. The closing share price on that day was 102.8p per Ordinary Share, implying a market capitalisation for the Company of approximately £1.82 billion, compared to £1.84 billion the previous year. The share price declined slightly year-on-year, by 1.3%. In the opinion of the Investment Adviser, this was mainly driven by concerns about the impact of inflation, rising interest rates and how Russia's invasion of Ukraine and the associated disruptions to supply chains will impact on the global economy, as well as the decline in the Company's NAV per share as discussed below.

LIQUIDITY

As at 31 March 2022, the Company had cash of £94.5 million, more than covering the £66.3 million of future funding commitments on investments it had made. During the period, due to the lingering consequences of COVID-19, the Investment Adviser focused on the monitoring and management of existing portfolio investments and deployment of capital into attractive new loans.

NAV PERFORMANCE

Over the financial year, the Company's NAV per Ordinary Share decreased by 2.68p post-dividend, from 103.18p to 100.50p, driven by the following effects:

	NAV
Factor	effect
Interest income on the Company's investments	8.57p
Losses on foreign exchange movements, net of the effect of hedging	0.00p
Negative price movements1	(3.52)p
IFRS adjustment from mid-price at acquisition to bid price	(0.31)p
Operating costs	(1.19)p
Gains from issuing Ordinary Shares at a premium to NAV	0.02p
Gross increase in NAV	3.57p
Less: Dividends paid	(6.25)p
Net decrease in NAV after payments of dividends	(2.68)p

1.  Over the year, portfolio income has been reasonably strong (both on an accounting basis and on a cash basis, as discussed in the next section), but the NAV, net of dividends, has overall fallen slightly due to negative price movements of 3.52p per share. This figure can be analysed as the sum of four different components:

	NAV
Factor	effect
Mark down of Bulb, Salt Lake Potash and Washington School	(2.50)p
Mark up of previously underperforming loans	0.70p
Price declines due to increases in long-term rates	(2.09)p
Other price movements	0.37p
NAV decrease due to price movements	(3.52)p

Although the NAV decline is disappointing, the Company has consistently outperformed the liquid credit markets, such as high yield bonds and leverage loans, since its IPO in March 2015 and this year was no exception. In fact, over the year the NAV total return to investors has been 3.5% (44% since the IPO), compared to -1.61% (22% since the IPO) for Sterling-hedged high yield bonds. The chart below shows this relative performance.

DIVIDEND COVER

Pleasingly, the level of dividend cash cover has increased from 1.04x in the last financial year to 1.06x for the current year. This improvement in cash cover was mainly driven by (1) several borrowers who had previously been permitted to capitalise interest during the COVID-19 pandemic starting to pay cash interest again and (2) interest income on floating rates loans increasing as LIBOR (or equivalent short-term rates) rose.

The Investment Adviser expects that the dividend cover will continue to improve in the next financial year, driven by the collection of accrued interest and by increasing short-term interest rates. The Directors of the Company have, in light of this, reaffirmed their dividend target.

THE CREDIT PERFORMANCE OF SPECIFIC INVESTMENTS

Overall, we have seen a meaningful improvement in the average credit quality of the portfolio, as many parts of the economy have rebounded from COVID-19. Specific examples include student accommodation, transportation and both traditional power and renewable energy. The last two sectors also benefited from the rise in energy prices in the second half of the year. However, as would be the case with any loan portfolio, some investments have underperformed, sometimes materially, and these positions are discussed below.

In our previous Annual Report, we highlighted four investments that were experiencing significant credit issues: a private school in Washington D.C., a restructured loan in the US midstream business, a Combined Heat and Power ("CHP") plant in Germany, and a business that owns and operates two refineries in Sweden. Pleasingly, the underlying performances of the last three on this list have improved to the extent that these loans are no longer of concern. In fact, as noted above, the prices of these three investments have increased and contributed in aggregate about 0.70p per share.

While these three loans have improved, two other loans have deteriorated. Together with our loan backed by the private school in Washington D.C. these investments are being actively managed by the Investment Adviser and are summarised below.

PART I. REVIEW OF THE YEAR

1. US private school

A loan backed by and secured on a large building in a prime area in Washington D.C., occupied by a private school under a long-term lease agreement. As at 31 March 2022, the value of this loan is equal to 1.66% of the portfolio.

