TIDMSEQI
RNS Number : 0032R
Sequoia Economic Infra Inc Fd Ld
25 June 2020
SEQUOIA ECONOMIC INFRASTRUCTURE INCOME FUND LIMITED
(the "Company" or "SEQI")
2020 FINAL RESULTS
CONTINUED PORTFOLIO GROWTH AND PERFORMANCE - INCREASED DIVID
TARGET
SEQI, the specialist investor in economic infrastructure debt,
announces its results for the year ended 31 March 2020.
HIGHLIGHTS
-- Dividends totalling 6.1875p per ordinary share paid during
the year following increase in annual target dividend from 6.00p to
6.25p per ordinary share announced in May 2019
-- Diversified portfolio of 72 investments across 8 sectors, 29
sub-sectors and 13 mature jurisdictions
o 93% of investments in private debt
o 70% floating rate investments, capturing short-term rate
rises
o Short weighted average life of 5.3 years creating reinvestment
opportunities
o Weighted average equity cushion of 35%
-- In line with the Company's commitment to implementing an ESG
policy, the Investment Adviser signed up to the United Nations
Principles for Responsible Investment ("UNPRI")
-- Annualised portfolio yield-to-maturity of 12.0% as at 31 March 2020(1)
-- Ongoing charges ratio of 0.96%, down from 1.02% in the prior
year (calculated in accordance with AIC guidance)(1)
-- Three capital raises completed during the year, all of which
were significantly over-subscribed:
o June 2019 - gross proceeds of GBP216 million
o September 2019 - gross proceeds of GBP139 million
o March 2020 - gross proceeds of GBP300 million
Post-year-end
-- Comprehensive portfolio and balance sheet review undertaken
in light of exceptional market volatility and spread widening
arising from the COVID-19 pandemic and oil price collapse
-- Assessment of cash yields and reaffirmation of dividend cover
and target for the financial year ending 31 March 2021
-- Restriction on certain new investments and preservation of
balance sheet capacity to take advantage of difficult market
conditions and opportunities to invest in new loans on attractive
and accretive terms
-- Redirection of the Investment Adviser's resources from
origination to enhanced credit and portfolio monitoring
Financial Highlights to 31 March 31 March
2020 2019
Total net assets GBP1,599,865,271 GBP1,097,139,421
Net Asset Value ("NAV") per ordinary
share (1) * 96.69p 103.41p
Ordinary share price * 94.00p 113.00p
Ordinary share (discount)/premium
to NAV (1) (2.8)% 9.3%
----------------- -----------------
* Cum dividend
Robert Jennings, Chairman of the Company, said:
"SEQI made good progress throughout most of our last financial
year. At the start of it we announced an increased target dividend
of 6.25p per share, which we have gone on to fulfil, and through
the year we undertook three successful and beneficial capital
raises, each of which was significantly oversubscribed.
The turbulent conditions of global financial markets in March
2020 led to a notable reduction in the value of our assets at year
end. However, the combination of our strong balance sheet and the
generally predictable and stable cash flows from our
widely-diversified debt portfolio have allowed us to reaffirm our
target dividend at 6.25p per share for 2020/21.
The relative stability of economic infrastructure debt and our
Investment Adviser's specialist expertise make SEQI well placed to
deliver attractive risk-adjusted returns to Shareholders and to
take advantage of the substantial long-term investment
opportunities in the space."
1. See appendix for Alternative Performance Measures
("APMs")
For further information, please contact:
Sequoia Investment Management Company Limited
Steve Cook
Dolf Kohnhorst
Randall Sandstrom +44 (0)20 7079
Greg Taylor 0480
Jefferies International Limited
Neil Winward +44 (0)20 7029
Gaudi le Roux 8000
Tulchan Communications (Financial PR)
Martin Pengelley
Elizabeth Snow +44 (0)20 7353
Deborah Roney 4200
Praxis Fund Services Limited (Company Secretary)
Matt Falla
Katrina Rowe +44 (0) 1481 755530
About Sequoia Economic Infrastructure Income Fund Limited
The Company seeks to provide investors with regular, sustained,
long-term distributions and capital appreciation from a diversified
portfolio of senior and subordinated economic infrastructure debt
investments. The Company is advised by Sequoia Investment
Management Company Limited.
LEI: 2138006OW12FQHJ6PX91
COMPANY SUMMARY
Principal Activity
Sequoia Economic Infrastructure Income Fund Limited (the
"Company") invests in a diversified portfolio of senior and
subordinated economic infrastructure debt investments through its
subsidiary Sequoia IDF Asset Holdings S.A. (the "Subsidiary",
together the "Fund"). The Company controls the Subsidiary through a
holding of 100% of its shares.
Investment Objective
The Company's investment objective is to provide investors with
regular, sustained, long--term distributions and capital
appreciation from a diversified portfolio of senior and
subordinated economic infrastructure debt investments. This
objective is subject to the Fund having a sufficient level of
investment capital from time to time and the ability of the Fund to
invest its cash in suitable investments.
Investment Policy
The Company's principal investment policy is to invest in a
portfolio of loans, notes and bonds where all or substantially all
of the associated underlying revenues are from business activities
in the following market sectors: transport, transportation
equipment, utilities, power, renewable energy, accommodation and
telecommunications infrastructure. The revenues should derive from
certain eligible jurisdictions, as defined in the Company's
Prospectus. In addition, in excess of 50% of the portfolio should
be floating rate or inflation-linked debt, and not more than 5% by
value of the Fund's investments (at the time of investment) should
relate to any one individual infrastructure asset.
Environmental, Social and Governance ("ESG") Policy
The Company takes its corporate and social responsibilities
seriously. As part of its sustainability strategy, it has
established a number of appropriate ESG policies which it takes
into account at all stages of its investment process. The guiding
principles behind its ESG programme are the United Nations
Principles for Responsible Investment ("UNPRI"), to which the
Investment Adviser is a signatory.
Dividend Policy
In the absence of any significant restricting factors, the Board
expects to pay dividends totalling 6.25p per ordinary share per
annum (increased from 6p per ordinary share with effect from the
quarter ended 30 June 2019) for the foreseeable future. The Company
pays dividends on a quarterly basis.
At an Extraordinary General Meeting of the Company held on 25
February 2020, Shareholders approved the implementation of a scrip
dividend scheme. For further details, please see note 4 to the
Financial Statements.
CHAIRMAN'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 2020.
Unsurprisingly, the current focus is rightly on COVID-19 and our
actions to protect our investments and our stakeholders. We discuss
that in detail below, but first I want to report on the progress
achieved in the past year.
NAV and Share Price Performance
Over the first eleven months of the financial year, the
Company's NAV per share increased from 103.41p to 106.36p, after
paying dividends of 6.1875p, producing a NAV total return of
9.0%(2) , which was in excess of the Company's target return.
However, during the month of March, the COVID-19 pandemic induced a
sharp downturn in the financial markets generally, including the
sub-investment grade credit markets such as high yield bonds and
leveraged loans. The markets are used by the Company's independent
valuation agents as pricing benchmarks for private debt and,
primarily as a result of that, the Company's NAV per share(2) fell
materially in March 2020, by 9.67p.
The overall outcome for the year, therefore, was that the NAV
per share decreased from 103.41p to 96.69p, resulting in a NAV
total return of -0.9%(2) , once dividends are taken into
account.
Prior to the ongoing pandemic, the Company's shares had
consistently traded at a premium to NAV, averaging 8.5% over the
last year, but fell to a discount of 2.8% to NAV(2) on 31 March
2020. However, after year end the share price partly recovered, and
shares were again trading at a premium by the end of April
2020.
Portfolio Performance
For the six months prior to the current crisis, the Investment
Adviser had been steadily rebalancing the portfolio in favour of
more defensive sectors, such as telecommunications, utilities and
renewables power, bringing the percentage of the portfolio in
defensive sectors from 43% in September 2019 to 47% in March 2020.
The Investment Adviser was also favouring higher credit-quality
transactions, and taking much less construction risk than before,
with those assets falling from 15.7% to 11.7% of the portfolio over
the year. This caution helped to mitigate some of the consequences
of COVID-19. Consequently, and also because infrastructure debt is
one of the least volatile types of lending, the Company
outperformed the liquid credit markets during March 2020 - for
example, the Credit Suisse Leveraged Loan Index fell by 21% over
the month, approximately twice as much as the decline in our asset
values.
It is important to note that 79% of the decline in our asset
values during March 2020 was caused simply by yields increasing in
the benchmarks (such as leveraged loans) used for pricing purposes.
The Company's independent valuers determined that the yield on our
portfolio of loans needed to increase to reflect what was happening
in the wider markets, and this was achieved by reducing the
carrying value of our investments from an average of 97.6% of par
at the end of February 2020 to 88.9% at the end of March 2020.
Consequently, the cash yield on our portfolio rose from 6.9% to
7.5% and its yield to maturity rose from 8.3% to 12.0% over the
same period. These pricing adjustments do not affect the Company's
revenue prospects or its ability to pay a dividend. Moreover, they
are expected to be temporary in nature, in that the price of our
loans will gradually accrete up to par as they get closer to
maturity, or if yields on the pricing benchmarks decline. An
alternative way of thinking about this is that the Company's
portfolio is now much higher yielding than before, and this should
in itself lead to stronger NAV growth over time.
The remaining 21% of the decline in our asset values was caused
by the underperformance of three investments. This was mostly a
result of the brutal fall in the price of oil during March 2020.
These investments are discussed in more detail in the Investment
Adviser's report, but investors should note the outlook for two of
the three investments improved materially in the two months
following year end.
Response to COVID-19
We were fortunate that we entered the current crisis with a
robust balance sheet, primarily due to our most recent GBP300
million capital raise, which closed on 3 March 2020. The proceeds
of the capital raise enabled us to repay the majority of borrowings
under our RCF, after funding new loans in settlement.
The magnitude of the shock to global financial markets in
mid-March 2020 prompted the Board and Investment Adviser to agree a
two-week moratorium on all new loan commitments, to allow for a
more comprehensive review to take place. At the end of March 2020,
the Board, with support from our consultants Kate Thurman and Tim
Drayson, our Investment Adviser, Investment Manager, Broker and
other service providers, jointly considered the findings from the
review in a series of virtual meetings and concluded as
follows:
-- We should aim to deploy funds in new loans at a more measured
pace, focusing on stronger credits within our investment
universe;
-- We should allocate greater resources to the monitoring of all
loans in our portfolio and should be willing to enter into dialogue
with distressed borrowers at an early stage should circumstances
warrant such an approach;
-- We should retain our dividend target of 6.25p per annum for
2020/21 in the expectation that this should be fully covered (net
of expenses and interest costs) by the cash yield on our
portfolio;
-- Our scenario planning indicated that we should have no
difficulty in repaying drawings on our RCF in December 2021 given
the contractual receipts of interest and principal over the
relevant period. For the years ending 31 March 2021 and 31 March
2022, these are expected to give rise to, respectively,
approximately GBP68 million and GBP300 million of free cash after
paying all operating costs, interest on borrowings and our target
dividend;
-- We should retain capacity to fund opportunistic secondary
market activity if attractively priced opportunities emerge;
and
-- We should also retain some capacity to support our share
price should it slip to and remain at a significant discount to NAV
for a protracted period.
The operational response by all of the Company's critical
service providers has been similarly swift and so, on behalf of the
Company, I would like to thank each of them and their staff for the
excellent efforts they have made to adapt to remote working in the
difficult circumstances that the UK and Channel Islands have faced.
It is a tribute to everyone that the contingency plans that had
been made for such an eventuality have worked almost
faultlessly.
While we are proud of the way the team has come together in
response to this crisis, we recognise that the decline in NAV and
our share price is disappointing for shareholders. It may provide
shareholders some reassurance to know that, following the mark-down
of NAV at year end, in the subsequent two months the Portfolio has
been strong and we believe the Company is well-placed to enjoy
further NAV growth.
It is still early days, but we take encouragement from the way
that both our Portfolio and our team have performed over the last
three months. Debt markets have been aided by the actions taken by
Central Banks to provide liquidity, but we remain alert to the
possibility that solvency issues may become more pressing as the
robust steps taken to support businesses during the early period of
difficulty start to run off, potentially causing spreads to widen
again. We expect that the prudent measures that we have implemented
will help to mitigate the impact on the Company of more generalised
solvency problems across the economies in which we operate, while
simultaneously positioning the Company to benefit from more stable
economic circumstances that would be conducive to improved
Shareholder returns over the long term.
ESG 2020
The issue of climate change and carbonisation of the atmosphere
is one which has become a greater concern even over the relatively
short period since our IPO. It naturally affects our credit
assessment processes but, more importantly, it also changes the way
we believe our capital should be deployed. Accordingly, at the
beginning of 2019, our Investment Adviser signed up to the UNPRI
and has been implementing a comprehensive ESG programme ("ESG
2020") across the existing portfolio and all new investments.
In general, our investment portfolio has strong environmental
credentials, with a meaningful allocation to renewable energy and
related sectors such as electricity grid stabilisation and even
highly specialised ships needed for the maintenance of offshore
windfarms. I am pleased to report that the Investment Adviser has
achieved all of the goals set by the Company in relation to the
adoption and implementation of a comprehensive ESG programme,
including a retroactive scoring of the current portfolio and
regular ESG reporting to the Board. The Company's ESG 2020
programme is described more fully in the Investment Adviser's
report. Importantly, this includes adding four positions to a
'run-off portfolio', consisting of legacy investments that have low
ESG scores. As at the date of this report, one of these loans has
already been sold; the others will also be sold, if an acceptable
price can be secured; if not, the Company will not participate in
their refinancing.
Closing
I would like to close this year's letter by thanking my fellow
Board members, the Investment Adviser, Investment Manager, our
Brokers, our Independent Advisers, and all other critical service
providers that have adapted extremely well to an unprecedented
period of disruption. I am also pleased with the way the team has
grown together over the last five years, which gives the Board
confidence that the Company will, over the long-term, continue to
deliver an attractive risk-adjusted return with a relatively low
correlation to the broader financial markets.
Thank you for your commitment and support.
Robert Jennings
Chairman
24 June 2020
2. See appendix for Alternative Performance Measures
("APMs")
INVESTMENT ADVISER'S REPORT
The Investment Adviser's Objectives for the Year
Over the course of the financial year ended 31 March 2020,
Sequoia Investment Management Company Limited ("Sequoia") has had a
number of objectives for the Company:
Goal Commentary
----------------------- --------------------------------------------------
Gross portfolio return The Company is fully invested with a portfolio
of 8-9% that yields in excess of 8%
----------------------- --------------------------------------------------
Growth in late cycle 47% of the portfolio is in defensive sectors(3)
strategies as at 31 March 2020.
----------------------- --------------------------------------------------
Capital growth to Gross proceeds of GBP654.8 million raised during
deliver economies the year across three over-subscribed capital
of scale and broader raises
benefits
----------------------- --------------------------------------------------
Timely and transparent Factsheet, commentary, and the full portfolio
investor reporting are provided monthly for full transparency
----------------------- --------------------------------------------------
Dividends of 6.25p We have delivered on our increased dividend
per share target with the declaration of a fourth dividend
of 1.5625p for the quarter ended 31 March 2020,
which was paid to Shareholders on 22 May 2020
----------------------- --------------------------------------------------
3. Accommodation, TMT, utilities, and renewables.
Capital Raised and Share Performance
The Company completed three capital raises during the financial
year ended 31 March 2020, all of which were very significantly
oversubscribed. Two partially pre-emptive offerings were completed
in June 2019 and February 2020, which raised gross proceeds of
GBP216 million and GBP300 million, respectively. A non-pre-emptive
placing of ordinary shares in September 2019 raised gross proceeds
of GBP138.75 million. In each case, the proceeds were used to repay
existing debt and acquire assets from the attractive pipeline of
investments, thereby mitigating cash drag.
As at 31 March 2020, the Company had 1,654,671,448 ordinary
shares in issue. The closing share price on that day was 94.0p per
share, implying a market capitalisation for the Company of
approximately GBP1.6 billion, compared to GBP1.2 billion a year
previously. At the date of signing of these Financial Statements,
the share price had recovered to 105.0p.
NAV Performance
Over the financial year, the Company's NAV decreased from
103.41p per share to 96.69p per share, driven by the following
factors:
Factor NAV
effect
Interest income on the Company's investments 9.71p
--------
Losses on foreign exchange movements, net of the effect of
hedging (0.67)p
--------
Negative market movements (9.17)p
--------
IFRS adjustment from mid-price at acquisition to bid price (0.59)p
--------
Operating costs (1.45)p
--------
Gains from issuing ordinary shares at a premium to NAV 1.64p
--------
Gross decrease in NAV (0.53)p
--------
Less: Dividends paid (6.19)p
--------
Net decrease in NAV after payments of dividends (6.72)p
--------
The year-end portfolio valuation was performed by PwC, who has
been the Company's independent Valuation Agent since April 2017.
PwC's role as valuation agent is to review the discount rates of
the private debt investments and to consider the credit quality and
sector of each, and then benchmark each one to appropriate public
investments or indices where applicable. The goal of this process
is to determine the fair value of the Company's assets on a monthly
basis, however the Company does not apply the IFRS 9 expected
credit losses model to its portfolio as, under IFRS 9, this
requirement applies only to financial assets measured at amortised
cost and not to assets valued at fair value.
March 2020 specifically saw a decline of 11.0p in asset
valuations, of which 79% was attributable to COVID-19-related
spread widening and the assumption of a higher discount rate to
calculate mark to market adjustments to valuations. This is
important to note because any subsequent reduction of the discount
rate will serve to increase the mark to market NAV and will over
time additionally result in a greater pull-to-par effect.
Although the general widening of spreads reduced the Company's
NAV as at 31 March 2020, it does not in itself affect the Company's
expectations at this time for receipt of interest and principal
payments.
In addition, the underlying performance of three of the
Company's investments has been adversely affected to varying
degrees by COVID-19 and the steep decline in the price of oil,
which accounts for a 1.54 pence reduction in the NAV per share when
marked to market. Updates on these investments are included later
on in this report.
Economic infrastructure as a diverse and highly cash-generative
asset class
It is worth taking a moment to provide important context to the
effect of COVID-19 on the Company's portfolio and on the economic
infrastructure debt asset class as a whole.
Economic infrastructure debt is a stable asset class typically
characterised by high barriers-to-entry and relatively stable
cashflows and includes sectors such as Transportation, Utilities,
Power, Telecommunications and Renewables. Economic infrastructure
is often supported by physical assets, long-term concessions or
licenses to operate infrastructure assets and these companies
frequently operate within a regulated framework. This is especially
true in the cases of the Utilities, Telecommunications and parts of
the Power sectors.
A characteristic common to economic infrastructure sectors is
that they earn their revenues from demand, usage or volume. This
means that the project's revenues are linked to its utilisation,
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.
These characteristics of economic infrastructure - stable
cashflows, high barriers-to-entry, physical assets, equity buffers
and lower gearing - all form the bedrock upon which the Company's
investment opportunities are based and analysed. This is not
expected to change, regardless of what is going on in the markets,
because these core features of economic infrastructure all
contribute to strong fundamentals that are critical for weathering
storms.
With that said, economic infrastructure debt is not immune to
market volatility and there are certain actions we have taken, some
of which were well before the COVID-19 crisis. These actions have
helped position the portfolio defensively for a potential downturn,
which we have discussed with many of you over the last year.
The market environment during the year
The Company operated in a largely benign environment in the
first eleven months of the year, during which time the NAV per
share grew by 3.25p after servicing the target dividend. However in
the last month of the Company's financial year, the liquid credit
markets especially experienced a historic widening of lending
margins and bond spreads in response to two extraordinary market
forces: the coronavirus pandemic and an oil supply glut resulting
from tensions between the US, Russia, and Saudi Arabia.
When compared to debt indices during the March COVID-19-related
sell-off, the fall in the Company's NAV compares relatively
favourably to non-infrastructure asset classes. For example, the
Credit Suisse Leveraged Loan Index fell approximately 21% on a
price basis in March 2020 yet has since rebounded by nearly
one-third of that amount as global volatility waned since the
middle of March 2020.
Diversified and cash-generative portfolio
The Company took advantage of the favourable market conditions
in 2019 to begin employing sensible late-cycle strategies. 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. We put these into place
over a year ago because we expected a slowdown in the economy, as
the business cycles in the US and the UK reached their 10th year in
the second half of 2019. It is important to note that we did not
chase yield as spreads tightened over the last few years. We did
not need to do this to maintain yield as infrastructure debt
remains an underinvested and uncrowded space.
-- We have 47% of the portfolio in defensive sectors. These
include Telecommunications, Accommodation, Utilities, and
Renewables which are viewed as defensive because they provide
essential services, often operate within a regulated framework and
have high barriers-to-entry.
-- Our Accommodation sector, which stands at 11%, is less
exposed to COVID-19 than one may expect, because we have no
exposure to the higher risk subsectors within Accommodation such as
old age care and acute hospitals.
-- We have 55% of the portfolio in senior and 45% in mezzanine
to position the portfolio better for a slow growth environment.
-- We have maintained the credit quality of the portfolio over
the last twelve months while still achieving our target yield. We
have a policy of not purchasing CCC quality names.
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 not in Portugal or
Italy, where in addition to the economic challenges, infrastructure
projects have also been exposed to regulatory and legal risks. 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 2020 represented approximately 93% of its portfolio (compared
to 85% a year previously). 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%-3%
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 a
high 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 cover potential calls
on its FX hedges in the event of an FX shock.
