Sequoia Economic Infrastructure has hit back at claims it should have slashed Bulb Energy’s valuation in its portfolio in the months leading up to the energy supplier’s collapse.
This week, the £1.9bn investment trust was forced to update markets on its £55m loan to Bulb Energy after the company went into administration, which it said it had learnt about via a press article.
The energy supplier is the largest yet to collapse due to rising wholesale gas prices and the first to do so through the special administration regime, which was created in 2011 to ensure the continuity of energy supply to consumers during administration. The special administrator will have access to government funds to continue energy supply for Bulb’s 1.7 million customers.
Sequoia Economic Infrastructure (SEQI) argues collateral is in excess of the loan amount. The senior ranking debt is secured against the assets of Bulb and its parent company Simple, although under the special administration regime secured lenders to Bulb are unable to enforce their security while the administration process is ongoing.
Simple has “substantial assets” that are collateral for the loan and sit outside the special administration process, the regulatory filing said. Nevertheless, Sequoia Economic Infrastructure has not yet told shareholders how the situation will affect the investment trust’s net asset value of which Bulb represents 2.9%.
Lack of change in Bulb’s valuation had been ‘surprising’
In an analyst note issued today in response to Sequoia’s update, Stifel questioned why Sequoia Economic Infrastructure had not reduced its valuation for Bulb Energy in the months leading up to its collapse.
Stifel issued a sell rating against Sequoia Economic Infrastructure in September specifically referencing Bulb, which at the time was in talks with its bankers to secure new sources of funding after the sharp rise in energy prices. It believed its premium, which was then 11%, looked expensive.
It reiterated that sell rating in its update on Tuesday morning, even as the premium has come down to 5.8%. “Two months on, we are no clearer on the future valuation implications of the company moving into administration,” Stifel said, adding: “We thought the lack of change in the valuation at the September and October valuation points was a bit surprising, given the disruption in the energy market, and rising risk of a potential default.”
But Sequoia Economic Infrastructure has hit back at Stifel.
“The monthly asset valuation process is taken extremely seriously both by the investment adviser and by SEQI’s independent board,” the investment trust said in a statement to Portfolio Adviser. “An important part of the process is the monthly review of all valuations by suitably qualified independent financial professionals, with further half yearly assessment by auditors. Taking all its realisations since inception, SEQI has a demonstrable track record of achieving higher than the mark from the realisations that have taken place, including underperforming or distressed assets.”
Sequoia Economic Infrastructure’s portfolio is independently valued by PwC and audited and reviewed by KPMG.
The board of the investment trust said it would support the investment adviser to “ensure a fair outcome for all parties including our shareholders that include retail investors, funds managing individuals’ savings and pensions and other investors”.
Stifel suggested a 50% provision would reduce Bulb’s contribution to NAV to 1.5%. “While the portfolio remains highly diversified, our main concern is whether there are any other names in the portfolio where a provision has been ‘delayed’.”
It named US Schools and Salt Lake Potash as examples. The latter, which represents 1.9% of NAV, has gone into voluntary administration, but Sequoia Economic Infrastructure has again noted collateral is in excess of the loan amount.