As a result of the COVID-19 pandemic, the ramp-up of school enrolments was much slower than expected. Lower than projected revenues from tuition fees left the school without the funds needed to pay rent to the property ‑ owning company which, in turn, left the property company (our borrower) unable to pay interest on its loan. Unfortunately, the school operator has to date been unsuccessful in raising the capital that would enable it to resume meeting its obligations under its lease, and the owner of the property has therefore worked with its lenders, including the Company, to restructure its debt. In April 2022, the property owner secured the refinancing of part of its capital structure and an agreement has been reached between the lenders and the borrower to restructure and extend the debt. This includes the injection of further equity by the property owner. This restructuring provides a stable capital structure for the borrower to realise the value of the property and repay the Company's loan.

2. UK energy supply company

A senior secured loan to a retail energy supplier in the UK, Bulb Energy ("Bulb"). As at 31 March 2022, the value of this loan is equal to 1.55% of the portfolio.

Over the course of the second half of 2021, global energy prices increased sharply. Bulb, in common with other energy supply companies in the UK, was unable to pass these increases on to its retail customers (given the retail energy price cap regulation in the UK) and consequentially found itself increasingly loss-making. Although Bulb had a substantial energy hedging programme in place, which helped to mitigate these losses, Bulb was unable to extend its hedges as market volatility increased and its capital position deteriorated. On 24 November 2021, Bulb and its parent company, Simple Energy Limited ("Simple"), went into the special administration regime ("SAR") and ordinary administration, respectively.

The primary objective of the SAR is to ensure continuity of energy supply to customers, and, in this regard, the Investment Adviser has been working openly and constructively with all stakeholders to ensure the best interests of customers, employees and creditors. During the SAR, the Fund is unable to enforce its senior security over the assets of Bulb. Moreover, any funding that the Government provides to Bulb, to support its ongoing operations during the SAR or to pursue other Government policy objectives, may rank senior to the Fund's secured loan. As such, the Government has, in effect, nationalised Bulb and deprived the Company of the value of its security.

However, the Company's loan to Bulb is also secured on the substantial assets of its parent, Simple. These assets are not included in the scope of the SAR and therefore continue to provide collateral for our loan to Bulb. The administrators of Simple continue to make progress on realising the value of its assets. On 3 May 2022, the Fund received a partial repayment of £10 million from Simple against the outstanding amounts due under the loan agreement, which cleared all outstanding interest due and reduced the outstanding loan balance to £47.6 million.

3. Australian potash facility

A senior secured loan to finance the construction of a potash extraction and processing facility in Western Australia, currently valued at 1.70% of the portfolio. The facility is owned by Salt Lake Potash ("SLP"), a company listed on the Australian stock exchange under the ticker SO4.

SLP's plan to start production in early 2022 met a series of obstacles, including technical/engineering issues and extreme weather (the heavy rainfall was classified as a 1-in-50-years event). These difficulties resulted in both the construction cost of the project increasing, as well as a delay to the date on which it would start to generate profits, leaving the project with a funding shortfall. SLP's attempt to raise additional capital from the stock market to address this shortfall unfortunately proved unsuccessful, and the project's lenders appointed KordaMentha as receivers on 20 October 2021.

The receivers, in consultation with the lenders, have continued to ensure that the project remains viable, by retaining key employees and undertaking necessary works, commissioning third-party advisers to update the project's business plan and due diligence reports, and prepared SLP for sale. On 10 March 2022, KordaMentha made an announcement on the Australian Stock Exchange regarding the start of the sale process and provided a short summary of some of the findings of the third ‑ party advisers, notably that the quantity of the potash resource was materially higher than originally estimated and the market price of potash is much higher than a year ago, but, offsetting that, the rate of future extraction may be lower than previously assumed.

FUND PERFORMANCE

		31 March	30 September	31 March
		2022	2021	2021
Net asset value	per Ordinary Share	100.50p	102.94p	103.18p
	£ million	1,777.0	1,818.2	1,819.1
Invested portfolio	percentage of NAV	95.0%	98.4%	94.3%
Total portfolio (including investments in settlement)	percentage of NAV	101.5%	100.3%	97.7%

PORTFOLIO CHARACTERISTICS

		31 March	30 September	31 March
		2022	2021	2021
Number of investments		76	74	72
Single largest investment	£ million	64.7	66.9	65.0
	percentage of NAV	3.6%	3.7%	3.6%
Average investment size	£ million	23.7	24.1	23.8
Sectors		8	8	8
Sub-sectors	by number of invested assets	29	31	31
Jurisdictions		12	12	12
Private debt		94.7%	94.9%	93.3%
Senior debt		53.6%	56.2%	54.7%
Floating rate	percentage of invested assets	50.1%	50.3%	56.5%
Construction risk		13.1%	10.1%	8.1%
Weighted-average maturity	years	5.2	5.3	5.6
Weighted-average life	years	4.1	4.3	4.5
Yield-to-maturity		8.4%	8.6%	9.0%
Modified duration		2.1	2.3	2.3