The portfolio's regular cash generation is another source of
liquidity to meet liabilities and reinvest in attractive economic
infrastructure debt opportunities. We estimate that the portfolio
will, over the next twelve months and twenty-four months
respectively, generate approximately GBP68 million (c. 4% of NAV)
and GBP300 million (c. 19% of NAV) of free cash based on expected
interest income and contractual repayments (excluding prepayments),
after payment of its operating expenses, interest on borrowings and
our target dividend to Shareholders. The portfolio's strong cash
generation arises from not only the investments' regular,
contractual and therefore predictable interest payments, but also
as a result of the portfolio's short duration, which means that
many of the loans in our portfolio mature over a short time frame.
This affords us considerable comfort that we would have sufficient
cash flow to meet our obligations to our advisers, banks and
Shareholders, even if credit markets were to deteriorate and to
turn illiquid for an extended period of time. Our status as a
closed-ended fund further protects us against unexpected redemption
pressure that from time to time afflicts other structures.
Credit monitoring
Across the range of sectors in which we invest, the outlook for
some is largely unaffected, though the situation remains fluid and
dependent on the length and severity of the economic impact of
continued COVID-19 lockdowns. These sectors include renewables,
data centres, mobile phone cell towers, smart metering, specialised
health care, US power, specialist shipping and residential
infrastructure. Some investments in other sectors, such as
transportation, transportation assets, and midstream oil & gas,
however, have greater exposure to COVID-19 and low oil prices and
will require close monitoring and communication with the borrowers.
Three investments within these sectors have been identified as
assets that will require enhanced monitoring going forward. The
effects of COVID-19 and low oil prices on these three investments
are described in more detail below:
1. US midstream
An investment in the senior and holdco subordinated loans of a
US midstream oil and gas business, based in the Permian basin. The
business also has relatively strong ESG credentials by capturing
gas that would normally be burned in the atmosphere as well as
providing safe disposal of contaminated water. The loans are equal
to 2.8% of the Company's gross asset value and approximately 81% of
the Company's exposure to this borrower is through senior secured
loans. This business is still in its ramp-up phase and capital
expenditure overruns and the fall in the oil price have left it
with short-term liquidity concerns. The Investment Adviser,
together with the other lenders to the business, have appointed
third-party consultants to advise on a range of scenarios which
could include a restructuring of the business. As a result, the
value of this loan has been marked down significantly.
2. Swedish refinery
A loan backed by a Swedish business that owns two oil
refineries, as well as some downstream assets, and which has made
considerable progress towards achieving EU targets for renewable
contents in transportation fuels by 2030. This loan is equal to
2.3% of the Company's gross asset value. The business suffered a
liquidity shock when the decline in the price of oil reduced the
amount of inventory financing it could draw, coupled with margin
calls on its commodity hedging book. However, post-year-end events
have materially improved its situation and the Investment Adviser
expects that the loan will continue to be serviced.
3. German CHP Plant and logistics business
A loan backed by a German Combined Heat and Power plant that
provides heat (in the form of steam) to industrial companies in the
automotive components sector, as well as selling electricity to the
grid. This loan is approximately 1.5% of the Company's gross asset
value. Due to the COVID-19 pandemic the German automotive industry
has almost completely shut down and the key users of power from the
plant are operating at minimum utilisation rates. The Investment
Adviser is closely following the situation and maintains frequent
contact with management and shareholders. It is possible that the
key off-takers will be eligible for German government support, and
in addition, the German government is considering a car scrappage
scheme, which will be positive for the automotive sector.
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. As the Company grows in size, Sequoia expects to source an
increasing number of opportunities from the primary market.
Primary market origination
The primary loan markets are the predominant source of
investment opportunities 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
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 79% of the portfolio
comprising primary investments as at 31 March 2020.
Secondary market origination
Some of the Company's investments continue to be acquired from
banks or other lenders in the secondary markets. This enables a
relatively rapid deployment of capital, since primary market
transactions in infrastructure debt can often take a considerable
time to execute. In addition, secondary market loans have
performance history that permits credit analysis on actual results
rather than financial forecasts. Research(4) 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.
In the current environment, there is the possibility that a
number of high quality economic infrastructure investments will
appear on the secondary market at attractive prices. As the Company
slowly ramps up deployment of its cash as the market improves,
these opportunities could be a significant source of alpha for the
Company without sacrificing credit quality.
4. Average annual European broad infrastructure and global
project finance default rates. Moody's, "Default and Recovery Rates
for Project Finance Bank Loans 1983-2018," March 2020
Strengthening the team at Sequoia Investment Management
Company
As the Company embarks on its sixth year of operations, a number
of initiatives have been taken by the Investment Adviser to ensure
there are ample resources to devote to all monitoring and new
origination activities.
During 2019, the Investment Adviser has recognised the need for
a senior employee with deep infrastructure experience to lead
Sequoia's risk functions. As a result, Sequoia has appointed Anurag
Gupta as Chief Risk Officer; he comes from KPMG, where he was a
Partner and Global Sector Head of Power in their global
infrastructure advisory practice. The depth of Anurag's strong
infrastructure experience is a valuable asset to Sequoia as the
risks of new and existing investments are evaluated and
monitored.
To support the enhanced monitoring during the ongoing COVID-19
pandemic as well as the deployment of capital into the Company's
pipeline of investments, the Investment Adviser has recently hired
one new analyst and is currently interviewing for a further new
analyst position. These analysts will augment the support available
for the Vice-Presidents and Associates as they continue to enhance
the review of all existing investments as well as exploring new
opportunities. A former 2019 intern will also join as a full-time
analyst this summer. The total headcount with these three
additional analysts will be eighteen, of which seventeen are
investment professionals.
Strong pipeline of opportunities
Sequoia continues to monitor the global effects of the COVID-19
pandemic as well as the primary and secondary effects of
historically low oil prices. As the world slowly emerges from
lockdown, Sequoia believes the Company is particularly
well-positioned to continue deploying capital into its strong
pipeline of mostly private debt infrastructure lending
opportunities. Attractive secondary market opportunities will also
be targeted if the pricing is consistent with the Company
generating a gross return in excess of 8% per annum. If the market
continues to stay soft, this could potentially be an opportunity to
improve the average credit quality of the portfolio without
sacrificing yield.
In terms of the pipeline, Sequoia is especially excited about
potential investments in the renewables, accommodation and TMT
(Telecommunications, Media and Technology) sectors where the
current portfolio is arguably underweight. Lending opportunities
are often attractive and additional investments into these sectors
would be desirable. Investments in these sectors will also provide
additional stability should market conditions deteriorate as a
result of a lengthy recession, a second wave of COVID infections or
another policy-driven market downturn.
Fund performance
31 March 30 September
2020 2019 31 March 2019
Net asset
value per ordinary share 96.69p 105.30p 103.41p
------------------
GBP million 1,599.9 1,459.9 1,097.1
-------------------------- ---------------------- --------- --- ------------- --- ------------------
Invested percentage of net
portfolio asset value 95.8% 99.3% 103.8%
including investments
Total portfolio in settlement 101.2% 108.7% 112.9%
------------------ -------------------------- ---- --------- --- ------------- --- ------------------
Portfolio characteristics
31 March 30 September
2020 2019 31 March 2019
Number of investments 72 78 69
---------------------------------------------- ---- --------- --- ------------- --- ------------------
Single largest
investment
Average investment
size GBP million 56.5 60.4 56.4
----------------------------
percentage
of NAV 3.5% 4.1% 5.1%
GBP million 21.3 18.6 16.5
---------------------- ------------------------- --------- --- ------------- --- ------------------
by number
of invested
Sectors assets 8 8 8
Sub-sectors 29 30 26
Jurisdictions 13 13 13
---------------------------- --------- ------------- ------------------
Private debt percentage 93.1% 88.4% 85.1%
of invested
assets
Senior debt 55.0% 62.0% 64.3%
Floating rate 69.7% 72.0% 69.4%
Construction risk 11.7% 15.7% 16.2%
---------------------------- ---------------- --------- ------------- ------------------
Weighted-average
maturity years 6.6 5.7 5.8
Weighted-average
life years 5.3 4.2 4.4
Yield-to-maturity 12.0% 8.2% 8.6%
Modified duration 1.5 1.2 1.3
---------------------------- --------------------- --------- --- ------------- --- ------------------
In summary, the opportunity for the Company in economic
infrastructure debt remains as strong and the asset class continues
to be under-invested and attractive. It is particularly in times of
market stress that economic infrastructure exhibits itself as a
strong and resilient asset class, and Sequoia is therefore
optimistic about the prospects for growing the Company while
maintaining its track record of sourcing suitable low risk,
resilient investments and delivering to Shareholders a total return
of 7-8% per annum over the long term.
Sequoia Investment Management Company Limited
Investment Adviser
24 June 2020
ESG 2020 - SUMMARY
The Company has begun a comprehensive programme of establishing
and incorporating broad ESG considerations into its approach to
investment.
The Board and the Investment Adviser take their corporate and
social responsibilities seriously. The Company already has strong
ESG credentials. For example, it is invested in a number of
renewable energy assets, such as solar panels and wind turbines, as
well as specialist vessels used in the maintenance of offshore wind
turbines. It is also invested in assets necessary for the
transition to a lower-carbon world such as natural gas pipelines in
the United States, which are needed to reduce the amount of
coal-fired electricity generation. Other investments have societal
benefits such as the provision of healthcare or education.
The Board and Investment Adviser have therefore established a
number of appropriate policies to demonstrate to shareholders how
the Company takes into account the risks associated with climate
change when deploying its capital. The Board as a whole, led by the
Chairman, is responsible for overseeing the development and
implementation of the Company's sustainability strategy.
The guiding principles behind the ESG programme are the UNPRI,
to which the Investment Adviser is a signatory. These principles
now cover investments in private debt, and as such are highly
relevant to the Company's business.
From these high-level principles we have derived the following
set of internal guidelines that require consideration in respect of
each of our loans or prospective loans.
Guidelines Considerations
Alignment with community
goals * Health & safety of residents: pollution & noise
* Historical and cultural elements preservation and
project's visual impact
Commitment to sustainability
goals * Counterparties' commitment to sustainability,
including an adequate maintenance plan
* Other indicators of commitment to sustainability
Efficient use of resources
* Materials recycling, reduction of energy & water
consumption and limitation on use of landfills
* Alternative water sources usage and consumption of
renewable energy
Reduced environmental footprint
* Emissions of greenhouse gasses and air pollutants
* Usage of environmentally friendly and biodegradable
materials
* Use of farmland and natural buffer zones
Sustainable economic development
* Job creation and workforce skills development
* Support of local social and business community
================================= ================================================================
The Investment Adviser has incorporated these principles into
all stages of its investment process:
-- The origination of new investments will include enhanced
negative and positive screening.
-- Due diligence and credit analysis will include assessing
thoroughly the potential impact of climate change, enhanced
environmental impact and technical assessments, the borrower's
social and governance framework, and ESG questionnaires.
-- Loan documentation can include, where appropriate, ESG
considerations. For example, these could include enhanced reporting
by borrowers in relation to their environmental impact.
-- The Company's reporting to its shareholders will be expanded
to cover ESG. In particular, it will take account of the
recommendations of the Task Force on Climate-related Disclosures
(TFCD), including those recommendations specific to the banking
sector, and the Company aims to provide best-in-class
disclosure.
In parallel with this, the Investment Adviser has
retrospectively reviewed the Company's existing portfolio and
assessed whether it is currently holding investments which, had
these policies been in place at the time, would not have been made.
The Investment Adviser positively notes that there were minimal
"red flag" investments in the portfolio at the time of review, and
this is only expected to improve over time as the ESG policy is
more firmly embedded within the investment process. Two "red flag"
investments were sold as a result of this process, including a coal
export terminal and a UK motorway services provider.
Based on its preliminary review, the Investment Adviser does not
believe its ESG policies will materially change the investment
portfolio's yield or diversification, given the portfolio's
existing ESG credentials. There are currently no investments in oil
& gas exploration and production investments, military
infrastructure, tobacco, gambling or alcohol.
The Company therefore views its ESG 2020 initiative as building
upon solid foundations and being an evolution rather than a
revolution.
Applying ESG principles to SEQI
ESG principles are applied in three ways to the SEQI
portfolio:
1. Negative screening
2. Thematic investing (positive screening)
3. ESG scoring
Negative screening
The following subsectors or asset types are excluded:
1. Military infrastructure, such as military housing.
2. Infrastructure related to the exploration and production of
oil and gas, such as oil rigs and platforms, fracking facilities
and facilities involved in tar sands. Note that midstream assets
such as pipelines are not necessarily excluded but are subject to
ESG scoring as set out below.
3. Infrastructure related to mining thermal coal.
4. Electricity generation from coal.
5. Alcohol, gambling, pornography and tobacco are already
excluded by SEQI's investment criteria.
Thematic investing (positive screening)
Currently, SEQI has three ESG investment themes. Positive
screening will be employed to increase the Fund's exposure to these
investment themes, subject to existing concentration limits.
1. Renewable energy, such as solar, wind and geothermal
generation, and directly related businesses including companies
that supply renewable energy.
2. Enabling the transition to a lower carbon world, such as grid
stabilization, electric vehicles, traffic congestion reduction and
the substitution of coal by gas.
3. Infrastructure with social benefits, such as healthcare, clean water and education.
As at 31 March 2020, thematic investing covers 55% of SEQI's
investment portfolio, split 15% renewable energy, 20% enabling the
transition to a lower carbon world and 20% infrastructure with
social benefits. The remaining 45% of the portfolio comprises
investments in the Transport, Transport Assets, Power, TMT and
Other sectors and is mostly ESG-neutral.
The following table shows example anonymised investments in each
theme:
Renewable energy Enabling the transition to a lower carbon world Infrastructure with social benefits
============================= ================================================ ====================================
US renewables business Spanish CCGT US telecom towers
US hydro power US midstream UK specialist care
UK flexible generation German toll road UK student housing
Nordic offshore wind repair German CCGT Dutch student housing
US solar panel business US midstream Irish student housing
UK electricity supplier US electricity generation US education
Spanish solar portfolios US pipelines
Nordic specialist shipping
US electric vehicles
============================= ================================================ ====================================
ESG scoring
Some infrastructure assets (for example, the electricity grid)
are neither excluded through negative screening nor positively
selected through thematic investing; therefore, it is necessary to
have a methodology to assess the ESG profile of these projects.
The Company's ESG scoring methodology has been designed to be as
objective as possible. The score primarily reflects the current ESG
performance of the investment but also reflects, to a limited
extent, the "direction of travel". For example, a business that
currently significantly contributes to climate change will receive
some credit if it is investing meaningfully to reduce its
contribution.
Note that the ESG score is distinct to a credit rating. Some
elements of ESG scoring will directly affect a borrower's credit
rating (for example, weak corporate governance has a negative
contribution to credit quality) but nonetheless it is entirely
possible for a business with a weak ESG score to have a strong
credit profile, and vice versa.
To facilitate ESG scoring during the investment process, the
Investment Adviser's new Chief Risk Officer, Anurag Gupta, has been
working closely with the portfolio management team to design an ESG
scoring model that must be completed prior to bringing a new
investment to the Investment Committee. The intention also is to
provide the credit analysts with a guide for ESG considerations at
the earliest stages of due diligence. Implementing the ESG model at
the beginning of the deal lifecycle will flag assets with weaker
ESG credentials much earlier.
Finally, the ESG scoring methodology and model have been
calibrated such that renewable energy projects with the most robust
social and governance practices would receive a score of 100, and a
power plant that burns thermal coal with no redeeming social or
governance policies would receive a score of 0. Needless to say,
the power plant in this example would not make it past the
Investment Adviser's new business committee.
ESG score distributions as at 31 March 2020
The Annual Report includes a chart representing the Company's
portfolio as at 31 March 2020. This is the result of the Investment
Adviser's preliminary review over the past six months
retrospectively scoring portfolio investments. It should serve as a
baseline upon which the Investment Adviser aims to improve
throughout the coming year. Over time, the Investment Adviser
expects the distribution to shift significantly to the right as
investments with weaker credentials repay, and capital is
redeployed in investments with stronger ESG profiles. In order to
accelerate this process, four of the Company's lowest-scoring
investments have been added to a 'run-off portfolio'. These are a
coal-export terminal, a hydrocarbons and chemicals import-export
terminal, a petrol station business and an airport services company
(which has been sold since year end). In aggregate, these positions
represent 6.3% of the Company's NAV at year end. Being in the
run-off portfolio means that the Investment Adviser will actively
look to dispose of these loans and, if it is not possible to sell
them at an attractive price, the Company will not participate in
their refinancing.
Principal Risks and Uncertainties
The Board established a Risk Committee, which is responsible for
reviewing the Company's overall risks and monitoring the risk
control activity designed to mitigate these risks. The Risk
Committee has carried out a robust assessment of the principal
risks facing the Company, including those that would threaten the
Company's business model, future performance, solvency or
liquidity. The Board has appointed International Fund Management
Limited ("IFML" or the "Investment Manager") as the Alternative
Investment Fund Manager ("AIFM") to the Company. IFML is also
responsible for providing risk management services compliant with
that defined in the Alternative Investment Fund Managers Directive
("AIFMD") and as deemed appropriate by the Board.
Under the instruction of the Risk Committee, IFML is responsible
for the implementation of a risk management policy and ensuring
that appropriate risk mitigation processes are in place; for
monitoring risk exposure; preparing quarterly risk reports to the
Risk Committee; and otherwise reporting on an ad hoc basis to the
Board as necessary.
Since their appointment on 30 January 2018, Tim Drayson and Kate
Thurman, independent consultants to the Company, have provided
guidance to the Board on the overall approach to risk management
across the Company's portfolio. Part of their focus has been to
assist the Investment Manager in scrutinising certain of the
Investment Adviser's credit evaluations.
Anurag Gupta's appointment as Chief Risk Officer of the
Investment Adviser provides additional oversight and resource to
the Company's risk management function and the due diligence
process employed by the Investment Adviser.
The principal risks associated with the Company are as
follows:
Market risk
The value of the investments made and intended to be made by the
Company will change from time to time according to a variety of
factors. The performance of the underlying borrowers, expected and
unexpected movements in interest rates, exchange rates, inflation,
bond ratings and general market pricing of similar investments will
all impact the Company and its Net Asset Value.
Credit risk
Borrowers of loans or issuers of bonds in which the Fund has
invested may default on their obligations. Such default may
adversely affect the income received by the Company and the value
of the Company's assets.
Liquidity risk
Infrastructure debt investments in loan form are not likely to
be publicly traded or freely marketable, and debt investments in
bond form may have limited or no secondary market liquidity. Such
investments may consequently be difficult to value or sell and
therefore the price that is achievable for the investments might be
lower than their valuation.
Counterparty risk
Counterparty risk can arise through the Company's exposure to
particular counterparties for executing transactions and the risk
that counterparties cannot meet their contractual obligations.
Leverage risk
Leverage risk arises where the Company takes on additional risk
because of the leverage of exposures, along with the specific
potential for loss arising from a leverage counterparty being
granted a charge over assets. The Board monitors the level of
leverage on an ongoing basis as well as the credit ratings of any
counterparties.
Compliance & regulatory risk
Compliance and regulatory risk can arise where processes and
procedures are not followed correctly or where incorrect judgement
causes the Company to be unable to meet its objectives or
obligation, exposing the Company to the risk of loss, sanction or
action by Shareholders, counterparties or regulators. The
Investment Adviser and the Administrator monitor compliance with
regulatory requirements and the Administrator presents a report at
quarterly Board meetings.
Operational risk
This is the risk of loss resulting from inadequate or failed
internal processes, people and systems or from external events.
This can include, but is not limited to, internal/external fraud,
business disruption and system failures, data entry errors and
damage to physical assets.
Political and economic risk
The Risk Committee reviews risks as they relate to Brexit and
the impact of Brexit on the above risks.
Emerging risks
The Board is constantly alert to the identification of any
emerging risks, in discussion with the Investment Manager and the
Investment Adviser. The Board will then assess the likelihood and
impact of any such emerging risks, and will discuss and agree
appropriate strategies to mitigate and/or manage the identified
risks. Emerging risks are managed through discussion of their
likelihood and impact at each quarterly Board meeting. Should an
emerging risk be determined to have any potential impact on the
Company, appropriate mitigating measures and controls are
agreed.
The emergence of the COVID-19 pandemic, and its ongoing effects,
have presented a significant emerging risk to markets globally, and
prompt action was taken by the Board and its key advisers in March
2020 to assess in full the potential impact to the Company from the
resulting exceptional market volatility and widening of spreads.
The impact of the pandemic is discussed further in the report of
the Audit Committee.
A detailed review of the main financial risks faced by the
Company, and how they are managed or mitigated, is set out in note
5 to the Financial Statements.
Going Concern
The Company has been incorporated with an unlimited life. In
accordance with the Company's Articles of Incorporation, the
Directors were required to propose an ordinary resolution (the
"Continuation Resolution") on or before 3 September 2016 that the
Company continues as a registered closed-ended collective
investment scheme, and to propose further Continuation Resolutions
within every three years thereafter. The first Continuation
Resolution was passed by Shareholders at an Extraordinary General
Meeting of the Company on 25 May 2016, and the second on 16 August
2018 at the Company's Annual General Meeting ("AGM"). Should a
Continuation Resolution not be passed, the Directors are required,
within six months, to put forward proposals for the reconstruction
or reorganisation of the Company to the Shareholders for their
approval. These proposals may or may not involve winding up the
Company and, accordingly, failure to pass a Continuation Resolution
will not necessarily result in the winding up of the Company.
