The £931m Sequoia Economic Infrastructure Income fund is looking to raise cash for a £300m debt pipeline in a difficult year for the sector following the collapse of Carillion and political noise around privatisation.
The £200m initial issue would be the largest in the sector this year if it reaches target. Infrastructure investment trusts have raised £700m in the year to date, a fraction of the £2.4bn total raised in 2017.
The board is also proposing a share issuance programme that would allow it to issue up to 250 million shares in future according to pipeline opportunities.
Greencoat Renewables was the largest fundraise in the sector in the year-to-date attracting €111m in an initial placing in July.
Carillion and politics hit infrastructure
Renewables and debt have dominated fundraising this year in the infrastructure sector, said Winterflood Investment Trusts research analyst Kieran Drake. The Economic Infrastructure Income fund already raised £75.7m in an oversubscribed issue in April.
“Problems with Carillion and the political rhetoric that started last year with the Labour Party were a problem for social infrastructure funds. There’s been less raised from those funds this year and a couple of them were trading a discounts so they were unable to consider raising,” Drake said.
The sector sold off in September last year due to remarks made by shadow chancellor John McDonnell that the Labour Party wanted to nationalise industries such as railways and water. Carillion’s collapse in Q1 added to discounts in the sector.
However, Last Word Research shows fund selectors are looking to increase their allocation to infrastructure over the next year.
Pipeline of senior secured and floating rate debt
Proceeds of Sequoia’s share issue would be used to repay down £116.2m in its revolving credit facility with excess cash used for a “growing set of attractive investment opportunities”, the board said via a regulatory filing published on Wednesday.
Approximately 78% of the £300m pipeline is senior secured debt opportunities and 76% are floating rate debt instruments. The US represents about 61% of the pipeline with a further 21% in the UK.
If the investment trust fails to raise the cash target, it will re-draw funds under the revolving credit facility to invest in pipeline opportunities. Over the next year, approximately £107.2m of assets will reach maturity.
Premiums and yield in the infrastructure sector
Reducing the 9.8% premium, approximately average for the infrastructure sector, would be one of the benefits of the share issue, the board said. The 3i Infrastructure investment trust has the largest premium in the sector at 18.1%, while International Public Partnerships is the lowest at 5.2%.
This morning, the premium had already dropped to 7%, according to Bloomberg.
But Drake said the relatively high premiums in the sector did not necessarily make an unattractive entry point for investors. “The premium will move with the yield the fund is offering. Shares prices have moved in line with bond markets.”
The Economic Infrastructure Income fund currently has a yield of 5.4%, according to the Association of Investment Companies.
Even though the Bank of England has started to raise rates, Drake said infrastructure remains popular with investors seeking income.
Shares fall on discounted issue
The £200m would be raised through a partially pre-emptive issue of ordinary shares. Shareholders would be entitled to two shares for every 11 they hold.
The issue price represents a premium of approximately 4.8% on the net asset value and a 4.5% discount on the existing share price. Shares fell on Wednesday morning following publication of the share offer but are still trading above the 106p offer price.
Shareholders will vote on the plans at an extraordinary general meeting on 5 October.