PART II. INVESTMENT STRATEGY

Economic infrastructure as a diverse, sustainable and highly cash-generative asset class

Economic infrastructure debt is a stable asset class typically characterised by high barriers to entry and relatively stable cash flows, and includes sectors such as transportation, utilities, power, telecommunications and renewables. Economic infrastructure is often supported by physical assets, long-term concessions or licences to operate infrastructure assets and these companies frequently operate within a regulated framework. This is especially true in the case of utilities, telecommunications and parts of the power sector.

A characteristic that economic infrastructure sectors have in common is that they earn their revenues from demand, usage or volume. This means that a project's revenues are linked to the utilisation of the project, such as a toll road where revenues are dependent or partially dependent upon traffic volumes. This is in contrast to social infrastructure, such as schools and hospitals, which are often compensated for the physical asset simply being available for use.

To mitigate demand risk, economic infrastructure projects are typically less highly geared than social infrastructure and have higher equity buffers, more conservative credit ratios, stronger loan covenants, and higher levels of asset backing for lenders. Economic infrastructure also provides higher returns than social infrastructure and is a much larger market. Moreover, as sustainability has become a key investment topic, the Investment Adviser notes that investing in new economic infrastructure is often necessary for the implementation of the latest technologies. This leads to an abundance of ESG-focused investment opportunities, benefiting not only the Company's portfolio, but also the modernisation of otherwise high barrier-to-entry sectors.

The characteristics of economic infrastructure - stable cash flows, high barriers to entry, physical assets, equity buffers and lower gearing - all form the bedrock upon which SEQI's investment opportunities are based and analysed. This is not expected to change, regardless of what is going on in the markets, because the core features of economic infrastructure all contribute to strong fundamentals that are critical for weathering storms.

With that said, the economic infrastructure market is not immune to volatility and there are certain actions we took prior to, and over the course of, the financial year, including targeting mainly floating rate assets, focusing on senior debt and favouring non-cyclical industries. These actions helped position the portfolio defensively for potential downturns, such as the COVID-19 pandemic and Russia's invasion of Ukraine.

Diversified and cash ‑ generative portfolio

The Company's portfolio remained resilient during the COVID-19 pandemic relative to the broader market. This was due to the defensive late-cycle strategies that the Company started adopting in 2019. These strategies included keeping a large portion of the portfolio in defensive sectors, keeping a strong allocation in senior compared to mezzanine debt, and maintaining the portfolio's credit quality even as spreads tightened prior to March 2020. The Company started adopting these strategies in 2019 because we expected a slowdown in the economy, as the business cycles in the US and the UK ran into their 10th year in the second half of 2019. Throughout the year, the Company has also continued to position itself defensively in anticipation of higher inflation and the potential of a recession. As a consequence of these actions, as at 31 March 2022:

· 48% of the portfolio is invested in defensive sectors, including telecommunications, accommodation, utilities and renewables. These are viewed as defensive because they provide essential services, often operate within a regulated framework and have high barriers to entry;

· 54% of the portfolio is in senior ‑ ranking debt, as opposed to mezzanine or other types of subordinated lending. Senior ‑ ranking debt has the first claim on a borrower's assets following a default and is therefore the most defensive type of lending;

· the average credit quality of the portfolio has been maintained at B1 over the last 12 months while still achieving our target yield. Our policy of not making CCC credit quality investments, or of investing in distressed debt, remains in place; and

· 50% of the portfolio is in floating rate loans. The Company focused on targeting floating rate assets throughout the year in order to continue to generate adequate real returns for investors.

The Investment Adviser aims to maintain or increase this percentage over time.

The Company's investment portfolio is diversified by borrower, jurisdiction, sector and sub-sector, with strict investment limits in place to ensure that this remains the case.

Geographically, the Company invests in stable low-risk jurisdictions. Under the terms of its investment criteria, the Company is limited to investment-grade countries, and has chosen to pursue selected opportunities in Spain, but it has not yet invested in Portugal or Italy. The Company has been focused on the United States, Canada, Australia, the UK, and Northern and Western Europe.