The Directors have considered the possibility that the next
Continuation Resolution, to be proposed at the 2021 AGM, may not be
passed by Shareholders, however they noted the overwhelming
majority vote in favour of the Continuation Resolutions passed in
May 2016 and August 2018, the consistently strong appetite for the
Company's investment proposition, evidenced by a number of
successful share issues, and that the Company's shares have, apart
from a period from late March to early April 2020, consistently
traded at a premium since launch.
The Directors have reviewed the Company's holdings in cash and
cash equivalents and investments, including a consideration of the
revaluation losses arising on certain investments as a result of
the COVID-19 pandemic. Partly as a result of the Company's large
capital raise in early March 2020, its balance sheet was
exceptionally strong when the consequences of COVID-19 impacted on
financial markets, with a very low level of gearing. Moreover, the
losses that were incurred at year end - which have already begun to
reverse, and should continue to do so as the investments mature and
their valuations accrete to par - were unrealised, and therefore
have no direct effect on the solvency of the business. The risk of
realised losses arising through loans defaulting is limited to a
few specific investments, representing a small proportion of the
Company's investment portfolio. The Directors also note that the
reductions in the valuation of investments as a result of COVID-19
have had no impact on the interest income cashflow of the Company
or its ability to pay its target dividend.
As a result of this review, the Directors have concluded that it
is appropriate to adopt the going concern basis in preparing the
Financial Statements as the Company, despite the effects of the
COVID-19 pandemic, has a strong balance sheet and adequate
financial resources to meet its liabilities as they fall due.
Viability Statement
The Directors have assessed the viability of the Company over a
five-year period to May 2025, taking account of the Company's
current position and the potential impact of the principal and
emerging risks outlined in this statement, including risks
associated with the current COVID-19 pandemic.
In making this statement, the Directors have considered the
resilience of the Company, taking into account its current
position, the principal and emerging risks facing the Company in
severe but reasonable scenarios and the effectiveness of any
mitigating actions. This assessment has considered the potential
impacts of these risks on the business model, future performance,
solvency and liquidity over the period.
The Directors have determined that the five year period to May
2025 is an appropriate period over which to provide its viability
statement as the average remaining life to maturity of the Fund's
portfolio of investments has historically generally fallen within
the range of 4 to 5 years. In making their assessment, the
Directors have taken into account the Company's NAV, net income,
cash flows, dividend cover, regulatory compliance, the anticipated
short- to medium-term effects of COVID-19 and other key financial
ratios over the period. These metrics are subject to sensitivity
analysis, which involves flexing a number of main assumptions
underlying the forecast. This analysis is carried out to evaluate
the potential impact of the Company's principal risks actually
occurring, primarily the following: severe changes in
macro-economic conditions, including a 20% Sterling FX shock, which
would trigger margin calls by the Company's FX counterparties;
inability to refinance leverage facilities; defaults of the two
largest investments, representing approximately 7% of the Fund's
portfolio, which would reduce the Company's annual interest income
by c. 6.8%; deterioration in underlying credit ratings; and
downgrading or illiquidity of loans. This analysis included
stress-testing to simulate the combined effects of the recession of
the early 2000s and the 2008 global financial crisis.
The viability model also includes projections for the continuing
deployment of capital into new target investments amounting to
approximately GBP478 million, whilst still supporting the Company's
target dividend and meeting its financial targets.
The Directors have also considered the possibility that a
Continuation Resolution, to be proposed at the 2021 AGM, may not be
passed by Shareholders. The Directors noted the overwhelming
majority vote in favour of the Continuation Proposals passed in May
2016 and August 2018 and the strong appetite for the Company's
investment proposition evidenced by the successful launch in March
2015, and a number of subsequent significantly over-subscribed Open
Offers and Placings, and therefore believe that the likelihood of
the Continuation Resolution failing is low. They also noted that
the rejection of a Continuation Proposal by Shareholders does not
necessarily oblige the Directors to wind up the Company.
Based on this assessment, the Directors have a reasonable
expectation that the Company will be able to continue in operation
and meet its liabilities as they fall due over the period to May
2025.
Management Arrangements
Investment Manager and Investment Adviser
The Directors are responsible for the determination of the
Company's investment policy and have overall responsibility for the
Company's activities. The Company has entered into an Investment
Management Agreement with the Investment Manager with effect from
28 January 2015. On the same date, the Investment Manager, with the
consent of the Company, entered into an Investment Advisory
Agreement with Sequoia Investment Management Company Limited (the
"Investment Adviser") to manage the assets of the Company in
accordance with the Company's investment policy. The Investment
Adviser is responsible for the day-to-day management of the
Company's portfolio and the provision of various other management
services to the Company, subject to the overriding supervision of
the Directors.
The Directors consider that the interests of Shareholders, as a
whole, are best served by the continued appointment of the
Investment Manager and the Investment Adviser to achieve the
Company's investment objectives.
Custody Arrangements
The Company's assets are held in custody by The Bank of New York
Mellon (the "Custodian") pursuant to a Custody Agreement dated 27
February 2015. A summary of the terms, including fees and notice of
termination period, is set out in note 10 to the Financial
Statements.
The Company's assets are registered in the name of the Custodian
within a separate account designation and may not be appropriated
by the Custodian for its own account.
The Board conducts an annual review of the custody arrangements
as part of its general internal control review and is pleased to
confirm that the Company's custody arrangements continue to operate
satisfactorily. The Board also monitors the credit rating of the
Custodian, to ensure the financial stability of the Custodian is
being maintained to acceptable levels. As at 31 March 2020, the
long-term credit rating of the Custodian as reported by Standard
and Poor's is AA- (2019: AA-), which is deemed to be an acceptable
level.
In January 2020 representatives of the Company undertook a due
diligence visit to the Custodian's offices in Ireland to meet a
number of personnel and review the performance of the Custodian.
Further details of the review are provided under the description of
the work of the Management Engagement Committee.
Administrator
Administration and Company Secretarial services are provided to
the Company by Praxis Fund Services Limited (the "Administrator").
The Administrator also assists the Company with AIFMD, Common
Reporting Standard and FATCA reporting.
A summary of the terms of appointment of the Investment Manager,
Investment Adviser, Custodian and Administrator, including details
of applicable fees and notice of termination periods, is set out in
note 10 to the Financial Statements.
GOVERNANCE
BOARD OF DIRECTORS
The Directors of Sequoia Economic Infrastructure Income Fund
Limited, all of whom are non-executive and independent, are as
follows:
Robert Jennings, CBE (Chairman)
Robert Jennings is a resident of the United Kingdom and
qualified as a Chartered Accountant in 1979. He has over 30 years'
experience in the infrastructure sector. Mr Jennings was a managing
director of UBS Investment Bank and was joint head of the Bank's
Infrastructure Group until 2007. He has twice acted as a special
senior adviser to HM Treasury; in 2001/02 during Railtrack's
administration and again in 2007/08 in relation to Crossrail.
Mr Jennings served as one of the Department for Transport
appointed non-executives on the Board of Crossrail, and was Chair
of Southern Water until February 2017. He was appointed to the
Board of 3i Infrastructure plc in a non-executive role with effect
from 1 February 2018, which is ongoing. In June 2019, he became one
of the founding directors of Chapter Zero, whose aim is to provide
non-executive directors and other parties a forum by which they can
conveniently access guidance on carbonisation, climate change and
the role of boards in responding to these challenges, having been a
member of its executive steering committee since November 2018.
Sandra Platts (Senior Independent Director)
Sandra Platts is a resident of Guernsey and holds a Masters in
Business Administration. Mrs Platts joined Kleinwort Benson (CI)
Ltd in 1986 and was appointed to the board in 1992. She undertook
the role of Chief Operating Officer for the Channel Islands
business and in 2000 for the Kleinwort Benson Private Bank Group -
UK and Channel Islands. In January 2007, she was appointed to the
position of Managing Director of the Guernsey Branch of Kleinwort
Benson and led strategic change programmes as part of her role as
Group Chief Operating Officer. Mrs Platts also held directorships
on the strategic holding board of the KB Group, as well as sitting
on the Bank, Trust Company and Operational Boards. She resigned
from these boards in 2010. Mrs Platts is a non--executive director
of NB Global Floating Rate Income Fund Limited and UK Commercial
Property REIT (both listed on the Main Market of the London Stock
Exchange) and Investec Bank (Channel Islands) Limited, plus a
number of other investment companies. She is a member of the
Institute of Directors.
Jan Pethick
Jan Pethick is a resident of the United Kingdom and has over 35
years' experience in the debt sector. Mr Pethick was Chair of
Merrill Lynch International Debt Capital Markets for 10 years, from
2000 to 2010. He had previously been Head of Global Debt
Origination at Dresdner Kleinwort Benson which had acquired the
credit research boutique, Luthy Baillie which he had co--founded in
1990. Prior to that, he worked for 12 years at Lehman Brothers
where he was a member of the Executive Management Committee in
Europe. Mr Pethick currently serves as Chair of Troy Asset
Management and was an independent member of the Supervisory Board
of Moody's Investor Services Europe.
Jonathan (Jon) Bridel
Jon Bridel is a resident of Guernsey. Mr Bridel is currently a
non--executive director of a number of London-listed investment
funds. Mr Bridel was previously Managing Director of Royal Bank of
Canada's investment businesses in the Channel Islands.
After qualifying as a Chartered Accountant in 1987, Mr Bridel
worked with Price Waterhouse Corporate Finance in London. He
subsequently held senior positions in banking, credit and corporate
finance, investment management and private international businesses
where he was Chief Financial Officer.
Mr Bridel holds a Master of Business Administration (Dunelm) and
also holds qualifications from the Institute of Chartered
Accountants in England and Wales, where he is a Fellow, the
Chartered Institute of Marketing, where he is a Chartered Marketer,
and the Australian Institute of Company Directors. He is also a
Chartered Director and Fellow of the Institute of Directors and is
a Chartered Fellow of the Chartered Institute for Securities and
Investment.
DISCLOSURE OF DIRECTORSHIPS IN PUBLIC COMPANIES LISTED ON
RECOGNISED STOCK EXCHANGES
The Directors hold the following directorships in other public
companies:
Company Name Stock Exchange
Robert Jennings, CBE
3i Infrastructure plc London Stock Exchange - Main Market
Sandra Platts
NB Global Floating Rate Income Fund Limited London Stock
Exchange - Main Market
UK Commercial Property REIT London Stock Exchange - Main
Market
Marble Point Loan Financing Limited London Stock Exchange -
SFS
Jan Pethick
None
Jon Bridel
DP Aircraft 1 Limited London Stock Exchange - SFS
Fair Oaks Income Limited London Stock Exchange - SFS
SME Credit Realisation Fund Limited (in wind-down) London Stock
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Starwood European Real Estate Finance Limited
(until 31 December 2020) London Stock Exchange - Main Market
The Renewables Infrastructure Group Limited London Stock
Exchange - Main Market
THE SEQUOIA INVESTMENT MANAGEMENT COMPANY TEAM
Sequoia Investment Management Company Limited ("Sequoia") is an
experienced investment adviser, which has acted as Investment
Adviser to the Company from its inception. Sequoia's management
team and Investment Committee are as follows:
Randall Sandstrom, Director and CEO/CIO
28 years of experience in the international and domestic credit
markets and infrastructure debt markets.
Has managed global high yield and investment grade bonds,
leveraged loans, ABS and money market securities.
Board of Directors, LCF Rothschild and MD of Structured Finance.
Former CEO/CIO, Eiger Capital.
Head of Euro Credit Market Strategy, Morgan Stanley.
Institutional Investors "All-American" senior Industrial Credit
Analyst, CS First Boston (energy and transportation). Has worked in
London, New York and Tokyo.
Steve Cook, Director and Head of Portfolio Management
19 years of infrastructure experience.
European Head of Whole Business Securitisation and CMBS and
Co-Head of Infrastructure Finance at UBS.
Head of European Corporate Securitisation at Morgan Stanley with
lending and balance sheet responsibility.
Wide variety of infrastructure projects in the UK and across
Europe as a lender, arranger and adviser.
Dolf Kohnhorst, Director and Co-Head of Infrastructure Debt
36 years of experience in investment banking, debt capital
markets and project finance commercial lending.
Head of Société Générale's Financial Institutions Group covering
UK, Irish, Benelux and Scandinavian banks, insurance companies,
pension funds and investment management companies.
16 years at Morgan Stanley heading Benelux and Scandinavian
sales teams and DCM Structured Solutions Group.
Commercial lending to shipping, construction and project finance
sectors.
Greg Taylor, Director and Co-Head of Infrastructure Debt
More than 30 years of infrastructure experience.
Head of Infrastructure Finance at Merrill Lynch and Co-Head of
Infrastructure Finance at UBS.
Developed Moody's methodology for rating regulated
infrastructure companies.
Broad perspective as bond arranger, direct lender, credit
analyst and financial adviser to both borrowers and public sector.
Includes lending in Europe, the UK, North America and Latin
America.
Anurag Gupta, Chief Risk Officer
Over 20 years of experience in project finance, infrastructure
investment and appraisal, risk management, M&A and financial
advisory.
Extensive transactional experience across infrastructure sectors
such as transportation, power and utilities, renewables, TMT and
social infrastructure.
Former KPMG in Canada Infrastructure Advisory Partner and Global
Sector Head of Power within the KPMG Global Infrastructure
Practice; previous infrastructure industry roles in both public and
private sectors in multiple geographies.
MBA (Tulane University, USA), Bachelors in Mechanical
Engineering (Engineering Council, UK) and BSc (Calcutta University,
India).
INDEPENT CONSULTANTS
The independent consultants of Sequoia Economic Infrastructure
Income Fund Limited are as follows:
Tim Drayson
Tim Drayson has over thirty years' experience in the US and
European debt capital markets. He was most recently Global Head of
Corporate Sales & Deputy Head of the European Corporate Debt
Platform at BNP Paribas and had been a member of the Fixed Income
Transaction Approval Committee, screening complex transactions and
interacting with the bank's credit committee. He joined BNP Paribas
as Global Head of Securitization in 2005, with responsibility for
managing all origination and structuring teams, including
infrastructure. Prior to joining BNP Paribas, Tim held senior roles
at Morgan Stanley in London as Head of Securitized Products
Distribution and Paine Webber in New York.
Kate Thurman
Kate Thurman is a highly experienced and respected credit market
professional having spent over 30 years identifying and analysing
credit risk in bond and loan instruments for institutional
portfolios. Kate has broad experience across industry sectors,
credit grades, legal structures and jurisdictions, having special
expertise in the assessment of quantitative and qualitative credit
factors and downside risks. She is a former board and audit
committee member of Colne Housing Society, a not-for-profit Housing
Association with 3,000 units under management and ca. GBP150
million of commercial debt. Her former executive career included
senior roles in Asset Management and Investment Banking
organisations.
DIRECTORS' REPORT
The Directors of Sequoia Economic Infrastructure Income Fund
Limited (the "Company") are pleased to submit their Annual Report
and the Audited Financial Statements (the "Financial Statements")
for the year ended 31 March 2020.
Results and Dividends
The results for the year are shown in the Statement of
Comprehensive Income.
The Directors have declared and paid dividends of GBP78,947,224
during the year ended 31 March 2020 (2019: GBP55,365,515). Further
details of dividends declared or paid are detailed in note 4 to the
Financial Statements.
Further to the Company's announcement of 22 May 2019, and with
effect from the quarter ended 30 June 2019, its dividend policy, in
the absence of any significant restricting factors, is to pay
dividends totalling 6.25p per ordinary share per annum (increased
from 6p per ordinary share) for the foreseeable future. This policy
was reaffirmed by the Company on 15 April 2020 for the financial
year ended 31 March 2021. The Company pays dividends on a quarterly
basis.
Independent Auditor
KPMG Channel Islands Limited was appointed as Auditor on 28
January 2015. A resolution to re-appoint KPMG Channel Islands
Limited as Auditor will be put to the forthcoming AGM.
Directors and Directors' Interests
The Directors, all of whom are independent and non-executive,
are listed in the Board of Directors section.
None of the Directors has a service contract with the Company
and no such contracts are proposed. During the year, Robert
Jennings received a fee of GBP66,800 per annum for his services as
Chairman of the Board of Directors. The remaining Directors each
received a fee of GBP44,300 per annum for their services as
Directors.
Robert Jennings serves as Chair of the Nomination Committee; Jan
Pethick as Chair of the Management Engagement Committee; Jon Bridel
as Chair of the Risk Committee; and Sandra Platts as Chair of the
Audit Committee and the Remuneration Committee. Jan Pethick, Jon
Bridel and Sandra Platts are each entitled to an additional fee of
GBP7,000 per annum in relation to their roles as Committee Chair.
Sandra Platts is entitled to a further additional fee of GBP5,000
per annum in relation to her role as Senior Independent
Director.
During the year, Robert Jennings, Jan Pethick, Jon Bridel and
Sandra Platts each received a listing fee of GBP6,000 in connection
with the Open Offer, Ordinary Share Placing and Offer for
Subscription on 27 June 2019, which was subject to admission.
Following a review of the Company's remuneration policy, the
Directors determined that such fees would no longer apply, and
therefore no fee was paid in connection with the Open Offer,
Ordinary Share Placing and Offer for Subscription on 3 March
2020.
For further information related to Directors' remuneration,
please refer to the Directors' Remuneration Report.
As at 31 March 2020, the Directors had the following interests
in the shares of the Company:
Name Percentage of
Number of ordinary shares
ordinary shares in issue
---------------------------------------- ----------------- -----------------
Robert Jennings (Chairman) (with other
members of his family) 242,666 0.02%
Jan Pethick (with his spouse) 263,820 0.02%
Jon Bridel (with his spouse) 10,452 0.00%
Sandra Platts (in a family RATS) 26,776 0.00%
---------------------------------------- ----------------- -----------------
During the year, Robert Jennings acquired 22,666 ordinary shares
in the Open Offer, Placing and Offer for Subscription on 3 March
2020. A holding of 20,000 ordinary shares previously deemed to be a
connected holding has been disaggregated where this is no longer
the case.
During the year, Sandra Platts acquired 2,384 ordinary shares in
the Open Offer, Placing and Offer for Subscription on 27 June 2019
and 5,319 ordinary shares in the Open Offer, Placing and Offer for
Subscription on 3 March 2020.
Substantial Shareholdings
As at 31 March 2020, the Company had the following shareholdings
in excess of 5% of the issued share capital:
Name Number of ordinary shares Percentage
------------------------------ -------------------------- -----------
Investec Wealth & Investment 126,095,443 7.62%
Rathbones 86,092,111 5.20%
------------------------------ -------------------------- -----------
Related Parties
Details of transactions with related parties are disclosed in
note 10 to the Financial Statements.
Listing Requirements
Since its listing on the Main Market of the London Stock
Exchange and admission to the premium segment of the Official List
of the UK Listing Authority, the Company has complied with the
Prospectus Rules, the Disclosure Guidance and Transparency Rules
("DTR") and the European Union's Market Abuse Regulation (as
implemented in the UK through the Financial Services and Markets
Act 2000 (Market Abuse) Regulations 2016).
Foreign Account Tax Compliance Act
The Foreign Account Tax Compliance Act ("FATCA") became
effective on 1 January 2013. The legislation is aimed at
determining the ownership of US assets in foreign accounts and
improving US tax compliance with respect to those assets. On 13
December 2013, the States of Guernsey entered into an
intergovernmental agreement ("IGA") with US Treasury, in order to
facilitate the requirements of FATCA. The Company registered with
the Internal Revenue Service ("IRS") on 25 February 2015 as a
Foreign Financial Institution ("FFI") and a Sponsoring Entity.
Common Reporting Standard
The Common Reporting Standard ("CRS"), formerly the Standard for
Automatic Exchange of Financial Account Information, became
effective on 1 January 2016, and is an information standard for the
automatic exchange of information developed by the Organisation for
Economic Co-operation and Development ("OECD"). CRS is a measure to
counter tax evasion, and it builds upon other information sharing
legislation, such as FATCA and the European Union Savings
Directive, and has superseded the UK-Guernsey IGA for the Automatic
Exchange of Information with effect from 1 January 2016. The first
reporting under CRS for Guernsey was made during 2017.
Alternative Investment Fund Managers Directive
The Company is categorised as a non-EU Alternative Investment
Fund ("AIF"). The AIFMD seeks to regulate managers of AIFs, such as
the Company. It imposes obligations on AIFMs who manage AIFs in a
member state of the European Economic Area ("EEA state"), or who
market shares in AIFs to investors who are domiciled, or with a
registered office, in an EEA state. Under the AIFMD, an AIFM must
be appointed and must comply with various organisational,
operational and transparency requirements.
On 28 January 2015, the Company appointed the Investment Manager
to act as AIFM on behalf of the Company. The Investment Manager is
responsible for fulfilling the role of the AIFM and ensuring the
Company complies with the AIFMD requirements. Details of the total
amount of remuneration for the financial year, split into fixed and
variable remuneration, paid by the AIFM to its staff, and the
number of beneficiaries, are made available to Shareholders on
request to the Investment Manager.
