SQN Asset Finance Income Fund (SQN)
Posted: August 31st, 2017, 12:04 pm
SQN is a diversified equipment leasing and asset finance investment company. It leases business assets or lends money secured on business assets such as anaerobic digestion plants, solar and wind energy generation equipment and vessels in the UK, Western Europe and the US. It pays a monthly dividend and yields c 7%. It has historically traded at a substantial premium of 10% to 15% above NAV.
However in April this year it reported that a US solar cell manufacturer it had lent approx. 7% of its NAV to (Suniva) had ceased production and had stopped repayments on its financing due to falling solar cell prices as a result of cheaper imports from China and other SE Asian countries. Suniva went into Chapter 11 bankruptcy and SQN provided additional financing as a 'debtor-in-possession' whilst Suniva pursues a section 201 trade case with the US International Trade Commission. The trade case was heard this month and the Commission is scheduled to release its findings on 22nd September. If the Commission finds on behalf of Suniva it will make a recommendation to the White House. Suniva hopes that the White House will impose tariffs on imports such that its cost of production in the US becomes competitive again. The other major solar cell manufacturer in the US SolarWorld has joined the trade case with Suniva. However there is considerable opposition to the trade case by others in the US solar energy industry such as installers and utilities as the plunging price of imported solar cells benefits them and helps solar energy compete with fossil fuel energy generation.
Since the revelation of the Suniva matter SQN's share price has fallen from 115 to about 100, removing the premium to NAV, which is reported at about par inclusive of the Suniva loan at cost. To date monthly dividends continue to be paid with no reduction as a result of this matter.
The worst case scenario in relation to Suniva is presumably that the case is lost and the full value of the loan written off, say 7% of NAV. This would reduce NAV to c 93. Hence the current share price could be viewed as reflecting a full write down and a 7% premium to NAV, much lower than the historic premium. The best case scenario is that President Trump imposes tariffs, which would be consistent with his previous statements about Chinese imports, Suniva thrives again and the loan repayments recommence.
I hold a position in SQN with an average cost of just under 110 and am thinking of topping up at 100 or below. Even if the Suniva case goes the wrong way there seems to be limited further downside and a still healthy yield on the rest of the portfolio. Does anyone else hold SQN and what views are out there?
However in April this year it reported that a US solar cell manufacturer it had lent approx. 7% of its NAV to (Suniva) had ceased production and had stopped repayments on its financing due to falling solar cell prices as a result of cheaper imports from China and other SE Asian countries. Suniva went into Chapter 11 bankruptcy and SQN provided additional financing as a 'debtor-in-possession' whilst Suniva pursues a section 201 trade case with the US International Trade Commission. The trade case was heard this month and the Commission is scheduled to release its findings on 22nd September. If the Commission finds on behalf of Suniva it will make a recommendation to the White House. Suniva hopes that the White House will impose tariffs on imports such that its cost of production in the US becomes competitive again. The other major solar cell manufacturer in the US SolarWorld has joined the trade case with Suniva. However there is considerable opposition to the trade case by others in the US solar energy industry such as installers and utilities as the plunging price of imported solar cells benefits them and helps solar energy compete with fossil fuel energy generation.
Since the revelation of the Suniva matter SQN's share price has fallen from 115 to about 100, removing the premium to NAV, which is reported at about par inclusive of the Suniva loan at cost. To date monthly dividends continue to be paid with no reduction as a result of this matter.
The worst case scenario in relation to Suniva is presumably that the case is lost and the full value of the loan written off, say 7% of NAV. This would reduce NAV to c 93. Hence the current share price could be viewed as reflecting a full write down and a 7% premium to NAV, much lower than the historic premium. The best case scenario is that President Trump imposes tariffs, which would be consistent with his previous statements about Chinese imports, Suniva thrives again and the loan repayments recommence.
I hold a position in SQN with an average cost of just under 110 and am thinking of topping up at 100 or below. Even if the Suniva case goes the wrong way there seems to be limited further downside and a still healthy yield on the rest of the portfolio. Does anyone else hold SQN and what views are out there?