The Company focuses predominantly on private debt, which on 31 March 2022 represented approximately 95% of its portfolio. This is because, typically, private debt enjoys an illiquidity premium, i.e. a higher yield than a liquid bond with otherwise similar characteristics. Since the Company's main investment strategy is "buy and hold", it makes sense to capture this illiquidity premium. Sequoia's research indicates that infrastructure private debt instruments yield approximately 1% more than public, rated bonds. However, in some cases, bonds can also be an attractive investment for three reasons.

Firstly, some bonds are "private placements" which, whilst in bond format, have an attractive yield that is comparable to loans. Secondly, some sectors, such as US utility companies, predominantly borrow through the bond markets, and therefore having an allocation to bonds can improve the diversification of the portfolio. Thirdly, having some liquid assets in the portfolio enables the Company to take advantage of future opportunities and can also be used to satisfy the Company's potential tender obligations.

The Company remains committed to limiting exposure to greenfield construction risk in the portfolio. Whilst up to 20% of the NAV can consist of lending to such projects, the actual exposure to assets in construction as of 31 March 2022 was 13% of the NAV. Sequoia is careful to select projects where it believes the Company will be well compensated for taking a moderate level of construction risk, and where the underlying strength of the borrower's business or project mitigates the risk.

The Company takes its corporate and social responsibilities seriously and has focused on further developing and implementing ESG initiatives during the fiscal year. Throughout the year, the Company continued to deploy its capital in sustainable investments with favourable ESG credentials such as renewables, energy transition and TMT investments. To further demonstrate its commitment to sustainability, the Company has also introduced a sustainability-linked margin adjustment to its RCF as part of the latest RCF refinancing and upsizing in November 2021 which will be determined annually based on the portfolio's overall ESG score.

The portfolio's resilience to rising interest rates and inflation

Two of the key investment themes currently are globally high inflation and rising interest rates. Clearly these two are linked and market participants expect central banks to continue to increase policy rates to try to bring inflation under control. We believe the portfolio is well positioned to manage this situation, and moreover see significant advantages for the Fund in a higher interest rate world.

Increasing interest rates are broadly positive for the Fund, although their impact can be complex.

· Rising short-term rates are positive, since half the investment portfolio consists of floating rate debt. Higher short-term rates therefore will increase the income that the Company derives from its investment portfolio, improving dividend cover and potentially helping to build NAV. It should however be noted that interest rates affect the cost of currency hedging and therefore increases in Sterling short ‑ term interest rates are the most beneficial.

· Rising long-term rates are positive over time, but may result in temporary NAV declines at first. The portfolio has a low modified duration of 2.1, which means that a one basis point increase in long-term interest rates will result in the portfolio valuation falling by approximately 2.1 basis points. However, this decrease is temporary as the price of the investments will "pull to par" as they approach maturity. The advantage to the Company of higher interest rates is that, all other things being equal, the Company will be able to charge higher rates on its new loans.

Origination activities

The Company's strategy is to invest in both the primary and secondary debt markets. Sequoia believes that this combination delivers a number of benefits: participating in the primary markets allows the Company to generate upfront lending fees and to structure investments to meet its own requirements; and buying investments in the secondary markets can permit the rapid deployment of capital into seasoned assets with a proven track record.

Primary market origination

The primary loan markets provide the most important investment opportunity for the Company. The Investment Adviser has sourced bilateral loans and participated in "club" deals, where a small number of lenders join together. The Company has also on occasion participated in more widely syndicated infrastructure loans. Primary market loans often have favourable economics because the Company, as lender, benefits from upfront lending fees. As the Company has grown, primary market investment activity has grown to surpass secondary market investments, with 84% of the portfolio comprising primary investments as of 31 March 2022.

Secondary market origination

Some of the Company's investments continue to be acquired from banks or other lenders in the secondary markets. This approach can provide one or more of the following benefits:

· enables a rapid deployment of capital, since secondary positions can be acquired relatively quickly compared to primary market transactions in infrastructure debt that first need to be structured, negotiated and documented;

· provides an additional source of due diligence material as loans have performance histories that permit credit analysis on actual results rather than financial forecasts. In addition, research1 shows that infrastructure loans improve in credit quality over time so secondary loans in many cases have improved in credit quality from the time of their initial origination; and

· provides a yield pick-up as there is a real shortage of secondary market investors in project finance, as most infrastructure debt funds focus exclusively on the primary markets. During periods of market volatility in particular, the Fund can take advantage of the limited competition to capture attractive discounts from sellers looking to reduce or exit positions.