Anti-bribery and Corruption
The Board acknowledges that the Company's international
operations may give rise to possible claims of bribery and
corruption. In consideration of The Bribery Act 2010, enacted in
the UK, at the date of this report the Board had conducted an
assessment of the perceived risks to the Company arising from
bribery and corruption to identify aspects of business which may be
improved to mitigate such risks. The Board has adopted a
zero-tolerance policy towards bribery and has reiterated its
commitment to carry out business fairly, honestly and openly.
Criminal Finances Act
The Board has a zero-tolerance commitment to preventing persons
associated with it from engaging in criminal facilitation of tax
evasion and will not work with any service provider who does not
demonstrate the same commitment. The Board has satisfied itself in
relation to its key service providers that they have reasonable
provisions in place to prevent the criminal facilitation of tax
evasion by their own staff or any associated persons.
UK Modern Slavery Act
The Board acknowledges the requirement to provide information
about human rights in accordance with the UK Modern Slavery Act.
The Board conducts the business of the Company ethically and with
integrity and has a zero tolerance policy towards modern slavery in
all its forms. As the Company has no employees, all its Directors
are non-executive and all its functions are outsourced, there are
no further disclosures to be made in respect of employees and human
rights.
By order of the Board
Sandra Platts
Director
24 June 2020
CORPORATE GOVERNANCE
Compliance
The Board places a high degree of importance on ensuring that
high standards of corporate governance are maintained and has
considered the principles and recommendations of the AIC Code of
Corporate Governance issued in February 2019 (the "AIC Code"),
effective for financial periods beginning on or after 1 January
2019. The AIC Code addresses all the principles set out in the UK
Code of Corporate Governance (the "UK Code") in addition to setting
out additional principles and recommendations on issues relevant to
listed investment funds. The Board considers that reporting against
the principles and recommendations of the AIC Code will provide
better information to Shareholders and during the year the Board
has reviewed its policies and procedures against the AIC Code.
The Board has also taken note of the Finance Sector Code of
Corporate Governance issued by the Guernsey Financial Services
Commission (the "Guernsey Code"). The Guernsey Code provides a
governance framework for GFSC licensed entities, authorised and
registered collective investment schemes. Companies reporting
against the UK Code or the AIC Code are deemed to satisfy the
provisions of the Guernsey Code.
For the year ended 31 March 2020, the Company has complied with
the recommendations of the AIC Code and the relevant provisions of
the UK Code. Issues that are not reported on in detail here are
excluded because they are deemed to be irrelevant to the Company,
being an externally managed investment company. In particular, all
of the Company's day-to-day management and administrative functions
are outsourced to third parties and as a result the Company has no
executive directors, employees or internal operations and therefore
has not reported in respect of provisions concerning the role of
the chief executive, the remuneration of executive directors', or
the internal audit function.
Composition of the Board and Independence of Directors
As at 31 March 2020, the Board of Directors comprised four
non-executive and independent Directors as set out below. The
Company has no executive Directors or any employees. The Chair and
all Directors are considered independent of the Investment Adviser,
the Investment Manager, the Administrator and Company Secretary.
The Directors consider that there are no factors, as set out in the
AIC Code, which compromise the Directors' independence and that
they all contribute positively to Board effectiveness. The Board
reviews the independence of all Directors annually. Robert Jennings
was deemed to be independent by the Board prior to his appointment
as Chair of the Company. The Directors' biographies are disclosed
in the Board of Directors section.
Robert Jennings is the Chair of the Board and of the Nomination
Committee.
Jan Pethick is the Chair of the Management Engagement
Committee.
Jon Bridel is the Chair of the Risk Committee.
Sandra Platts is the Senior Independent Director ("SID") and
Chair of the Audit Committee and of the Remuneration Committee.
No Director has a service contract with the Company. The terms
of appointment for each non-executive Director are set out in
writing between each individual and the Company. The terms of each
Director's appointment were formally reviewed, and revised
appointment letters were entered into with each non-executive
Director in July 2019. Copies of the appointment letters are
available for review by Shareholders at the Company's registered
office.
As Chair, Robert Jennings is responsible for leading the Board
of Directors and for ensuring its effectiveness in all aspects of
its role. The specific duties of the Chair include setting the
Board's agenda, expectations concerning the Company's culture,
ensuring the Board has in place effective decision-making processes
which are supported by accurate and high-quality information, and
demonstrating ethical leadership and promoting the highest
standards of integrity, probity and corporate governance throughout
the Company. The Board's annual performance evaluation is led by
the Chair, with the support from the SID, and it will take action
as appropriate based on the results of that evaluation.
Recognising the increased size of the Company, in 2018 the
governance arrangements of the Board evolved and changes included
the appointment of Sandra Platts as Senior Independent Director
("SID") to provide support to the Chair in setting and overseeing
the strategic direction of the Board. The responsibilities of the
SID also include being available to Shareholders as an additional
point of contact or to communicate any concerns to the Board, and
working closely with the Nomination Committee to develop the
Board's succession planning and pipeline.
Under the terms of their appointment, all non-executive
Directors were subject to re-election at the first AGM. Thereafter,
in accordance with the Company's Articles of Incorporation, two
Directors shall retire each year and may offer themselves for
re-election.
In accordance with the AIC Code, all Directors are subject to
re-election annually by Shareholders . The Board has adopted a
policy on tenure that it considers appropriate for an investment
company. The Board does not consider length of service by itself to
be a factor impairing director independence. However, the Board's
tenure and succession policy applied to all non-executive Directors
seeks to ensure that the Board remains well balanced and that
skills, knowledge and experience of the Board is refreshed at
appropriate intervals. In order to avoid undue disruption from the
departure of multiple directors in the same year and for reasons of
continuity, the Nomination Committee confirmed the Board's approach
to an orderly and gradual phasing of its membership whereby the
first of those Directors appointed at the Company's launch would
retire without seeking re-appointment at the 2021 AGM.
Board Diversity
The Board supports the recommendations of the Davies Report and
notes the recommendations of the Parker review into ethnic
diversity and the Hampton-Alexander review on gender balance in
FTSE leadership. The Board supports the widening of its diversity,
whilst ensuring the capabilities, experience and background of each
member remain appropriate to the Company and continue to contribute
to overall Board effectiveness.
The findings of the Nomination Committee's most recent review of
the size, structure and composition of the Board concluded that it
would be appropriate to increase the size of the Board and a search
for a suitable Guernsey-based female Director has been ongoing for
some time. Notwithstanding, the Board believes that it is currently
functioning in a highly effective manner. To the extent a suitable
fifth director is not appointed in the near-term the Board will
seek to address the balance of gender diversity as part of its
succession planning arrangements to be implemented in 2021. Until
these plans are realised, when including the role of Kate Thurman
as Independent Consultant to the Board and that of Sandra Platts'
as SID, one third of the overall independent oversight of the
Company is provided by women. A statement of the Board's views on
diversity and succession can be found at
www.seqifund.com/investors/documents-circulars.
The Board and relevant personnel of our Investment Adviser and
our other advisers acknowledge and adhere to the Market Abuse
Regulation, which was implemented on 3 July 2016.
Directors' Performance Evaluation
The Board has established an informal system for the evaluation
of its own performance and that of the Company's individual
Directors, which is led by the Chairman and, as regards the
Chairman's performance evaluation, by the Senior Independent
Director. It considers this to be appropriate having regard to the
non-executive role of the Directors and the significant outsourcing
of services by the Company to external providers.
The Directors undertake, on an annual basis, an assessment of
the effectiveness of the Board particularly in relation to its
oversight and monitoring of the performance of the Investment
Manager, Investment Adviser and other key service providers. The
evaluations consider the balance of skills, experience,
independence and knowledge of the Company. The Board also evaluates
the effectiveness of each of the Directors.
The last externally facilitated Board effectiveness review was
undertaken by Condign Board Consulting Limited and concluded in May
2018. The review assessed aspects such as the quality of the
Board's engagement with the Investment Advisory team concerning
investment strategy, and the monitoring of performance; the balance
of Shareholder returns with other measures of success, including
yields, assets under management and NAV; the ongoing cohesiveness
of the Board and its key advisers; its oversight of Shareholder
relationships and communications; and issues relating to
transitioning and long-term succession planning. The findings from
the independent performance evaluation concluded that the Company
maintained high standards of corporate governance practice and, in
the context of the Company, the main principles of the AIC Code
continued to be applied effectively.
Certain findings from the Board's internal performance
evaluation for the financial year ended 31 March 2020 identified
matters to which consideration would be given during the coming
year. These include assessing the appropriateness of the size of
the Board in light of the Company's continued growth and the skills
and experience to be provided by a future appointee to the
Board.
The Board remains cognisant of the need to anticipate and
respond to evolving challenges, and therefore the governance
framework in place by the Company is subject to regular review to
ensure it remains appropriate in the context of the Company. The
next externally facilitated Board effectiveness review will be
carried out in relation to the financial year ending 31 March
2021.
Directors' Remuneration
It is the responsibility of the Remuneration Committee to debate
and make recommendations to the Board in relation to the Directors'
remuneration, having regard to the level of fees payable to
non-executive Directors in the industry generally, the role that
individual Directors fulfil in respect of Board and Committee
responsibilities and the time committed to the Company's affairs.
No Director who is a member of the Committee takes part in
discussions relating to their own remuneration. The Directors
periodically benchmark the remuneration policy of the Company
against comparable information on listed investment companies,
particularly those operating in similar or adjacent market sectors,
in addition to giving due regard to the individual circumstances of
the Company which may warrant a departure from industry norms.
No Director has a service contract with the Company and details
of the Directors' remuneration, and changes thereto reflecting the
increased time commitment required of the Board, can be found in
the Directors' Remuneration Report.
Directors' and Officers' Liability Insurance
The Company maintains insurance in respect of directors' and
officers' liability in relation to the Directors' actions on behalf
of the Company.
Relations with Shareholders
The Board believes that the maintenance of good relations and
understanding the views of Shareholders is important to the
long-term sustainable success of the Company and since launch the
Board has adopted a policy of actively engaging with major
Shareholders through a variety of means.
The Company reports to Shareholders twice a year by way of the
Interim and Annual Reports. In addition, net asset values are
published monthly, and the Investment Adviser publishes monthly
reports to Shareholders, in addition to the transcripts of any
investor calls held, on its website www.seqifund.com.
The Board receives quarterly reports on the Shareholder profile
of the Company and regular contact with major Shareholders is
undertaken by the Company's corporate brokers and the executives of
the Investment Adviser. Any issues raised by major Shareholders are
reported to the Board on a regular basis.
The Chairman and individual Directors are willing to meet major
Shareholders to discuss any particular items of concern or to
understand their views on governance and the performance of the
Company. Members of the Board, including the Chairman and the Audit
Committee Chair, and the Investment Adviser, are also available to
answer any questions which may be raised by any Shareholder at the
Company's Annual General Meeting. Any general queries can also be
submitted to the Board via the Company Secretary at the Company's
registered office.
Stakeholders, Business Relationships and Socially Responsible
Investment
Whilst directly applicable to companies incorporated in the UK,
the Board recognises the intention of the AIC Code that matters set
out in section 172 of the Companies Act, 2006 are reported. The
Board strives to understand the views of the Company's key
stakeholders and to take these into consideration as part of its
discussions and decision-making process. As an investment company
the Company does not have any employees and conducts its core
activities through third-party service providers. Each provider has
an established track record and is required to have in place
suitable policies and procedures to ensure it maintains high
standards of business conduct, treats customers fairly, and employs
corporate governance best practice.
Whilst the primary duty of the Directors is owed to the Company
as a whole, the Board considers as part of its decision-making
process the interests of all of the Company's key stakeholders.
Particular consideration is given to the continued alignment of
interests between the activities of the Company and those that
contribute to delivering the Board's strategy, which include the
Investment Manager, the Investment Adviser, the Company Secretary,
recipients of the Company's capital and providers of long-term debt
finance.
The Board's commitment to maintaining high-standards of
corporate governance; its policy for active shareholder engagement,
combined with the Directors' duties enshrined in Company law; the
constitutive documents; the Disclosure Guidance and Transparency
Rules; and the Market Abuse Regulation, ensure that Shareholders
are provided with frequent and comprehensive information concerning
the Company and its activities.
Stakeholders, Business Relationships and Socially Responsible
Investment (continued)
Recipients of the Company's capital are subject to a
comprehensive ESG assessment deployed by the Investment Adviser as
part of the Company's investment process, designed to encourage
sustainability and mitigate the impact of corporate activity on the
environment and the communities in which they operate. Further
details can be found in the Investment Adviser's Report and the ESG
Report. The interests of borrowers, sponsors and relevant
intermediaries involved in the credit process are also discussed
during scheduled Board meetings and in detail during the Board's
detailed portfolio review sessions.
The relationship with the providers of the Company's RCF is
managed by the Company's service providers. Regular updates are
provided on developments concerning the Company and any public
announcements, in addition to monthly reporting of portfolio
compliance covenants.
The Board respects and welcomes the views of all stakeholders.
Any queries or areas of concern regarding the Company's operations
can be raised with the Company Secretary.
Directors' Meetings and Attendance
The table below shows the Directors' attendance at Board and
Committee meetings during the 2019/20 annual Board cycle.
Number of Robert Jennings* Sandra Platts Jan Pethick* Jon
meetings Bridel
held
--------------------------------- ---------- ----------------- -------------- ------------- --------
Board - scheduled 4 4 4 4 4
Board - ad hoc 16 14 16 13 16
Audit Committee 2 2 2 2 2
Risk Committee 4 4 4 4 4
Nomination Committee 1 1 1 1 1
Remuneration Committee 1 1 1 1 1
Management Engagement Committee 1 1 1 1 1
Listing Committee 2 N/A N/A 2 2
--------------------------------- ---------- ----------------- -------------- ------------- --------
* Onshore resident Directors
The annual meetings of the Nomination Committee, Remuneration
Committee and Management Engagement Committee, and the fourth
quarterly Board meeting, usually held at the end of March, this
year fell on 1 April 2020, but are included in this table for
completeness.
Kate Thurman and Tim Drayson, the Company's independent
consultants, attended a number of Risk Committee and other meetings
with the Directors during the year.
Board Responsibilities
The Board meets formally on a quarterly basis to review the
overall business activities of the Company and any matters
specifically reserved for its consideration. Standing agenda items
considered at all quarterly board meetings cover portfolio
performance, capital allocation and deployment, ESG matters, NAV
and share price performance, shareholder return metrics, reviewing
changes to the risk environment including the assessment of
emerging risks, marketing and investor relations, peer group
information and industry issues. Consideration is also given to
administration and corporate governance matters, legislative
developments and, where applicable, reports are received from the
Board's formally constituted committees.
The Directors also review the Company's activities every quarter
to ensure that the Company adheres to its investment policy.
Additional ad hoc reports are received as required and Directors
have access at all times to the advice and services of the Company
Secretary, who is responsible for ensuring that the Board
procedures are followed, and that applicable rules and regulations
are complied with. The Board has adopted a schedule of matters
specifically reserved for its decision making and distinguishing
these from matters it has delegated to the Company's key service
providers.
Although no formal training is given to Directors by the
Company, the Directors are kept up to date on various matters such
as Corporate Governance issues through bulletins and training
materials provided from time to time by the Company Secretary, the
AIC and professional firms.
The Board actively monitors the level of the share price premium
or discount to determine what action, if any, is required. This was
noted particularly during the equity market sell off and the
significant volatility associated with the COVID-19 crisis. The
Board continues to closely monitor the rating of the Company's
shares.
Board Committees
Audit Committee
As at 31 March 2020, the Audit Committee comprised Sandra
Platts, Jon Bridel, Jan Pethick and Robert Jennings, and was
chaired by Sandra Platts. The Committee meets at least three times
a year.
The key objectives of the Audit Committee include a review of
the Financial Statements to ensure they are prepared to a high
standard and comply with all relevant legislation and guidelines,
where appropriate, and to maintain an effective relationship with
the Auditor. The Audit Committee also reviews, considers and, if
appropriate, recommends for the purposes of the Company's Financial
Statements the valuations prepared by the Investment Manager and
Investment Adviser. With respect to the Auditor, the Audit
Committee's role will include the assessment of their independence
and the effectiveness of the audit, and a review of the Auditor's
engagement letter and remuneration and any non-audit services
provided by the Auditor. For the principal duties and report of the
Audit Committee please refer to the Report of the Audit
Committee.
Risk Committee
As at 31 March 2020, the Risk Committee comprised Jon Bridel,
Robert Jennings, Jan Pethick and Sandra Platts, and was chaired by
Jon Bridel. The Committee meets quarterly.
The principal function of the Risk Committee is to identify,
assess, monitor and, where possible, oversee the management of
risks to which the Company's investments are exposed, principally
to enable the Company to achieve its target investment objective of
regular, sustained, long-term distributions over the planned life
of the Company, with regular reporting to the Board. As the Company
is an externally managed non-EU AIF for the purposes of AIFMD, the
Directors have appointed the Investment Manager as AIFM to manage
the additional risks faced by the Company as well as the relevant
disclosures to be made to investors and regulators. On 30 January
2015, the FCA confirmed that the Company was eligible to be
marketed via the FCA's National Private Placement Regime and the
Company has complied with Article 22 and 23 of the AIFMD for the
year ended 31 March 2020.
The Risk Committee works closely with IFML and, as required, the
independent consultants, and provides oversight of the Company's
risk management function. The financial year under review saw a
high volume of transactions completed which, particularly in
certain cases where the profile of the transaction met the
internally agreed criteria for escalation, required extensive
liaison between the Directors, the independent consultants and IFML
to apply appropriate scrutiny to the investment proposition and
ensure that the Company would not be exposed to undue credit
risk.
As part of the Risk Committee's ongoing monitoring of the risk
management framework, during the year enhancements were recommended
to certain credit monitoring procedures to provide the Directors
with greater insight to factors such as 'ramp-up' and construction
risk. The Committee welcomes the appointment of Mr Anurag Gupta as
CRO to the Investment Adviser, further strengthening the risk
management and due diligence functions employed throughout the
credit process.
Nomination Committee
As at 31 March 2020, the Nomination Committee comprised Jon
Bridel, Robert Jennings, Jan Pethick and Sandra Platts, and was
chaired by Robert Jennings. The Committee meets at least once
annually.
The Committee's key duties include, but are not limited to,
reviewing the structure, size and composition of the Board, to
consider the succession planning for Directors and senior
executives, reviewing the leadership needs of the organisation and
identifying candidates for appointment to the Board. The process of
Board evaluation for the financial year-ended 31 March 2020 was led
by the Chair and conducted internally by way of written
questionnaires.
During the review undertaken during the year of the size,
structure, composition and effectiveness of the Board, it was
concluded by the Nomination Committee that the incumbent Board,
together with its Independent Consultants, continues to provide the
breadth of skills, knowledge and experience to discharge its duties
effectively, and to meet the leadership needs of the Company. In
response to comments from the internal Board effectiveness review,
particularly concerning the size of the Board and gender diversity,
steps are being taken by the Nomination Committee to ensure the
approach to succession planning continues to support the
development of a diverse pipeline of potential candidates (as
explained under 'Board Diversity' section of this report).
In order to avoid undue disruption from the departure of
multiple Directors in the same year, and for reasons of continuity,
the Nomination Committee confirmed the Board's approach to an
orderly and gradual phasing of its membership, as set out in its
formal succession plan, whereby the first of those Directors
appointed at the Company's launch would retire without seeking
re-appointment at the 2021 AGM. Shareholders will be asked to
approve the appointment of his or her successor at this
meeting.
Remuneration Committee
As at 31 March 2020, the Remuneration Committee comprised Jon
Bridel, Robert Jennings, Jan Pethick and Sandra Platts, and was
chaired by Sandra Platts. The Committee meets at least once
annually.
The Committee is responsible for considering the remuneration of
the Directors and determining the Company's remuneration policy. In
conjunction with the Company's advisers, the Remuneration Committee
undertook a detailed review of the Company's remuneration policy.
Changes agreed as part of this review provide the Company with a
simplified remuneration structure which better reflects industry
practice. For details of the remuneration of the Directors during
the year, please refer to the Directors' Remuneration Report.
Management Engagement Committee
As at 31 March 2020, the Management Engagement Committee
comprised Jon Bridel, Robert Jennings, Jan Pethick and Sandra
Platts, and was chaired by Jan Pethick. The Committee meets at
least once annually.
The Committee is responsible for the regular review of the terms
of the Investment Advisory and Investment Management Agreements,
along with the performance of the Administrator, Investment Adviser
and the Investment Manager and the Fund's other key service
providers. For the principal duties and report of the Committee
please refer to the Report of the Management Engagement
Committee.
Internal Control Review and Risk Management System
The Board of Directors is responsible for putting in place a
system of internal controls relevant to the Company and for
reviewing the effectiveness of those systems. The review of
internal controls is an ongoing process for identifying and
evaluating the risks faced by the Company, and which are designed
to manage risks rather than eliminate the risk of failure to
achieve the Company's objectives.
It is the responsibility of the Board to undertake risk
assessment and review of the internal controls in the context of
the Company's objectives that cover business strategy, operational,
compliance and financial risks facing the Company. These internal
controls are implemented by the Company's four main service
providers, the Investment Adviser, the Investment Manager, the
Administrator and the Custodian. The Board receives periodic
updates from these main service providers at the quarterly Board
meetings of the Company. The Board is satisfied that each service
provider has effective systems in place to control the risks
associated with the services that they are contracted to provide to
the Company and are therefore satisfied with the internal controls
of the Company.
The Board of Directors considers the arrangements for the
provision of Investment Advisory, Investment Management,
Administration and Custody services to the Company on an on-going
basis and a formal review is conducted annually. As part of this
review the Board considered the quality of the personnel assigned
to handle the Company's affairs, the investment process and the
results achieved to date.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the Directors'
Report and Financial Statements in accordance with applicable law
and regulations. The Companies (Guernsey) Law, 2008 (the "Company
law") requires the Directors to prepare financial statements for
each financial year. Under that law they are required to prepare
the Financial Statements in accordance with International Financial
Reporting Standards ("IFRS") as issued by the IASB and applicable
law.
Under the Company law, the Directors must not approve the
Financial Statements unless they are satisfied that they give a
true and fair view of the state of affairs of the Company and its
profit or loss for that year.
In preparing these Financial Statements, the Directors are
required to:
-- select suitable accounting policies and apply them
consistently;
-- make judgements and estimates that are reasonable, relevant
and reliable;
-- state whether applicable accounting standards have been
followed, subject to any material departures disclosed and
explained in the Financial Statements;
-- assess the Company's ability to continue as a going concern,
disclosing, as applicable, matters related to going concern;
and
-- use the going concern basis of accounting, unless they either
intend to liquidate the Company or cease operations, or have no
realistic alternative but to do so.
The Directors are responsible for keeping proper accounting
records that are sufficient to show and explain the Company's
transactions and disclose with reasonable accuracy at any time the
financial position of the Company and to enable them to ensure that
the Financial Statements comply with the Company law. They are
responsible for such internal control as they determine is
necessary to enable the preparation of financial statements that
are free from material misstatement, whether due to fraud or error,
and have general responsibility for taking such steps as are
reasonably open to them to safeguard the assets of the Company and
to prevent and detect fraud and other irregularities.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Company's website. Legislation in the United Kingdom and Guernsey
governing the preparation and dissemination of financial statements
may differ from legislation in other jurisdictions.
The Directors who hold office at the date of approval of the
Directors' Report confirm that, so far as they are aware, there is
no relevant audit information of which the Company's Auditor is
unaware, and that each Director has taken all the steps they ought
to have taken as a director to make themselves aware of any
relevant audit information and for establishing that the Company's
Auditor is aware of that information.
Responsibility Statement of the Directors in respect of the
Annual Report
Each of the Directors, who are listed in the Board of Directors
section, confirms to the best of their knowledge and belief
that:
-- the Financial Statements, prepared in accordance with IFRS as
issued by the IASB, give a true and fair view of the assets,
liabilities, financial position and profit of the Company, as
required by DTR 4.1.12R; and
-- the Management Report (comprising the Chairman's Statement,
the Investment Adviser's Report, the Directors' Report and other
Committee Reports) includes a fair review of the development and
performance of the business during the year, and the position of
the Company at the end of the year, together with a description of
the principal risks and uncertainties that the Company faces, as
required by DTR 4.1.8R and DTR 4.1.9R.
The Directors consider that the Annual Report, comprising the
Financial Statements and the Management Report, taken as a whole,
is fair, balanced and understandable and provides the information
necessary for Shareholders to assess the Company's position and
performance, business model and strategy.
Sandra Platts
Director
24 June 2020
DIRECTORS' REMUNERATION REPORT
The Company's policy in regard to Directors' remuneration is to
ensure that the Company maintains a transparent and competitive fee
structure in order to recruit, retain and motivate non-executive
Directors of excellent quality in the overall interests of
Shareholders and the long-term success of the Company.
No element of the Directors' remuneration is performance
related, nor does any Director have any entitlement to pensions,
share options or any long-term incentive plans from the
Company.
The Directors received the following remuneration in the form of
Directors' fees:
Year ended 31 March 2020 Year ended 31 March 2019
Per annum Actual Actual
GBP GBP GBP
Robert Jennings (Chairman of the Board and the
Nomination Committee) 66,800 66,800 65,000
Jan Pethick (Chair of the Management Engagement
Committee) 51,300 51,300 50,000
Jon Bridel (Chair of the Risk Committee) 51,300 51,300 50,000
Sandra Platts (Chair of the Audit and Remuneration
Committees) 56,300 56,300 50,000
Total 225,700 225,700 215,000
---------- ------------------------- -------------------------
In addition, Robert Jennings, Jan Pethick, Jon Bridel and Sandra
Platts each received a listing fee of GBP6,000 in connection with
the Open Offer, Ordinary Share Placing and Offer for Subscription
on 27 June 2019, consistent with the policy applied in previous
years. However, following a review of the Company's remuneration
policy, the Directors resolved that they would henceforth forego
any such fees, as a result of which no fee was paid in connection
with the Open Offer, Ordinary Share Placing and Offer for
Subscription on 3 March 2020.
The remuneration policy set out above is the one applied for the
year ended 31 March 2020.
In consultation with the Company's advisers during March 2020,
the Remuneration Committee engaged PwC to undertake an independent
review of the Company's remuneration policy, which included
receiving reports benchmarking the Company's position relative to
peers and other vehicles in the listed infrastructure and debt
sectors. PwC's work as remuneration consultant was performed
independently from their portfolio valuation services. No other
connection exists between PwC and the Company or its individual
Directors. Having reviewed the level of activity over the prior
year and the time requirement placed on the Directors in attending
to matters as the Company continued to gain scale, it was agreed
that the Company's remuneration policy be amended such that an
increase should be applied to the fees payable to the Chair, the
SID and to each of the Directors for acting as a Committee Chair.
However, as noted above, it was also agreed that the additional
fees paid to the Directors in prior years for work in relation to
capital raises shall no longer form part of the policy. No Director
was involved in determining his or her own remuneration.
Accordingly, conditional on receiving Shareholder approval to
the Remuneration Report at the 2020 AGM, the total amount of fees
payable to the Directors for the forthcoming financial year will be
as follows, representing a decrease in total fees payable of over
1.6% against the current year:
Year ended 31 March 2021 Year ended 31 March 2020
Proposed Actual
GBP GBP
Robert Jennings (Chairman of the Board and the Nomination
Committee) 75,000 72,800
Jan Pethick (Chair of the Management Engagement Committee) 54,300 57,300
Jon Bridel (Chair of the Risk Committee) 54,300 57,300
Sandra Platts (Chair of the Audit and Remuneration
Committees) 62,000 62,300
Total 245,600 249,700
------------------------- -------------------------
Directors' and officers' liability insurance cover is maintained
by the Company on behalf of the Directors.
The Directors were appointed as non-executive Directors by
letters issued on 6 January 2015, and subsequently revised on 1
July 2019. Each Director's appointment letter provides that, upon
the termination of their appointment, they must resign in writing
and all records remain the property of the Company. The Directors'
appointments can be terminated in accordance with the Articles and
without compensation. The notice period for the removal of
Directors is two months as specified in the Director's appointment
letter. The Articles provide that the office of director shall be
terminated by, among other things: (a) written resignation; (b)
unauthorised absences from board meetings for twelve months or
more; (c) unanimous written request of the other directors; and (d)
an ordinary resolution of the Company.
Under the terms of their appointment, each Director was subject
to re-election at the first AGM and annually thereafter. The
Company may terminate the appointment of a Director immediately on
serving written notice and no compensation is payable upon
termination of office as a director of the Company becoming
effective.
The amounts payable to Directors as at 31 March 2020 are shown
in note 10 to the Financial Statements and related to services
provided as non-executive Directors. No Director has a service
contract with the Company, nor are any such contracts proposed.
Sandra Platts
Remuneration Committee Chair
24 June 2020
REPORT OF THE MANAGEMENT ENGAGEMENT COMMITTEE
The Company has established a Management Engagement Committee
with formally delegated duties and responsibilities within written
terms of reference (which are available from the Company's
website).
Chairman and Membership
As at 31 March 2020, the Management Engagement Committee
comprised Jon Bridel, Robert Jennings, Jan Pethick and Sandra
Platts, and was chaired by Jan Pethick. The Committee meets at
least once a year.
The Committee is responsible for the regular review of the terms
of the Investment Advisory and Investment Management Agreements,
along with the performance of the Administrator, Investment Adviser
and the Investment Manager and the Fund's other key service
providers. The membership of the MEC and its terms of reference are
kept under review.
Duties
Through the Committee, the Directors continually monitor the
performance and the continued appointment of all key service
providers and a formal, detailed assessment of the performance and
the terms of engagement of the Company's key service providers is
undertaken on at least an annual basis to ensure each remains fair
and reasonable. This annual review process includes two-way
feedback, which provides the Board with an opportunity to
understand the views, experiences and any significant issues
encountered by service providers during the year. In addition, the
Management Engagement Committee is actively involved in monitoring
and reviewing the overall basis of remuneration for the Investment
Adviser, particularly to ensure that this continues to motivate and
incentivise the level of performance expected of the Investment
Adviser.
The Directors recognise the importance of maintaining strong and
effective business relationships with the Company's operational
counterparties and that high quality interaction with these
stakeholders is an important success factor for delivering the
Board's strategy. The annual performance assessment conducted by
the Management Engagement Committee seeks to ensure that:
-- the terms of engagement remain fair and reasonable and
reflective of the services performed in the context of the nature,
scale and complexity of the Company;
-- strong congruence exists between the objectives of the
counterparty and those of the Company;
-- they have not been the subject of any adverse event which may
present additional risk to the Company;
-- they remain appropriately incentivised to perform their duties to a high standard; and
-- their continued engagement remains in the best interests of the Company as a whole.
Main Activities during the year
Key matters considered by the Management Engagement Committee
during the year included an on-site visit to the offices of the
Custodian during January 2020 to meet with key personnel, to review
the performance and the key systems, processes and procedures in
place by the Custodian. No material issues or deficiencies were
reported from the review and actions were agreed to enhance
coordination between the Custodian and other key service
providers.
As part of the Board's annual performance evaluation, additional
feedback is received on the quality of service and the
effectiveness of the working relationships with each of the
Company's key service providers. No material actions arose as a
result of the last review.
Taking into consideration the supplementary guidance issued by
the AIC in 2019 which described certain measures by which
investment companies may assess the relationship with portfolio
managers, during November 2019 the Committee undertook an enhanced
qualitative assessment of the performance and relationship with
Sequoia Investment Management Company Limited. The feedback from
this assessment reaffirmed the view that the Investment Adviser
held significant experience in the markets in which the Company
operated, a strong focus remained on the performance of their core
duties, and there existed a high level of congruence between the
duties of the Investment Adviser and the objectives of the Company.
Currently the Board does not consider it necessary to obtain an
independent appraisal of the Investment Adviser's services and the
continued retention of the Investment Adviser's services is
considered to be in Shareholders' best interests.
Jan Pethick
Management Engagement Committee Chair
24 June 2020
REPORT OF THE AUDIT COMMITTEE
The Company has established an Audit Committee with formally
delegated duties and responsibilities within written terms of
reference (which are available from the Company Secretary).
Chairman and Membership
As at 31 March 2020, the Audit Committee comprised Jon Bridel,
Robert Jennings, Jan Pethick and Sandra Platts, and was chaired by
Sandra Platts. The Board believes that it is appropriate for the
Chairman of the Company to be a member of the Audit Committee as it
feels that the breadth of his financial experience is of great
value to the work of the Committee in the discharge of its
responsibilities. All members of the Committee are independent
Directors; have no links with KPMG Channel Islands Limited, the
Company's Auditor (the "Auditor" or "KPMG"); and are independent of
the Investment Manager and Investment Adviser. The membership of
the Audit Committee and its terms of reference are kept under
review. The relevant qualifications and experience of each member
of the Audit Committee are detailed in the Board of Directors
section. The Audit Committee's intention is to meet three times a
year in any full year and to meet with the Auditor as
appropriate.
Duties
The Audit Committee's main role and responsibility is to provide
advice to the Board on whether the Annual Report and Audited
Financial Statements, taken as a whole, are fair, balanced and
understandable and provide the information necessary for
Shareholders to assess the Company's performance, business model
and strategy. The Audit Committee gives full consideration and
recommendation to the Board for the approval of the contents of the
Interim and Annual Financial Statements of the Company, which
includes reviewing the Auditor's report.
The other principal duties of the Committee are to consider the
appointment of the Auditor; to discuss and agree with the Auditor
the nature and scope of the audit; to keep under review the scope,
results and effectiveness of the audit and the independence and
objectivity of the Auditor; and to review the Auditor's letter of
engagement, planning report for the financial period and management
letter, as applicable.
The Audit Committee is responsible for monitoring the financial
reporting process and the effectiveness of the Company's internal
control and risk management systems. The Audit Committee also
focuses particularly on compliance with legal requirements,
accounting standards and the relevant Listing Rules and ensuring
that an effective system of internal financial control is
maintained.
The Audit Committee also reviews, considers and, if appropriate,
recommends for the purposes of the Company's Financial Statements
the valuations prepared by the Investment Manager and Investment
Adviser. These valuations are the most critical element in the
Company's Financial Statements and the Audit Committee considers
them carefully.
Financial Reporting and Audit
The Audit Committee has an active involvement and oversight in
the preparation of both the interim and annual Financial Statements
and in doing so is responsible for the identification and
monitoring of the principal risks associated with the preparation
of the Financial Statements. The principal risk identified in the
preparation of these Financial Statements is the valuation of the
Company's investment in Sequoia IDF Asset Holdings S.A., its
subsidiary company (the "Subsidiary"), which holds all of the
underlying investments.
The Company's investment in the Subsidiary had a fair value of
GBP1,551,492,432 as at 31 March 2020 (2019: GBP1,118,045,818),
representing a substantial proportion of the net assets of the
Company, and as such is the biggest factor in relation to the
accuracy of the Financial Statements. PwC was engaged as Valuation
Agent throughout the year and was responsible for carrying out a
fair market valuation review of the Subsidiary's investments on a
monthly basis. Draft pricing for the Subsidiary's investments is
provided by the Investment Adviser to the Valuation Agent, who in
turn produces a final valuation report for review by the Investment
Adviser and the Investment Manager. Final responsibility for the
valuation of the Subsidiary's investments, subject to Board
approval, rests with the Investment Manager. This report is then
submitted to TMF Luxembourg S.A. (the "Sub-Administrator"), for
inclusion in the Subsidiary's NAV.
The Audit Committee has regular dialogue with the Investment
Manager and Investment Adviser regarding the methods of valuation
used. It reviews and may challenge their methodologies, controls
and processes of valuation used to value the Subsidiary's
investments. The Audit Committee regularly reviews the valuations
prepared by the Investment Adviser for investments where market
prices are not readily available. At the year end these represented
77.9% (2019: 68.9%) of total investments. Where appropriate these
valuations are scrutinised and compared against valuations of
investments with similar characteristics or subject to a
sensitivity analysis based on changes in key assumptions. The Audit
Committee has also considered the Auditor's approach to their audit
of the valuation of the Subsidiary's investments and discussed with
the Auditor their approach to testing the appropriateness and
robustness of the valuation methodologies applied. The Auditor has
not reported any significant differences between the valuations
used and the results of the work performed during their testing
process.
In relation to the 31 March 2020 valuation specifically, the
Audit Committee was aware that, during March 2020, there had been
substantial financial market disruption caused by COVID-19, the
resultant shut-down of large parts of the global economy and the
accompanying material decline in the price of oil. This manifested
itself through both declines in the value of many financial assets
and increased volatility in these types of assets. As such, the
year-end valuation process was especially challenging and
necessitated an enhanced level of focus and diligence from all
parties involved. Significant work was undertaken to assess
comparable instruments for the purposes of valuing private debt
instruments and there was, in parallel, a focused initiative to
reassess the credit quality of the Company's investments in the
light of the economic consequences of COVID-19. One of the reasons
why the Company announced a two-week moratorium on new investments
on 16 March 2020 was to ensure that the full resources of the
Investment Adviser could be dedicated to this analysis, which was
shared with, and challenged by, PwC, the Audit Committee, the
Investment Manager and the Company's independent consultants.
Based on the review and analysis described above, the Audit
Committee is satisfied that, as at 31 March 2020, the fair values
of the Subsidiary's investments fully reflect the market disruption
caused by COVID-19 and its specific effects on the Company's
investments. As a result, the Audit Committee is satisfied that as
at 31 March 2020, as stated in the Financial Statements, the fair
value of the Company's investment in the Subsidiary is
reasonable.
The Audit Committee reviewed the Company's accounting policies
applied in the preparation of the Annual Financial Statements,
together with the relevant critical judgements, estimates and
assumptions made by the Board and, having discussed matters with
the Auditor, determined that these were in compliance with
International Financial Reporting Standards ("IFRS") as issued by
the IASB and were reasonable. The Audit Committee reviewed the
materiality levels applied by the Auditor to the financial
statements as a whole and was satisfied that these materiality
levels were appropriate. The Auditor reports to the Audit Committee
all material corrected and uncorrected differences. The Auditor
explained the results of their audit and that on the basis of their
audit work, there were no adjustments proposed that were material
in the context of the Financial Statements as a whole.
The Audit Committee also reviews the Company's financial reports
as a whole to ensure that such reports appropriately describe the
Company's activities and that all statements contained in such
reports are consistent with the Company's financial results and
projections. Accordingly, the Audit Committee was able to advise
the Board that the Annual Report and Audited Financial Statements
are fair, balanced and understandable and provide the information
necessary for Shareholders to assess the Company's performance,
business model and strategy.
External Auditor
The Audit Committee has responsibility for making a
recommendation on the appointment, re-appointment or removal of the
Auditor. KPMG was appointed as the first Auditor of the Company.
During the year, the Audit Committee received and reviewed the
audit plan and report from the Auditor.
To assess the effectiveness of the Auditor, the Audit Committee
reviewed:
-- The Auditor's fulfilment of the agreed audit plan and variations from it, if any;
-- The Auditor's assessment of its objectivity and independence as auditor of the Company;
-- The Auditor's report to the Audit Committee highlighting
their significant areas of focus in the conduct of their audit and
findings thereon that arose during the course of the audit; and
-- Feedback from the Investment Manager, Investment Adviser and
Administrator evaluating the performance of the audit team.
For the year ended 31 March 2020, the Audit Committee was
satisfied that there had been appropriate focus and challenge on
the primary areas of audit risk and assessed the quality of the
audit process as good.
Where non-audit services are to be provided to the Company by
the Auditor, full consideration of the financial and other
implications on the independence of the Auditor arising from any
such engagement will be considered before proceeding. All non-audit
services are pre-approved by the Audit Committee if it is satisfied
that relevant safeguards are in place to protect the Auditor's
objectivity and independence.
The Audit Committee notes the current financial year marked
KPMG's fifth year holding office as external Auditor. In line with
the rotation requirements, the Company's lead audit partner will
change for the year ending 31 March 2021, subject to Shareholders
approving the reappointment of KPMG as external Auditor at the 2020
Annual General Meeting.
To fulfil its responsibility regarding the independence of the
Auditor, the Audit Committee considered:
-- a report from the Auditor describing its arrangements to
identify, report and manage any conflicts of interest; and
-- the extent of non-audit services provided by the Auditor.
During the year ended 31 March 2020, other than the Interim
review, no non-audit services were provided by KPMG.
The following table summarises the remuneration paid to KPMG and
to other KPMG member firms for audit and non-audit services.
For the year For the year
ended 31 March ended 31 March
2020 2019
GBP GBP
Annual audit of the Company 133,000 95,000
Interim review of the Company 28,000 25,750
Annual audit of the Subsidiary 32,600 28,000
-------------------------------- ---------------- ----------------
Internal Controls
As the Company's investment objective is to invest all of its
assets into the Subsidiary, the Audit Committee, after consultation
with the Investment Manager, Investment Adviser and Auditor,
considers the key risk of misstatement in its Financial Statements
to be the valuation of its investment in the Subsidiary, but are
also mindful of the risk of the override of controls by its service
providers, the Investment Manager, the Investment Adviser, the
Administrator and the Sub-Administrator.
The Investment Manager, Investment Adviser and Administrator
together maintain a system of internal control on which they report
to the Board. The Board has reviewed the need for an internal audit
function and has decided that the systems and procedures employed
by the Investment Manager, Investment Adviser and Administrator
provide sufficient assurance that a sound system of risk management
and internal control, which safeguards Shareholders' investment and
the Company's assets, is maintained. An internal audit function
specific to the Company is therefore considered unnecessary.
The Audit Committee is responsible for reviewing and monitoring
the effectiveness of the internal financial control systems and
risk management systems on which the Company is reliant. These
systems are designed to ensure proper accounting records are
maintained, that the financial information on which business
decisions are made and which is used in publications is reliable,
and that the assets of the Company are safeguarded. Such a system
of internal financial controls can only provide reasonable and not
absolute assurance against misstatement or loss.
In accordance with the guidance on risk management, internal
control and financial and business reporting published by the
Financial Reporting Council (the "FRC") in September 2014, which
integrated the earlier guidance of the Turnbull Report, the Audit
Committee has reviewed the Company's internal control procedures.
These internal controls are implemented by the Company's four main
service providers, the Investment Manager, the Investment Adviser,
the Administrator and the Custodian. The Audit Committee has
performed reviews of the internal financial control systems and
risk management systems during the year. The Audit Committee is
satisfied with the internal financial control systems of the
Company.