PART III. POSITIONING THE INVESTMENT PORTFOLIO FOR THE FUTURE

Investment opportunities

Sequoia continues to monitor the global response to the COVID-19 pandemic as well as the primary and secondary effects of Russia's invasion of Ukraine. As the world continues to emerge from lockdowns, Sequoia believes the Company is particularly well positioned to continue deploying capital into its pipeline of mostly private debt infrastructure lending opportunities. Sequoia continued to witness a steady stream of infrastructure debt opportunities during the second half of this financial year despite the difficult market conditions. In terms of the pipeline, Sequoia is especially excited about potential investments in the renewables and accommodation sectors where the current portfolio is arguably underweight, lending opportunities are often attractive and capital deployment into these sectors would be desirable for diversification. Investments in these sectors will also provide additional stability in case of a potential policy-driven market downturn or other unpredictable events. Overall, the opportunity for the Company in economic infrastructure debt remains strong and the asset class continues to be under ‑ invested and attractive. It is in times of market stress that economic infrastructure debt demonstrates its strength and resilience as an asset class, and so Sequoia is optimistic about the prospects for growing the Company while maintaining its track record of sourcing suitable investments and delivering to Shareholders a total return of 7-8% over the long term.

In exploring these investment opportunities, the Company will utilise its RCF, which was refinanced during the year, on more attractive terms than the previous facility. Notably, the facility was increased to £325 million, margins on drawn amounts have been reduced and the facility's covenants were modified to better suit the Fund's needs. As of 31 March 2022, the Company had drawn £121.4 million on the RCF.

In light of the ongoing economic uncertainty, the Company expects to have only a moderate level of net debt. This will leave the Company with liquidity to, for example, meet margin calls on its FX hedging book, or take advantage of secondary market opportunities that may present themselves. Additionally, low gearing is prudent in periods of market volatility, and will lead a more stable NAV.

Strengthening the team at Sequoia Investment Management Company

As the Company embarks on its seventh year of operations, a number of growth initiatives at the Investment Adviser have taken place to ensure there are sufficient resources to devote to monitoring and new origination activities.

Specifically, the Investment Adviser has hired six additional investment professionals since March 2021 (one Vice President, four Analysts and one Fund Controller). These hires will further enhance an already-strong team. As at March 2022, the total headcount with these additional hires was 24. We believe that this is one of the largest and most knowledgeable investment teams focused solely on infrastructure debt in the market, and as such positions the Company well for continued success.

SEQUOIA INVESTMENT MANAGEMENT COMPANY LIMITED

Investment Adviser

8 July 2022

Statement of comprehensive income

For the year ended 31 March 2022

		Year ended	Year ended
		31 March 2022	31 March 2021
	Note	£	£
Revenue
Net (losses)/gains on non-derivative financial assets at fair value
through profit or loss	6	(27,520,112)	6,958,954
Net (losses)/gains on derivative financial assets at fair value
through profit or loss	7	(39,932,471)	106,075,653
Investment income	9	151,920,575	114,979,084
Net foreign exchange (losses)/gains		(1,023,582)	419,582
Total revenue		83,444,410	228,433,273
Expenses
Investment Adviser fees	10	11,836,201	11,253,254
Investment Manager fees	10	349,634	344,938
Directors' fees and expenses	10	305,202	246,127
Administration fees	10	453,630	440,311
Auditor's fees		188,598	198,590
Legal and professional fees1		1,327,377	520,366
Valuation fees		821,400	759,500
Custodian fees		255,221	249,084
Listing, regulatory and statutory fees		168,318	148,768
Other expenses		497,617	219,945
Total operating expenses		16,203,198	14,380,883
Loan finance costs	15	4,522,522	4,094,586
Total expenses		20,725,720	18,475,469
Profit and total comprehensive income for the year		62,718,690	209,957,804
Basic and diluted earnings per Ordinary Share	13	3.55p	12.62p

1.  Legal and professional fees includes an amount of £666,019 in the current year in respect of fees relating to the Fund's investment in Bulb Energy.

All items in the above statement are from continuing operations.