Sandra Platts
Audit Committee Chair
24 June 2020
INDEPENT AUDITOR'S REPORT TO THE MEMBERS OF SEQUOIA ECONOMIC
INFRASTRUCTURE INCOME FUND LIMITED
Our opinion is unmodified
We have audited the financial statements of Sequoia Economic
Infrastructure Income Fund Limited (the "Company"), which comprise
the statement of financial position as at 31 March 2020, the
statements of comprehensive income, changes in shareholders' equity
and cash flows for the year then ended, and notes, comprising
significant accounting policies and other explanatory
information.
In our opinion, the accompanying financial statements:
- give a true and fair view of the financial position
- are prepared in accordance with International Financial
Reporting Standards;
- comply with the Companies (Guernsey) Law, 2008.
Basis for Opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) ("ISAs (UK)") and applicable law. Our
responsibilities are described below. We have fulfilled our ethical
responsibilities under, and are independent of the Company in
accordance with, UK ethical requirements including FRC Ethical
Standards, as applied to listed entities. We believe that the audit
evidence we have obtained is a sufficient and appropriate basis for
our opinion.
Key Audit Matters: our assessment of the risks of material
misstatement
Key audit matters are those matters that, in our professional
judgment, were of most significance in the audit of the financial
statements and include the most significant assessed risks of
material misstatement (whether or not due to fraud) identified by
us, including those which had the greatest effect on: the overall
audit strategy; the allocation of resources in the audit; and
directing the efforts of the engagement team. These matters were
addressed in the context of our audit of the financial statements
as a whole, and in forming our opinion thereon, and we do not
provide a separate opinion on these matters. In arriving at our
audit opinion above, the key audit matter was as follows (unchanged
from 2019):
Non-derivative financial assets at fair value through profit or loss
======================================================================================================
Valuation of non-derivative financial assets at fair value through profit or loss
GBP1,551,492,432; (2019: GBP1,118,045,818)
Refer to the Report of the Audit Committee, Note 2 accounting policy, Note 5 and Note 6 disclosures.
======================================================================================================
The risk Our response
Basis: Our audit procedures included, but were
The Company's investment in not limited to:
its Subsidiary is carried Internal Controls:
at fair value through profit We evaluated the design, implementation
or loss and represents a significant and operating effectiveness of the key
proportion of the Company's controls over the valuation of the Portfolio.
net assets. The fair value Evaluating experts engaged by management:
of the Subsidiary reflects With the support of our KPMG valuation
its net asset value, the most specialists:
significant component of which * We assessed the objectivity, capabilities and
is its underlying portfolio competence of the Valuation Agent engaged by the
of senior and subordinated Company;
economic infrastructure debt
investments valued at GBP1,532m
(2019: GBP1,139m), namely * We considered the methodology applied by the
private loans ("Private Debt") Valuation Agent in performing their work and held
with a fair value of GBP1,426m discussions with them which included the impact of
(2019: GBP969m) and publicly COVID-19 on the Portfolio; and
traded bonds ("Public Debt")
with a fair value of GBP106m
(2019: GBP170m) (together, * We obtained and assessed the Valuation Agent's
the "Portfolio"). findings and considered the impact, if any, on our
Private Debt is primarily audit work.
valued using third party broker
quotes and pricing from syndicate
desks. Where such market information Assessing fair value of infrastructure
is not externally available, debt investments:
the valuations are based on With the support of our KPMG valuation
yields derived from comparable specialists:
loans and bonds taking into * We assessed the appropriateness of the valuation
consideration the instrument's methodology applied against our own expectations
project type and structural based on our knowledge of the asset class and
and credit characteristics. experience in the industry;
The Company engages a third
party valuation expert (the
"Valuation Agent") to perform * We held discussions with the Investment Adviser in
a fair market valuation review relation to the Portfolio to identify credit and
of the Private Debt. Public operational issues, including the impact of COVID-19;
Debt is valued using market and
pricing data sourced from
approved third party pricing
vendors. * For 100% by fair value of the Public Debt and 94% by
Risk: fair value of the Private Debt our KPMG valuation
The valuation of the Company's specialist either independently obtained prices from
investment at fair value through pricing vendors or, where this pricing information
profit and loss is considered was not available, derived an independent mark to
a significant area of our model valuation based on market inputs for comparable
audit, given that it represents instruments with similar structural and credit
the majority of the net assets characteristics.
of the Company. Inherent in
that valuation is the use
of significant estimates and For the remaining Private Debt positions:
judgments in determining the * We agreed key contractual terms such as coupon and
fair value of the Subsidiary's repayment terms to supporting documentation;
Portfolio. There is a risk
of error through the inappropriate
selection and application * We compared all expected loan interest receipts
of inputs and/or assumptions versus actual cash flows and evaluated the Investment
in deriving a fair value for Adviser's credit memorandums, to assess whether there
the Portfolio, including the had been any specific credit events which would
impact of COVID-19. impact their fair value; and
* We performed research to publicly available
information for contradictory evidence.
Assessing disclosures:
We also considered the Company's disclosures
(see Note 3) in relation to the use of
estimates and judgements in determining
the fair value of the Portfolio and the
Company's valuation policies adopted in
Note 2 and financial risk and fair value
disclosures in Note 5 and Note 6 respectively
for compliance with IFRS.
-----------------------------------------------------------------
Our application of materiality and an overview of the scope of
our audit
Materiality for the financial statements as a whole was set at
GBP29.3m, determined with reference to a benchmark of net assets of
GBP1,599.9m, of which it represents approximately 2.0%.
We reported to the Audit Committee any corrected or uncorrected
identified misstatements exceeding GBP1.5m, in addition to other
identified misstatements that warranted reporting on qualitative
grounds.
Our audit of the Company was undertaken to the materiality level
specified above, which has informed our identification of
significant risks of material misstatement and the associated audit
procedures performed in those areas as detailed above.
We have nothing to report on going concern
The directors have prepared the financial statements on the
going concern basis as they do not intend to liquidate the Company
or to cease its operations, and as they have concluded that the
Company's financial position means that this is realistic. They
have also concluded that there are no material uncertainties that
could have cast significant doubt over its ability to continue as a
going concern for at least a year from the date of approval of the
financial statements ("the going concern period").
In our evaluation of the directors' conclusions, we considered
the inherent risks to the Company's activities including where
relevant the impact of the COVID-19 pandemic and the requirements
of the applicable financial reporting framework. We analysed how
those risks might affect the Company's financial resources or
ability to continue operations over the going concern period,
including challenging the underlying data and key assumptions used
to make the assessment, and evaluated the directors' plans for
future actions in relation to their going concern assessment.
Based on this work, we are required to report to you if we have
anything material to add or draw attention to in relation to the
directors' statement in Note 2 to the financial statements on the
use of the going concern basis of accounting with no material
uncertainties that may cast significant doubt over the Company's
use of that basis for a period of at least twelve months from the
date of approval of the financial statements. We have nothing to
report in these respects.
We have nothing to report on the other information in the Annual
Report
The directors are responsible for the other information. The
other information comprises the information included in the annual
report but does not include the financial statements and our
auditor's report thereon. Our opinion on the financial statements
does not cover the other information and we do not express an audit
opinion or any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our
responsibility is to read the other information and, in doing so,
consider whether the other information is materially inconsistent
with the financial statements or our knowledge obtained in the
audit, or otherwise appears to be materially misstated. If, based
on the work we have performed, we conclude that there is a material
misstatement of this other information, we are required to report
that fact. We have nothing to report in this regard.
Disclosures of emerging and principal risks and longer-term
viability
Based on the knowledge we acquired during our financial
statements audit, we have nothing material to add or draw attention
to in relation to:
- the directors' confirmation within the viability statement
that they have carried out a robust assessment of the emerging and
principal risks facing the Company, including those that would
threaten its business model, future performance, solvency or
liquidity;
- the Principal Risks and Uncertainties disclosures describing
these risks and explaining how they are being managed and
mitigated; and
- the directors' explanation in the viability statement of how
they have assessed the prospects of the Company, over what period
they have done so and why they considered that period to be
appropriate, and their statement as to whether they have a
reasonable expectation that the Company will be able to continue in
operation and meet its liabilities as they fall due over the period
of their assessment, including any related disclosures drawing
attention to any necessary qualifications or assumptions.
Corporate governance disclosures
We are required to report to you if:
- we have identified material inconsistencies between the
knowledge we acquired during our financial statements audit and the
directors' statement that they consider that the annual report and
financial statements taken as a whole is fair, balanced and
understandable and provides the information necessary for
shareholders to assess the Company's position and performance,
business model and strategy; or
- the section of the annual report describing the work of the
Audit Committee does not appropriately address matters communicated
by us to the Audit Committee
We are required to report to you if the Corporate Governance
Statement does not properly disclose a departure from the
provisions of the UK Corporate Governance Code specified by the
Listing Rules for our review.
We have nothing to report to you in these respects.
We have nothing to report on other matters on which we are
required to report by exception
We have nothing to report in respect of the following matters
where the Companies (Guernsey) Law, 2008 requires us to report to
you if, in our opinion:
- the Company has not kept proper accounting records; or
- the financial statements are not in agreement with the accounting records; or
- we have not received all the information and explanations,
which to the best of our knowledge and belief are necessary for the
purpose of our audit.
Respective responsibilities
Directors' responsibilities
As explained more fully in the Statement of Directors'
Responsibilities, the directors are responsible for: the
preparation of the financial statements including being satisfied
that they give a true and fair view; such internal control as they
determine is necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to
fraud or error; assessing the Company's ability to continue as a
going concern, disclosing, as applicable, matters related to going
concern; and using the going concern basis of accounting unless
they either intend to liquidate the Company or to cease operations,
or have no realistic alternative but to do so.
Auditor's responsibilities
Our objectives are to obtain reasonable assurance about whether
the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue our
opinion in an auditor's report. Reasonable assurance is a high
level of assurance, but does not guarantee that an audit conducted
in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or
error and are considered material if, individually or in aggregate,
they could reasonably be expected to influence the economic
decisions of users taken on the basis of the financial
statements.
A fuller description of our responsibilities is provided on the
FRC's website at www.frc.org.uk/auditorsresponsibilities .
The purpose of this report and restrictions on its use by
persons other than the Company's members as a body
This report is made solely to the Company's members, as a body,
in accordance with section 262 of the Companies (Guernsey) Law,
2008.
Our audit work has been undertaken so that we might state to the
Company's members those matters we are required to state to them in
an auditor's report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to
anyone other than the Company and the Company's members, as a body,
for our audit work, for this report, or for the opinions we have
formed.
Dermot Dempsey
For and on behalf of KPMG Channel Islands Limited
Chartered Accountants and Recognised Auditors
Glategny Court
St Peter Port
Guernsey GY1 1WR
Channel Islands
24 June 2020
FINANCIAL STATEMENTS
STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 March 2020
Year ended Year ended
31 March 2020 31 March 2019
Note GBP GBP
Revenue
Net (losses)/gains on non-derivative financial assets at fair value through
profit or loss 6 (112,892,142) 3,634,711
Net losses on derivative financial assets at fair value through profit or loss 7 (47,992,453) (26,634,900)
Investment income 9 115,453,949 106,717,142
Net foreign exchange loss (937,093) (1,593,178)
Total revenue (46,367,739) 82,123,775
-------------- --------------
Expenses
Investment Adviser fees 10 10,165,841 7,312,391
Investment Manager fees 10 344,933 320,000
Directors' fees and expenses 10 226,782 216,601
Administration fees 10 425,066 405,541
Auditor's fees 149,074 136,129
Legal and professional fees 240,948 280,542
Valuation fees 761,400 502,000
Custodian fees 235,878 215,114
Listing, regulatory and statutory fees 127,899 105,700
Other expenses 464,082 286,268
-------------- --------------
Total operating expenses 13,141,903 9,780,286
Loan finance costs 15 5,851,763 3,172,657
Total expenses 18,993,666 12,952,943
-------------- --------------
(Loss)/profit and total comprehensive (loss)/income for the year (65,361,405) 69,170,832
-------------- --------------
Basic and diluted (loss)/earnings per ordinary share 13 (5.03)p 7.48p
-------------- --------------
All items in the above statement are from continuing
operations.
The accompanying notes form an integral part of the Financial
Statements.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the year ended 31 March 2020
Retained
Share earnings/
Year ended 31 March 2020 capital (losses) Total
Note GBP GBP GBP
At 1 April 2019 1,072,031,030 25,108,391 1,097,139,421
Issue of ordinary shares during the
year, net of issue costs 12 647,034,479 - 647,034,479
Total comprehensive loss for the year - (65,361,405) (65,361,405)
Dividends paid during the year 4 - (78,947,224) (78,947,224)
At 31 March 2020 1,719,065,509 (119,200,238) 1,599,865,271
------------- ------------- -------------
Share Retained
Year ended 31 March 2019 capital earnings Total
Note GBP GBP GBP
At 1 April 2018 746,867,128 11,303,074 758,170,202
Issue of ordinary shares during the
year, net of issue costs 12 325,163,902 - 325,163,902
Total comprehensive income for the year - 69,170,832 69,170,832
Dividends paid during the year 4 - (55,365,515) (55,365,515)
At 31 March 2019 1,072,031,030 25,108,391 1,097,139,421
------------- ------------ -------------
FINANCIAL STATEMENTS
STATEMENT OF FINANCIAL POSITION
At 31 March 2020
31 March 2020 31 March 2019
Note GBP GBP
Non-current assets
Non-derivative financial assets at fair value through profit or loss 6 1,551,492,432 1,118,045,818
Current assets
Cash and cash equivalents 8 37,581,698 27,633,414
Trade and other receivables 14 90,008,334 60,522,481
Derivative financial assets at fair value through profit or loss 7 6,629,477 10,598,250
------------- -------------
Total current assets 134,219,509 98,754,145
Total assets 1,685,711,941 1,216,799,963
Current liabilities
Loan payable 15 35,000,000 113,875,164
Trade and other payables 16 3,140,194 2,364,618
Derivative financial liabilities at fair value through profit or loss 7 47,706,476 3,420,760
------------- -------------
Total current liabilities 85,846,670 119,660,542
Total liabilities 85,846,670 119,660,542
Net assets 1,599,865,271 1,097,139,421
------------- -------------
Equity
Share capital 12 1,719,065,509 1,072,031,030
Retained (losses)/earnings (119,200,238) 25,108,391
------------- -------------
Total equity 1,599,865,271 1,097,139,421
------------- -------------
Number of ordinary shares 12 1,654,671,448 1,060,975,849
------------- -------------
Net asset value per ordinary share 96.69p 103.41p
------------- -------------
The Financial Statements were approved and authorised for issue
by the Board of Directors on
24 June 2020 and signed on its behalf by:
Sandra Platts
Director
STATEMENT OF CASH FLOWS
For the year ended 31 March 2020
Year ended Year ended
Note 31 March 2020 31 March 2019
GBP GBP
Cash flows from operating activities
(Loss)/profit for the year (65,361,405) 69,170,832
Adjustments for:
Net losses/(gains) on non-derivative financial assets at fair value through
profit or loss 6 112,892,142 (3,634,711)
Net losses on derivative financial assets at fair value through profit or
loss 7 47,992,453 26,634,900
Investment Adviser fees settled through issue of ordinary shares 12 955,218 1,279,907
Net foreign exchange loss 937,093 1,593,178
Loan finance costs 15 5,851,763 3,172,657
Increase in trade and other receivables (excluding finance costs) 14 (29,128,510) (52,430,820)
Increase in trade and other payables (excluding finance costs) 16 785,719 571,320
74,924,473 46,357,263
Cash received on settled forward contracts 48,119,873 17,278,070
Cash paid on settled forward contracts (47,857,837) (36,958,973)
Purchases of investments 6 (916,880,278) (534,891,241)
Sales of investments 6 370,541,522 194,907,810
-------------- --------------
Net cash outflow from operating activities (471,152,247) (313,307,071)
-------------- --------------
Cash flows from financing activities
Net proceeds from issue of ordinary shares 646,079,261 323,883,995
Proceeds from drawdown of loan 15 450,311,769 260,249,614
Repayment of loan 15 (531,249,054) (186,730,072)
Loan finance costs paid (6,221,221) (3,022,861)
Dividends paid 4 (78,947,224) (55,365,515)
-------------- --------------
Net cash inflow from financing activities 479,973,531 339,015,161
-------------- --------------
Net increase in cash and cash equivalents 8,821,284 25,708,090
Cash and cash equivalents at beginning of year 27,633,414 2,393,742
Effect of foreign exchange rate changes on cash and cash equivalents during
the year 1,127,000 (468,418)
Cash and cash equivalents at end of year 37,581,698 27,633,414
-------------- --------------
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 March 2020
1. GENERAL INFORMATION
Sequoia Economic Infrastructure Income Fund Limited (the
"Company") was incorporated and registered in Guernsey under the
Companies (Guernsey) Law, 2008 on 30 December 2014. The Company's
registration number is 59596 and it is regulated by the Guernsey
Financial Services Commission as a registered closed ended
collective investment scheme under The Registered Collective
Investment Scheme Rules 2015. The Company is listed and began
trading on the Main Market of the London Stock Exchange and was
admitted to the premium segment of the Official List of the UK
Listing Authority on 3 March 2015.
The Company makes its investments through Sequoia IDF Asset
Holdings S.A. (the "Subsidiary"). The Company controls the
Subsidiary through a holding of 100% of its shares. The Company
further invests in the Subsidiary through the acquisition of
Variable Funding Notes ("VFNs") issued by the Subsidiary. The
Subsidiary is domiciled in Luxembourg and has no underlying
subsidiaries.
Through its Subsidiary, the Company invests in a diversified
portfolio of senior and subordinated economic infrastructure debt
investments.
With effect from 28 January 2015, Sequoia Investment Management
Company Limited (the "Investment Adviser") was appointed as the
Investment Adviser and International Fund Management Limited (the
"Investment Manager") was appointed as the Investment Manager.
2. SIGNIFICANT ACCOUNTING POLICIES
Statement of compliance
The Annual Financial Statements (the "Financial Statements"),
which give a true and fair view, have been prepared in accordance
with International Financial Reporting Standards ("IFRS") issued by
the International Accounting Standards Board ("IASB") and
interpretations issued by the International Financial Reporting
Interpretations Committee ("IFRIC") and are in compliance with the
Companies (Guernsey) Law, 2008, the Prospectus Rules, the
Disclosure Guidance and Transparency Rules and the Market Abuse
Directive (as implemented in the UK through Financial Services and
Markets Authority).
Basis of preparation
The Company's Financial Statements have been prepared on a going
concern basis under the historical cost convention, as modified by
the revaluation of financial instruments measured at fair value
through profit or loss.
The preparation of financial statements in conformity with IFRS
requires the Directors to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date
of the Financial Statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates. Significant estimates and judgements
are discussed in note 3. The principal accounting policies adopted
are set out below.
The Directors believe that the Annual Report and Financial
Statements contain all of the information required to enable
Shareholders and potential investors to make an informed appraisal
of the investment activities and profits and losses of the Company
for the year to which it relates and does not omit any matter or
development of significance.
In accordance with the investment entities exemption contained
in IFRS 10, "Consolidated Financial Statements", the Board has
determined that the Company satisfies the criteria to be regarded
as an investment entity and that the Company provides investment
related services. As a result, the Company is required to only
prepare individual Financial Statements under IFRS and measures its
investment in its Subsidiary at fair value. This determination
involves a degree of judgement (see note 3 for further
details).
Going concern
The Company has been incorporated with an unlimited life. In
accordance with the Company's Articles of Incorporation, the
Directors were required to propose an ordinary resolution (the
"Continuation Resolution") on or before 3 September 2016 that the
Company continues as a registered closed-ended collective
investment scheme, and to propose further Continuation Resolutions
within every three years thereafter. The first Continuation
Resolution was passed by Shareholders at an Extraordinary General
Meeting of the Company on 25 May 2016, and the second on 16 August
2018 at the Company's Annual General Meeting ("AGM"). Should a
Continuation Resolution not be passed, the Directors are required
to put forward proposals within six months for the reconstruction
or reorganisation of the Company to the Shareholders for their
approval. These proposals may or may not involve winding up the
Company and, accordingly, failure to pass a Continuation Resolution
will not necessarily result in the winding up of the Company.
The Directors have considered the possibility that the next
Continuation Resolution, to be proposed at the 2021 AGM, may not be
passed by Shareholders, however they noted the overwhelming
majority vote in favour of the Continuation Resolutions passed in
May 2016 and August 2018, the consistently strong appetite for the
Company's investment proposition, evidenced by a number of
successful share issues, and that the Company's shares have, apart
from a period from late March to early April 2020, consistently
traded at a premium since launch.
The Directors have reviewed the Company's holdings in cash and
cash equivalents and investments, including a consideration of the
revaluation losses arising on certain investments as a result of
the COVID-19 pandemic, and have considered the income deriving from
those investments, as well as the likelihood that future
Continuation Resolutions will be passed. As a result of this
review, the Directors have concluded that it is appropriate to
adopt the going concern basis in preparing the Financial Statements
as the Company, despite the effects of the COVID-19 pandemic, has a
strong balance sheet and adequate financial resources to meet its
liabilities as they fall due.
New Accounting Standards effective and adopted
-- IFRS 9 (amended), "Financial Instruments" (amendments
regarding prepayment features with negative compensation and
modifications of financial liabilities, effective for periods
commencing on or after 1 January 2019).
In addition, the IASB completed its Annual Improvements
2015-2017 Cycle project in December 2017. This project has amended
certain existing standards and interpretations effective for
accounting periods commencing on or after 1 January 2019.