Statement of changes in Shareholders' equity

For the year ended 31 March 2022

			Retained
			(losses)/
		Share capital	earnings	Total
Year ended 31 March 2021	Note	£	£	£
At 1 April 2020		1,719,065,509	(119,200,238)	1,599,865,271
Issue of Ordinary Shares during the year, net of issue costs	12	112,790,636	-	112,790,636
Total comprehensive income for the year		-	209,957,804	209,957,804
Dividends paid during the year	4	-	(103,483,330)	(103,483,330)
At 31 March 2021		1,831,856,145	(12,725,764)	1,819,130,381

			Retained
			(losses)/
		Share capital	earnings	Total
Year ended 31 March 2021	Note	£	£	£
At 1 April 2020		1,719,065,509	(119,200,238)	1,599,865,271
Issue of Ordinary Shares during the year, net of issue costs	12	112,790,636	-	112,790,636
Total comprehensive income for the year		-	209,957,804	209,957,804
Dividends paid during the year	4	-	(103,483,330)	(103,483,330)
At 31 March 2021		1,831,856,145	(12,725,764)	1,819,130,381

Statement of financial position

At 31 March 2022

		31 March 2022	31 March 2021
	Note	£	£
Non-current assets
Non-derivative financial assets at fair value through profit or loss	6	1,770,022,999	1,730,455,551
Current assets
Cash and cash equivalents	8	8,759,040	20,018,189
Trade and other receivables	14	143,092,101	108,061,966
Derivative financial assets at fair value through profit or loss	7	17,536,684	51,501,035
Total current assets		169,387,825	179,581,190
Total assets		1,939,410,824	1,910,036,741
Current liabilities
Loan payable	15	-	83,894,203
Trade and other payables	16	3,855,430	3,487,807
Derivative financial liabilities at fair value through profit or loss	7	37,143,642	3,524,350
Total current liabilities		40,999,072	90,906,360
Non-current liabilities
Loan payable	15	121,368,920	-
Total liabilities		162,367,992	90,906,360
Net assets		1,777,042,832	1,819,130,381
Equity
Share capital	12	1,837,390,531	1,831,856,145
Retained losses		(60,347,699)	(12,725,764)
Total equity		1,777,042,832	1,819,130,381
Number of Ordinary Shares	12	1,768,238,998	1,763,120,710
Net asset value per Ordinary Share		100.50p	103.18p

The Financial Statements were approved and authorised for issue by the Board of Directors on 8 July 2022 and signed on its behalf by:

SANDRA PLATTS

Director

Statement of cash flows

For the year ended 31 March 2022

		Year ended	Year ended
		31 March 2022	31 March 2021
	Note	£	£
Cash flows from operating activities
Profit for the year		62,718,690	209,957,804
Adjustments for:
Net losses/(gains) on non-derivative financial assets at fair value through profit or loss	6	27,520,112	(6,958,954)
Net losses/(gains) on derivative financial assets at fair value through profit or loss	7	39,932,471	(106,075,653)
VFN interest capitalised	6	(7,309,761)	-
Investment Adviser fees settled through issue of Ordinary Shares		878,100	842,142
Net foreign exchange loss/(gain)		1,023,582	(419,582)
Loan finance costs	15	4,522,522	4,094,586
Increase in trade and other receivables (excluding finance costs)	14	(33,004,700)	(18,752,224)
Increase in trade and other payables (excluding finance costs)	16	45,287	294,102
		96,326,303	82,982,221
Cash received on settled forward contracts		43,775,627	61,655,940
Cash paid on settled forward contracts		(16,124,456)	(44,633,971)
Purchases of investments	6	(399,588,003)	(401,557,473)
Sales of investments	6	339,810,204	229,553,308
Net cash inflow/(outflow) from operating activities		64,199,675	(71,999,975)
Cash flows from financing activities
Proceeds from issue of Ordinary Shares, net of issue costs1		-	108,633,236
Proceeds from loan drawdowns	15	36,023,268	175,183,485
Loan repayments	15	-	(125,000,000)
Payment of loan finance costs		(5,772,304)	(3,365,984)
Dividends paid (excluding scrip dividends)2		(105,684,339)	(100,168,072)
Net cash (outflow)/inflow from financing activities		(75,433,375)	55,282,665
Net decrease in cash and cash equivalents		(11,233,700)	(16,717,310)
Cash and cash equivalents at beginning of year		20,018,189	37,581,698
Effect of foreign exchange rate changes on cash and cash equivalents during the year		(25,449)	(846,199)
Cash and cash equivalents at end of year		8,759,040	20,018,189

1.  Excludes non-cash transactions. For details, refer to note 12 of the Financial Statements.

2.  Excludes non-cash transactions. For details, refer to note 4 of the Financial Statements.

 

END

 

 

FR UKUORUNUBRAR