The adoption of these amended standards has had no material
impact on the Financial Statements of the Company.
Investment income
Investment income is recognised in profit or loss of the
Statement of Comprehensive Income on the effective interest rate
method basis and includes interest income from the Company's
investment in VFNs issued by the Subsidiary and from cash and cash
equivalents.
VFN interest
Interest on VFNs issued by the Subsidiary is paid to the Company
on a quarterly basis. VFN interest is calculated on an accruals
basis, as the amount of revenue receivable in the quarter by the
Subsidiary deriving from its investments and cash and cash
equivalents, less any expenses due or payable by the
Subsidiary.
Net gains/(losses) on financial assets at fair value through
profit or loss
Net gains/(losses) on financial assets at fair value through
profit or loss consists of realised and unrealised gains and losses
on both non-derivative and derivative financial assets at fair
value through profit or loss, and are recognised in profit or loss
in the Statement of Comprehensive Income. Gains or losses on
non-derivative financial instruments are calculated as described in
the section 'Non-derivative financial instruments - fair value and
subsequent measurement' within this note; gains or losses on
derivative financial instruments are calculated as described in the
section 'Derivative financial instruments - fair value and
subsequent measurement' within this note.
Expenses
Expenses of the Company are recognised in profit or loss of the
Statement of Comprehensive Income on an accruals basis.
Share-based payments (equity-settled)
In accordance with the terms of the Investment Advisory
Agreement, one tenth (up to 31 August 2018, one quarter) of the
Investment Adviser's fee is settled through the issue of ordinary
shares in the Company. Services received in exchange for the grant
of any share-based payments are measured indirectly by reference to
the fair value of the ordinary shares at the date of issue.
Share-based payments are recognised as an expense in profit or loss
of the Statement of Comprehensive Income.
Ordinary shares
The ordinary shares of the Company are classified as equity
based on the substance of the contractual arrangements and in
accordance with the definition of equity instruments under IAS 32.
The proceeds from the issue of participating shares are recognised
in the Statement of Changes in Shareholders' Equity, net of issue
costs.
Cash and cash equivalents
Cash comprises current deposits with banks. Cash equivalents are
short-term, highly liquid investments that are readily convertible
to known amounts of cash, are subject to an insignificant risk of
changes in value, and are held for the purpose of meeting
short-term cash commitments rather than for investments or other
purposes. Certain amounts of the Company's cash are held as
collateral against the Company's forward foreign exchange trading
facilities (see note 8).
Financial instruments
Classification
The Company classifies its financial assets and financial
liabilities into categories in accordance with IFRS 9, "Financial
Instruments".
Financial assets and liabilities at fair value through profit
and loss
Financial assets and liabilities classified in this category are
designated by management on initial recognition as part of a group
of financial assets and/or liabilities which are managed and their
performance evaluated on a fair value basis, in accordance with a
documented investment strategy. This category includes the
Company's investment in shares and VFNs issued by the Subsidiary
and forward foreign exchange contracts. The Investment Entities
exception to consolidation in IFRS 10, "Consolidated Financial
Statements" requires subsidiaries of an investment entity to be
accounted for at fair value through profit or loss in accordance
with IFRS 9.
Financial assets at amortised cost
This category comprises cash and cash equivalents and trade and
other receivables.
Financial liabilities at amortised cost
This category comprises loans payable and trade and other
payables.
Recognition and initial measurement
Financial assets and financial liabilities at fair value through
profit or loss are measured initially at fair value, being the
transaction price, on the trade date. Transaction costs on
financial assets at fair value through profit or loss are expensed
immediately. Financial assets or financial liabilities not at fair
value through profit or loss are initially recognised at fair value
plus transaction costs that are directly attributable to their
acquisition or issue.
Non-derivative financial instruments - fair value and subsequent
measurement
After initial measurement, the Company measures non-derivative
financial assets classified at fair value through profit or loss at
their fair values. Changes in fair value are recorded within "Net
gains/(losses) on non-derivative financial assets at fair value
through profit or loss" in the Statement of Comprehensive Income.
This account includes foreign exchange differences but excludes VFN
interest income.
"Fair value" is the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date in the
principal or, in its absence, the most advantageous market to which
the Company has access at that date. The fair value of a liability
reflects its non-performance risk.
If there is no quoted price in an active market, the Company
uses valuation techniques that maximise the use of relevant
observable inputs and minimise the use of unobservable inputs. The
chosen valuation technique incorporates all of the factors that
market participants would take into account in pricing a
transaction. Please refer to note 6 for further details.
Non-derivative financial instruments - amortised cost
measurement
After initial measurement, other financial liabilities are
measured at amortised cost using the effective interest rate
method. The amortised cost of a financial asset or financial
liability is the amount at which the financial asset or financial
liability is measured on initial recognition, minus principal
repayments, plus or minus the cumulative amortisation using the
effective interest method of any difference between the initial
amount recognised and the maturity amount, minus any reduction for
impairment.
Derivative financial instruments - fair value and subsequent
measurement
The Company holds derivative financial instruments to minimise
its exposure to foreign exchange risks and from time to time may
also hold derivative financial instruments to minimise its exposure
to interest rate risks or for economic leveraging. Derivatives are
classified as financial assets or financial liabilities (as
applicable) at fair value through profit or loss and are initially
recognised at fair value; attributable transaction costs are
recognised in profit or loss in the Statement of Comprehensive
Income when incurred. Subsequent to initial recognition,
derivatives are measured at fair value and changes thereto are
recorded within 'Net gains/(losses) on derivative financial
instruments at fair value through profit or loss' in the Statement
of Comprehensive Income. This account includes foreign exchange
differences but excludes interest income. The fair values of
derivative transactions are measured using their market prices at
the reporting date.
Derecognition
A financial asset is derecognised when the contractual rights to
the cash flows from the financial asset expire or it transfers the
financial asset and the transfer qualifies for derecognition in
accordance with IFRS 9. A financial liability is derecognised when
the obligation specified in the contract is discharged, cancelled
or expires.
Foreign currency
Functional and presentation currency
The Financial Statements of the Company are presented in the
currency of the primary economic environment in which the Company
operates (its functional currency). The Directors have considered
the primary economic currency of the Company; the currency in which
the original finance was raised; the currency in which
distributions will be made; and ultimately what currency would be
returned to Shareholders if the Company was wound up. The Directors
have also considered the currency to which the Company's
investments are exposed. On balance, the Directors believe that
Sterling best represents the functional currency of the Company
during the year. Therefore, the books and records are maintained in
Sterling and, for the purpose of the Financial Statements, the
results and financial position of the Company are presented in
Sterling, which has been selected as the presentation currency of
the Company.
Transactions and balances
Foreign currency transactions are translated into the functional
currency using the exchange rates prevailing at the dates of the
transactions. Foreign currency balances at the year end are
translated into the functional currency at the exchange rates
prevailing at the year end date. Foreign exchange gains and losses
resulting from the settlement of such transactions and from the
translation at year end exchange rates of monetary assets and
liabilities denominated in foreign currencies are recognised in
profit or loss of the Statement of Comprehensive Income.
Non-monetary items measured at historical cost are translated
using the exchange rates at the date of the transaction.
Non-monetary items measured at fair value are translated using the
exchange rates at the date when fair value was determined.
Dividends
Interim dividends paid to Shareholders are recorded through the
Statement of Changes in Shareholders' Equity when they are declared
to Shareholders. Final dividends are recorded through the Statement
of Changes in Shareholders' Equity when they are approved by
Shareholders. The payment of any dividend by the Company is subject
to the satisfaction of a solvency test as required by the Companies
(Guernsey) Law, 2008.
Segmental reporting
The Board has considered the requirements of IFRS 8 - "Operating
Segments". The Company has entered into an Investment Management
and Investment Advisory Agreement with the Investment Manager and
Investment Adviser respectively, under which the Board has
delegated the day to day responsibility for the management of the
Company's investment portfolio to the Investment Manager, who has
then delegated that responsibility to the Investment Adviser per
the Investment Advisory Agreement, subject to the overall
supervision of the Board. Subject to its terms and conditions, the
Investment Advisory Agreement requires the Investment Adviser to
manage the Company's investment portfolio in accordance with the
Company's investment guidelines in effect from time to time,
including the authority to purchase and sell securities and other
investments and to carry out other actions as appropriate to give
effect thereto. However, the Board retains full responsibility to
ensure that the Investment Adviser adheres to its mandate.
Moreover, the Board is fully responsible for the appointment and/or
removal of the Investment Adviser. Accordingly, the Board is deemed
to be the "Chief Operating Decision Maker" of the Company. In the
Board's opinion, the Company is engaged in a single segment of
business, through its investment in the Subsidiary, being
investment in senior and subordinated infrastructure debt
instruments and related and/or similar assets.
The Company receives no revenues from external customers. Other
than the Subsidiary, which is a Luxembourg company, the Company
holds no non-current assets in any geographical area other than
Guernsey.
2. USE OF JUDGEMENTS AND ESTIMATES
The preparation of Financial Statements in accordance with IFRS
requires the Board to make judgements, estimates and assumptions
that affect the application of policies and the reported amounts of
assets and liabilities and income and expenses. The estimates and
associated assumptions are based on various factors that are
believed to be reasonable under the circumstances, the results of
which form the basis of making the judgements about carrying values
of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on a
semi-annual basis. Revisions to accounting estimates are recognised
in the period in which the estimate is revised if the revision
affects only that period, or in the period of the revision and
future periods if the revision affects both current and future
periods.
The principal judgements and estimates are as follows:
Judgements
Functional currency
Refer to note 2 'Functional and presentation currency'.
Investment Entity
The Board has determined that the Company has all the elements
of control as prescribed by IFRS 10 in relation to the Subsidiary
as the Company owns 100% of the equity of the Subsidiary, is
exposed and has rights to the returns of the Subsidiary and has the
ability either directly or through the Investment Adviser to affect
the amount of its returns from the Subsidiary.
The Company provides investment management services and has a
number of investors who pool their funds to gain access to these
services and investment opportunities that they might not have had
access to individually. The Company, being listed on the Main
Market of the London Stock Exchange, obtains funding from a diverse
group of external Shareholders, to whom it has committed that its
business purpose is to invest funds solely for the returns from
capital appreciation and investment income.
The Company has only one investment - the Subsidiary - in which
it holds 100% of the equity, however its investment in the
Subsidiary is used to acquire exposure to a portfolio comprising a
large number of investments. The fair value method is used to
represent the Subsidiary's performance in its internal reporting to
the Board, and to evaluate the performance of the Subsidiary's
investments and to make investment decisions for mature
investments. Those investments have documented maturity/redemption
dates, or will be sold if other investments with better risk/reward
profile are identified, which the Directors consider demonstrates a
clear exit strategy.
The Subsidiary serves as an asset holding company and does not
provide investment-related services.
Accordingly, when the Subsidiary is assessed based on the
structure of the Company and its Subsidiary as a whole as a means
of carrying out activities, the Board has concluded that the
Company satisfies sufficient of the criteria above to meet the
definition of an investment entity. As a result, under the terms of
IFRS 10, the Company is not permitted to consolidate the
Subsidiary, but must measure its investment in the Subsidiary at
fair value through profit or loss. The Company has determined that
the fair value of the Subsidiary is the Subsidiary's net asset
value and has concluded that the Subsidiary meets the definition of
an unconsolidated subsidiary under IFRS 12 and has made the
necessary disclosures.
Estimates
Fair value of non-derivative and derivative financial
instruments at fair value through profit or loss
The Company records its investment in the Subsidiary and in
forward foreign exchange contracts at fair value. Details of the
valuation methodologies applied in determining the fair value of
the Subsidiary and its underlying infrastructure investments are
disclosed in note 6. The report of the Audit Committee and the
additional methodology disclosures in note 6 underline the
additional valuation estimation uncertainty caused by COVID-19's
impact on the financial markets. The valuations of forward foreign
exchange contracts are prepared with reference to prevailing
exchange rates. The Directors consider that these valuations
represent the best estimate of the fair values of the Company's
investment in the Subsidiary and its underlying infrastructure
investments and in forward foreign exchange contracts.
4. DIVIDS
On 22 May 2019, the Company announced that it had increased the
Company's dividend target from 6.00p to 6.25p per ordinary share
per annum. Accordingly, with effect from the dividend for the
quarter ended 30 June 2019, the Company's dividend policy, in the
absence of any significant restricting factors, is to pay dividends
totalling 6.25p per ordinary share per annum for the foreseeable
future. The Company pays dividends on a quarterly basis.
The Company paid the following dividends on its ordinary shares
during the year ended 31 March 2020:
Dividend
rate per
ordinary Net dividend
share payable Ex-dividend
Period to Payment date (pence) (GBP) Record date date
31 March 2019 30 May 2019 1.5000 15,914,638 3 May 2019 2 May 2019
23 August
30 June 2019 2019 1.5625 19,705,516 26 July 2019 25 July 2019
30 September 22 November 25 October 24 October
2019 2019 1.5625 21,661,773 2019 2019
31 December 21 February 24 January 23 January
2019 2020 1.5625 21,665,297 2020 2020
--------------- -------------- ---------- ------------- ------------- -------------
The Company paid the following dividends on its ordinary shares
during the year ended 31 March 2019:
Dividend
rate per Net dividend
ordinary payable Ex-dividend
Period to Payment date share (pence) (GBP) Record date date
31 March 2018 25 May 2018 1.5000 11,224,736 27 April 2018 26 April 2018
24 August
30 June 2018 2018 1.5000 12,321,526 27 July 2018 26 July 2018
30 September 22 November 26 October 25 October
2018 2018 1.5000 15,907,343 2018 2018
31 December 22 February 25 January 24 January
2018 2019 1.5000 15,911,910 2019 2019
--------------- -------------- --------------- ------------- -------------- --------------
Under Guernsey law, the Company can pay dividends in excess of
its retained earnings provided it satisfies the solvency test
prescribed by the Companies (Guernsey) Law, 2008. The solvency test
considers whether the Company is able to pay its debts when they
fall due, and whether the value of the Company's assets is greater
than its liabilities. The Company satisfied the solvency test in
respect of all dividends declared or paid in the year.
At an Extraordinary General Meeting of the Company held on 25
February 2020, Shareholders approved the implementation of a scrip
dividend scheme whereby the Company may from time to time offer to
any holders of ordinary shares the right to elect to receive
ordinary shares credited as fully paid in lieu of cash. The
decision whether to offer such a scrip dividend alternative in
respect of any dividend will be made by the Directors at the time
the relevant dividend is declared.
5. FINANCIAL RISK MANAGEMENT
The Board of Directors has overall responsibility for the
establishment and oversight of the Company's risk management
framework. The Company's risk management policies are established
to identify and analyse the risks faced by the Company, to set
appropriate risk limits and controls and to monitor risks and
adherence to limits. Risk management policies are reviewed
regularly to reflect changes in market conditions and the Company's
activities. Below is a non-exhaustive summary of the risks that the
Company is exposed to as a result of its use of financial
instruments:
Market Risk
Market risk is the risk that changes in market factors such as
foreign exchange rates, interest rates and equity prices will
affect the Company's income and/or the value of its holdings in
financial instruments.
The Company's exposure to market risk comes mainly from
movements in the value of its investment in the Subsidiary and on a
look-through basis to the underlying investments in the
Subsidiary's portfolio. Changes in credit spreads may further
affect the Subsidiary's net equity or net income, and hence the
value of the Company's investment in the Subsidiary.
The objective of market risk management is to manage and control
market risk exposures within acceptable parameters while optimising
the return on risk. The Company's strategy for the management of
market risk is driven by its investment objective to provide
investors with regular, sustained, long-term distributions and
capital appreciation from a diversified portfolio of senior and
subordinated economic infrastructure debt investments, which are
held in a portfolio at the Subsidiary level. The various components
of the Company's market risk are managed on a daily basis by the
Investment Manager in accordance with policies and procedures in
place, as detailed below.
In addition, the Company, through the underlying Subsidiary,
intends to mitigate market risk generally by not making investments
that would cause it to have exposure to any one individual
infrastructure asset exceeding 10% of the Fund's investments at the
time of investment. The Subsidiary's market positions are monitored
on a quarterly basis by the Board of Directors and by the
Investment Manager at the point of investment and on an ongoing
basis.
Interest Rate Risk
Interest rate risk is the risk that the fair value or future
cash flows of a financial instrument will fluctuate because of
changes in market interest rates. The Subsidiary's interest-bearing
financial assets and liabilities expose it to risks associated with
the effects of fluctuations in the prevailing levels of market
interest rates on its financial position and cash flows.
The Company is exposed to cash flow interest rate risk in
respect of its cash and cash equivalents and the floating rate debt
investments held by the Subsidiary and to fair value interest rate
risk in respect of the fixed rate debt investments held by the
Subsidiary.
As the Company has no investment restrictions which would
confine its investment universe to short-dated issues, the
Investment Manager is mindful that fixed interest portfolios with
longer durations may be subject to relatively greater adverse
effects of a rising interest rate environment and inflationary
considerations.
Interest rate risk is mitigated through the diversification of
assets by duration and jurisdiction and with maintaining in excess
of 50% of its portfolio in floating rate or inflation-linked
debt.
Interest receivable on bank deposits or payable on bank
overdraft positions will be affected by fluctuations in interest
rates. Interest rate risk on cash and cash equivalents at Company
and Subsidiary level is not considered significant.
The following table shows the profile of the Subsidiary's
investment portfolio:
31 March 2020 31 March 2019
Range of interest rates GBP Range of interest rates GBP
Investments with floating
interest rates 0.00% to 12.52% 1,068,190,141 0.00% to 12.60% 790,763,073
Investments with fixed interest
rates 3.88% to 11.00% 464,629,429 3.88% to 13.94% 348,515,119
Financial assets at fair value through profit or loss (note
6) 1,532,819,570 1,139,278,192
-------------- --------------
The following table shows the Directors' best estimate of the
sensitivity of the Subsidiary's portfolio of investments to
stressed changes in interest rates, with all other variables held
constant. The table assumes parallel shifts in the respective
forward yield curves and is based on the modified duration of the
assets.
31 March 2020 effect on net assets 31 March 2019 effect on net assets
Possible reasonable change in and profit or loss and profit or loss
interest rate GBP GBP
+1% (18,278,814) (18,292,303)
-1% 19,720,694 20,139,211
-------------------------------------- ------------------------------------- -------------------------------------
The possible change in the interest rate of 1% is regarded as
reasonable in view of the current low level of global interest
rates.
Under the terms of the Prospectus, the Company is permitted to
use interest rate hedging instruments to protect against exposure
to interest rate risk. However, no such hedging arrangements were
entered into during the year and none were in place at the year
end.
Currency risk
Currency risk is the risk that the fair value or future cash
flows of a financial instrument will fluctuate because of changes
in foreign exchange rates.
The Company is directly exposed to currency risk in respect of
its cash and cash equivalents and derivatives denominated in
currencies other than Sterling, and indirectly through its
investment in the Subsidiary.
The functional and presentational currency of the Company is
Sterling. The Company invests in its Subsidiary through VFNs
denominated in various currencies other than the functional
currency, currently US Dollar, Euro, Australian Dollar and
Norwegian Krone. The Subsidiary in turn invests in financial
instruments and enters into transactions that are denominated in
currencies other than the functional currency. Consequently, the
Company is exposed to risk that the exchange rate of its functional
currency relative to other foreign currencies may change in a
manner that has an adverse effect on the fair value or future cash
flows of the Company's financial assets or liabilities.
The Investment Manager monitors the exposure to foreign
currencies and reports to the Board on a regular basis. The
Investment Manager measures the risk of the foreign currency
exposure by considering the effect on the net asset value and
income of a movement in the rates of exchange to which the assets,
liabilities, income and expenses are exposed. A currency hedging
program is in place at the Company level, in line with the
intentions stated in the Prospectus, to protect against the effects
of currency exposure on the future income arising from the
underlying portfolio of investments held by the Subsidiary.
The total net foreign currency exposure of the Company and the
Subsidiary combined at the year end was as detailed in the
following table. These figures have been presented on a combined
basis, as there exist foreign currency assets and liabilities in
both the Company and the Subsidiary, and the forward foreign
exchange contracts held at the Company level are taken out to hedge
currency exposure existing at the Subsidiary level.
31 March 2020 31 March 2019
GBP GBP
USD Exposure
Financial assets at fair value through profit or loss 821,314,508 591,848,993
Forward foreign exchange contracts (890,275,485) (564,652,969)
Cash and cash equivalents 80,319,309 20,424,877
Trade and other receivables 10,035,723 4,166,767
Loan payable - (53,875,164)
Trade and other payables (10,767,757) (34,141)
-------------- --------------
Net USD Exposure 10,626,298 (2,121,637)
-------------- --------------
EUR Exposure
Financial assets at fair value through profit or loss 423,040,901 248,240,364
Forward foreign exchange contracts (488,495,036) (259,290,882)
Cash and cash equivalents 11,007,714 1,420,495
Trade and other receivables 6,859,451 3,610,808
Trade and other payables (68,610) (226,155)
-------------- --------------
Net EUR Exposure (47,655,580) (6,245,370)
-------------- --------------
NOK Exposure
Financial assets at fair value through profit or loss 14,103,302 12,584,566
Forward foreign exchange contracts (17,684,148) (11,503,375)
Cash and cash equivalents 904,421 1,236
Trade and other receivables 169,434 256,168
-------------- --------------
Net NOK Exposure (2,506,991) 1,338,595
-------------- --------------
PLN Exposure
Financial assets at fair value through profit or loss - 1,019,928
Forward foreign exchange contracts - (4,515,099)
Cash and cash equivalents - 56,485
Trade and other receivables - 6,112
-------------- --------------
Net PLN exposure - (3,432,574)
-------------- --------------
AUD Exposure
Financial assets at fair value through profit or loss 35,558,372 40,965,698
Forward foreign exchange contracts (38,841,991) (40,141,297)
Cash and cash equivalents - 279
Trade and other receivables 733,128 894,261
-------------- --------------
Net AUD exposure (2,550,491) 1,718,941
-------------- --------------
TOTAL EXPOSURE (42,086,764) (8,742,045)
-------------- --------------
31 March 31 March
Possible 2020 effect Possible 2019 effect
reasonable 31 March on net assets reasonable 31 March on net assets
change 2020 net and profit change 2019 net and profit
in exchange exposure or loss in exchange exposure or loss
rate GBP GBP rate GBP GBP
USD/GBP +/- 5% 10,626,298 +/- 531,315 +/- 5% (2,121,637) -/+ 106,082
EUR/GBP +/- 5% (47,655,580) -/+ 2,382,779 +/- 5% (6,245,370) -/+ 312,269
NOK/GBP +/- 5% (2,506,991) -/+ 125,350 +/- 5% 1,338,595 +/- 66,930
PLN/GBP +/- 5% - - +/- 5% (3,432,574) -/+ 171,629
AUD/GBP +/- 5% (2,550,491) -/+ 127,525 +/- 5% 1,718,941 +/- 85,947
--------- ------------- ------------- --------------- ------------- ------------ ---------------
The possible change in exchange rates of 5% is regarded as
reasonable, as this is the approximate volatility during the course
of the year of Sterling against the major currencies to which it is
exposed.
The following table details the split of currencies based on
fair value of bonds and loans in the Subsidiary's investment
portfolio:
31 March 31 March
2020 2019
Currency GBP GBP
Sterling 238,802,487 244,618,643
US Dollar 821,314,508 591,848,993
Euro 423,040,901 248,240,364
Norwegian Krone 14,103,302 12,584,566
Polish Zloty - 1,019,928
Australian Dollar 35,558,372 40,965,698
-------------- --------------
Total 1,532,819,570 1,139,278,192
-------------- --------------
Credit and Counterparty Risk
Credit risk is the risk that a counterparty to a financial
instrument will fail to discharge an obligation or commitment that
it has entered into with the Company or the Subsidiary or a vehicle
in which the Company or Subsidiary invests, resulting in a
financial loss to the Company. It arises principally from debt
securities held, and also from derivative financial assets and cash
and cash equivalents. For risk management reporting purposes, the
Company considers and aggregates all elements of credit risk
exposure (such as individual obligation default risk, country risk
and sector risk).
In respect of the debt investments, credit risk is the risk that
the fair value of a loan (or more generally, a stream of debt
payments) will decrease due to a change in the borrower's ability
to make payments, whether that change is an actual default or a
change in the borrower's probability of default.
The Investment Manager's management of the Subsidiary's
portfolio is underpinned by the ongoing monitoring and mitigation
of credit risk in the portfolio to ensure that any credit events or
institutional ratings changes are identified in a timely
manner.
The following table analyses the external ratings of the
Subsidiary's portfolio investments, calculated using all available
ratings for the portfolio investments from Standard and Poor's,
Moody's and Fitch.
31 March 31 March
2020 2019
Standard & Poor's rating (or equivalent) GBP GBP
BBB- to BBB+ 20,394,788 50,865,441
BB- to BB+ 78,601,721 85,764,906
B- to B+ 165,946,714 157,143,472
CCC- to CCC+ 19,405,367 -
Unrated 1,248,470,980 845,504,373
-------------- --------------
1,532,819,570 1,139,278,192
-------------- --------------
Prior to any investment purchase, the Investment Adviser
provides a credit memorandum to the Investment Manager which
includes a Sequoia Credit Rating (based on an in-house rating
system, which takes into account certain facets of the investment,
including the issuer's security, financial statements, debt
covenants and the type of debt) for the debt investment, along with
a recommendation to purchase the asset. The Investment Manager vets
the recommendation and liaises with the Risk Committee where
appropriate.
The mitigation of credit risk starts with the Investment
Adviser's Investment Committee, which monitors risks associated
with potential debt investments and makes recommendations for
acquisitions whilst allocating a Sequoia Credit Rating.
The Investment Adviser formally performs credit reviews of the
full portfolio at least semi-annually or as and when a particular
'Credit Event' occurs.
The single investment rated in the CCC band at the year end was
downgraded during the year from BB at the prior year end.
The table below analyses the Company's maximum exposure to
credit risk for the components of the Statement of Financial
Position.
31 March
31 March 2020 2019
GBP GBP
Non-derivative financial assets at fair value
through profit or loss 1,551,492,432 1,118,045,818
Cash and cash equivalents 37,581,698 27,633,414
Trade and other receivables 88,878,671 59,789,705
Derivative financial assets at fair value
through profit or loss 6,629,477 10,598,250
-------------- --------------
1,684,582,278 1,216,067,187
-------------- --------------
In line with the Company's original Prospectus a Cash Management
Policy has been put in place. Cash deposits will only be placed
with banks that hold a short-term rating of at least A-1, P-1 or F1
from Standard and Poor's, Moody's or Fitch respectively and no more
than 40% of net assets may be placed with any one bank at any time.
The Investment Manager carefully manages this process ensuring
uninvested cash is dispersed to adequately rated banks whilst
maximising interest received. The Bank of New York Mellon, as
Custodian, holds cash in relation to the portfolio operations and
in order to settle investment transactions. At the year end the
Standard and Poor's short-term credit rating of Bank of New York
Mellon was A-1+ (2019: A-1+).
For operational purposes, the Company's policy is to utilise
banks with an investment grade rating or higher (A-3, P-3 or F3
from Standard and Poor's, Moody's or Fitch respectively). The
Company's operational cash is held with The Royal Bank of Scotland
International Limited ("RBSI"). During the year, the Company has
used AFEX Markets plc ("AFEX"), Global Reach Partners ("Global
Reach"), Investec Bank (Channel Islands) Limited ("IBCI"),
Macquarie Bank Limited ("Macquarie"), Monex Europe Limited
("Monex"), RBSI and TTT Moneycorp Limited ("Moneycorp") to
undertake forward foreign exchange transactions. Hedging collateral
may be held with these institutions if required. At the year end
the short-term credit ratings of these institutions were as follows
(Standard & Poors unless otherwise specified): AFEX: no rating;
Global Reach: no rating; IBCI: F2 (Fitch); Macquarie: A-1; Monex: B
(Fitch); Moneycorp: no rating, and RBSI: A-2 (2019: Global Reach:
no rating; IBCI: F2 (Fitch); Monex: B; Moneycorp: no rating; and
RBSI: A-2).
Bankruptcy or insolvency of any of the above financial
institutions may cause the Company's rights with respect to the
cash held to be delayed or limited. The Company monitors its risk
by regularly monitoring the credit ratings of these financial
institutions.
Credit risk arising on debt securities held by the Subsidiary is
constantly monitored by the Investment Manager. Credit risk is
mitigated by the diversification of assets by maturity profile and
jurisdiction.
The Subsidiary's exposure to credit risk in respect of its
investments, based on the country of registration, is summarised
below:
31 March 31 March
2020 2019
GBP GBP
United States of America/Canada 775,373,280 524,924,316
Europe 429,113,987 296,559,291
United Kingdom 238,802,487 213,564,143
Australia 89,529,816 104,230,442
-------------- --------------
Subsidiary financial assets at fair value through
profit or loss (note 6) 1,532,819,570 1,139,278,192
-------------- --------------
The table below summarises the Subsidiary's portfolio
concentrations:
Largest portfolio
holding of a single Average portfolio
asset holding
% of total portfolio % of total portfolio
31 March 2020 3.69 1.39
--------------- ---------------------- ----------------------
Largest portfolio
holding of a single Average portfolio
asset holding
% of total portfolio % of total portfolio
31 March 2019 4.95 1.45
--------------- ---------------------- ----------------------
The following table summarises the Subsidiary's exposure to
market risk, based on its concentration by industry:
31 March 31 March
2020 2019
GBP GBP
Accommodation 167,840,298 115,728,584
Power 207,951,468 157,481,970
Renewable Energy 165,840,298 116,822,042
Telecommunication, Media and Technology 255,035,983 138,676,788
Transport 327,299,841 209,451,538
Transportation Equipment 99,159,887 85,139,689
Utilities 129,961,433 189,437,264
Other 179,734,942 126,540,317
-------------- --------------
Subsidiary financial assets at fair value through
profit or loss (note 6) 1,532,819,570 1,139,278,192
-------------- --------------
Activities undertaken by the Company and its Subsidiary may give
rise to settlement risk. Settlement risk is the risk of loss due to
the failure of an entity to honour its obligations to deliver cash,
securities or other assets as contractually agreed.
For the majority of transactions, settlement risk is mitigated
by conducting settlements through a broker to ensure that a trade
is settled only when both parties have fulfilled their contractual
settlement obligations. Settlement limits form part of the credit
approval and limit monitoring processes. The Investment Manager
also conducts reviews of the settlement process and custodian to
ensure stringent settlement process is in place.
Liquidity Risk
Liquidity risk is the risk that the Company or the Subsidiary
will encounter difficulty in meeting the obligations associated
with its financial liabilities that are settled by delivering cash
or another financial asset.
The Company's policy and the Investment Manager's approach to
managing liquidity risk in both the Company and the Subsidiary is
to ensure, as far as possible, that it will always have sufficient
liquidity to meet its liabilities when due, under both normal and
stress conditions, without incurring unacceptable losses or risking
damage to the Company's reputation.
In accordance with the Alternative Investment Fund Managers
Directive ("AIFMD"), the Company has implemented a liquidity policy
that is consistent with its underlying obligations and redemption
policy, in accordance with the requirements relating to
quantitative and qualitative risk limits and which considers both
funding and trading liquidity.
The Investment Manager manages the Company's liquidity risk by
taking into account the liquidity profile and strategy of the
Company and at the Subsidiary level primarily through investing in
a diverse portfolio of assets. Liquidity risk mitigation will be
sought through careful selection of assets, asset duration, asset
liquidity profiling through loan market interaction, geographical
focus, currency allocations, cash management and other Company
considerations.
Given the Company's permanent capital structure as a
closed-ended fund, it is not exposed to redemption risk. However,
the financial instruments of the Company and the Subsidiary include
derivative contracts traded over-the-counter and debt investments,
which are not traded in an organised public market and which may be
illiquid.
The overall liquidity risk of the Company and the Subsidiary is
monitored on a quarterly basis by the Board of Directors and on an
ongoing basis by the Investment Manager. Shareholders will have no
right of redemption and must rely, in part, on the existence of a
liquid market in order to realise their investment.
There are no company assets subject to special arrangements
arising from their illiquid nature.
With the exception of the loan payable (see note 15) and certain
forward foreign exchange contracts (see note 7), the Company's
accounts receivable and financial liabilities at 31 March 2020 will
all mature within four months of the reporting date.
Operational Risk
Operational risk is the risk of direct or indirect loss arising
from a wide variety of causes associated with the processes,
technology and infrastructure supporting the Company's activities
relating to financial instruments, either internally or on the part
of service providers, and from external factors other than credit,
market and liquidity risks such as those arising from legal and
regulatory requirements and generally accepted standards of
investment management behaviour.
Operational risk is managed so as to balance the limiting of
financial losses and reputational damage with achieving the
investment objective of generating returns to investors.
The Investment Manager works with the Board to identify the
risks facing the Company and the Subsidiary. The key risks are
documented and updated in the Risk Matrix by the Investment
Manager.
The primary responsibility for the development and
implementation of controls over operational risk rests with the
Board. This responsibility is supported by the development of
overall standards for the management of operational risk, which
encompasses the controls and processes at the service providers and
the establishment of service levels with the service providers.
The Directors' assessment of the adequacy of the controls and
processes in place at service providers with respect to operational
risk is carried out through having discussions with and reviewing
reports from the Investment Manager, who conducts regular
discussions with the service providers.
Capital Management
The Board's policy is to maintain a strong capital base so as to
maintain investor, creditor and market confidence and to sustain
future development of the Company. The Company's capital is
represented by its share capital. Capital is managed in accordance
with the investment policy, in pursuit of its investment
objectives. There are no duration restrictions on the investments
acquired by the Subsidiary. Target annual returns for investors in
the Company are an income return of 5% to 6% and a capital return
of 1% to 2%.
The Company may employ leverage for short term liquidity or
investment purposes. During the year, the Company has increased its
revolving credit facility with a consortium of three banks led by
Royal Bank of Scotland International Limited from GBP150 million to
GBP280 million (see note 15).
6. NON-DERIVATIVE FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS
Year ended Year ended
31 March 31 March
2020 2019
GBP GBP
Cost at the start of the year 1,078,100,991 738,117,560
VFNs purchased during the year 916,880,278 534,891,241
VFNs redeemed during the year (370,541,522) (194,907,810)
Realised gains on VFNs redeemed during the
year 77,708 -
-------------- --------------
Cost at the end of the year 1,624,517,455 1,078,100,991
Net unrealised (losses)/gains on non-derivative
financial assets at the end of the year (73,025,023) 39,944,827
Non-derivative financial assets at fair value
through profit or loss at the end of the year 1,551,492,432 1,118,045,818
-------------- --------------
The following table provides a reconciliation of the financial
assets at fair value through profit or loss of the Subsidiary to
the Company's financial assets at fair value through profit or
loss:
31 March 31 March
2020 2019
GBP GBP
Subsidiary's non-derivative financial assets
at fair value through profit or loss 1,532,819,570 1,139,278,192
Subsidiary's net current assets/(liabilities) 18,672,862 (21,232,374)
Company's non-derivative financial assets at
fair value through profit or loss 1,551,492,432 1,118,045,818
-------------- --------------
None of the Subsidiary's non-derivative financial assets at fair
value through profit or loss are subject to any special
arrangements arising from their illiquid nature.
The Company's net gains/(losses) on non-derivative financial
assets at fair value through profit or loss in the year comprises
the following:
Year ended Year ended
31 March 31 March
2020 2019
GBP GBP
Unrealised gains on VFNs 40,849,001 24,351,316
Realised gains on VFNs redeemed 77,708 -
Unrealised loss on revaluation of the Subsidiary (153,818,851) (20,716,605)
Net (losses)/gains on non-derivative financial
assets at fair value through profit or loss (112,892,142) 3,634,711
-------------- -------------
On a look-through basis, the Fund's cumulative net gains on
non-derivative financial assets at fair value through profit or
loss as at 31 March 2020 comprises the following:
Year ended Year ended
31 March 31 March
2020 2019
GBP GBP
Subsidiary
Investment income during the year 110,569,914 71,930,640
Net return on financial assets and liabilities
during the year, including foreign exchange
and VFN interest payable (269,623,773) (100,983,218)
Net other income during the year 5,235,008 8,335,973
-------------- --------------
Subsidiary losses during the year (153,818,851) (20,716,605)
Subsidiary gains brought forward 2,661,284 23,377,889
-------------- --------------
Subsidiary (losses)/gains carried forward
at the end of the year (151,157,567) 2,661,284
Company
Unrealised foreign exchange gains on VFNs
brought forward 37,283,543 12,932,227
Unrealised foreign exchange gains on VFNs
during the year 40,849,001 24,351,316
Net (losses)/gains on non-derivative financial
assets at fair value through profit or loss
carried forward at the end of the year (73,025,023) 39,944,827
-------------- --------------
Fair Value Measurement
IFRS 13 requires that a fair value hierarchy be established that
prioritises the inputs to valuation techniques used to measure fair
value. The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities
(Level 1 measurements) and the lowest priority to unobservable
inputs (Level 3 measurements). The three levels of the fair value
hierarchy under IFRS 13 are as follows:
- Level 1: inputs that are quoted market prices (unadjusted) in
active markets for identical instruments;
- Level 2: inputs other than quoted prices included in Level 1
that are observable for the asset or liability, either directly (as
prices) or indirectly (derived from prices). This category includes
instruments valued using: quoted market prices in active markets
for similar instruments; quoted for identical or similar
instruments in markets that are considered less than active; or
other valuation techniques in which all significant inputs are
directly or indirectly observable from market data.
- Level 3: Inputs that are unobservable. This category includes
all instruments for which the valuation technique includes inputs
not based on observable data and the unobservable inputs have a
significant effect on the instrument's valuation. This category
includes instruments that are valued based on quoted prices for
similar instruments but for which significant unobservable
adjustments or assumptions are required to reflect differences
between the instruments.
The level in the fair value hierarchy within which the fair
value measurement is categorised in its entirety is determined on
the basis of the lowest level input that is significant to the fair
value measurement. For this purpose, the significance of an input
is assessed against the fair value measurement in its entirety. If
a fair value measurement uses observable inputs that require
significant adjustment based on unobservable inputs, that
measurement is a Level 3 measurement. Assessing the significance of
a particular input to the fair value measurement requires
judgement, considering factors specific to the asset or
liability.
The determination of what constitutes 'observable' requires the
exercise of judgement. Observable data is considered to be market
data that is readily available, regularly distributed or updated,
reliable, not proprietary, and provided by independent sources that
are actively involved in the relevant market.
The Company's investment in the Subsidiary, through the
acquisition of shares and the issue of VFNs, is classified within
Level 3, as it is not traded and contains unobservable inputs. The
Board considers that the NAV of the Subsidiary is representative of
its fair value.
31 March 2020
Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
Assets
Non-derivative financial assets at fair value through profit
or loss - - 1,551,492,432 1,551,492,432
Derivative financial assets at fair value through profit or
loss - 6,629,477 - 6,629,477
--------- ----------- -------------- --------------
Total - 6,629,477 1,551,492,432 1,558,121,909
--------- ----------- -------------- --------------
Liabilities
Derivative financial liabilities at fair value through profit
or loss - 47,706,476 - 47,706,476
--------- ----------- -------------- --------------
Total - 47,706,476 - 47,706,476
--------- ----------- -------------- --------------
31 March 2019
Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
Assets
Non-derivative financial assets at fair value through profit
or loss - - 1,118,045,818 1,118,045,818
Derivative financial assets at fair value through profit or
loss - 10,598,250 - 10,598,250
--------- ----------- -------------- --------------
Total - 10,598,250 1,118,045,818 1,128,644,068
--------- ----------- -------------- --------------
Liabilities
Derivative financial liabilities at fair value through profit
or loss - 3,420,760 - 3,420,760
--------- ----------- -------------- --------------
Total - 3,420,760 - 3,420,760
--------- ----------- -------------- --------------
During the year there have been no transfers between levels of
the fair value hierarchy. Such transfers are recognised at the end
of the reporting period in which the change has occurred.
Movements in the Company's Level 3 financial instruments during
the year were as follows:
Year ended Year ended
31 March 31 March
2020 2019
GBP GBP
Opening balance 1,118,045,818 774,427,676
Purchases 916,880,278 534,891,241
Sales (370,541,522) (194,907,810)
Net (losses)/gains on non-derivative financial
assets in the year (112,892,142) 3,634,711
-------------- --------------
Closing balance 1,551,492,432 1,118,045,818
-------------- --------------
The investments held by the Subsidiary in the underlying
portfolio are classified within the fair value hierarchy as
follows:
31 March 2020
Level 1 Level 2 Level 3 Total
Assets GBP GBP GBP GBP
Non-derivative financial assets at fair value through
profit or loss 19,631,392 271,606,409 1,241,581,769 1,532,819,570
----------------------------------------------------------- ----------- ------------ -------------- --------------
31 March 2019
Level 1 Level 2 Level 3 Total
Assets GBP GBP GBP GBP
Non-derivative financial assets at fair value through profit
or loss 46,767,939 332,561,459 759,948,794 1,139,278,192
------------------------------------------------------------- ----------- ------------ ------------ --------------
The Subsidiary's Level 3 investment valuations are calculated by
discounting future cashflows at a yield appropriate to comparable
infrastructure loans or bonds (with such yield assessed primarily
from publicly available sources and secondarily in consultation
with brokers and syndicate desks). Spread data will also be
cross-referenced to recently priced primary market transactions if
possible. When identifying comparable loans or bonds, for the
purpose of assessing market yields, structural and credit
characteristics and project type are also considered.
During the year, four investments, with a total value of
GBP5,220,884, were transferred from Level 2 to Level 3 of the fair
value hierarchy, and two investments, with a total value of
GBP13,172,971, were transferred from Level 1 to Level 2. Such
transfers are recognised at the end of the reporting period in
which the change has occurred.
The following table summarises the significant unobservable
inputs the Company used to value its Subsidiary's underlying
investments categorised within Level 3 at 31 March 2020. The table
is not intended to be all-inclusive but instead captures the
significant unobservable inputs relevant to our determination of
fair values.
Significant
Fair value Primary valuation unobservable
Type Sector GBP technique inputs Range input
Private Accommodation 141,426,653 Market comparables Discount 7.3%-9.7%
debt rate
Private Power 28,982,043 Market information Trading activity N/a
debt
Private Power 146,391,084 Market comparables Discount 6.5%-19.7%
debt rate
Private Renewable 120,694,194 Market comparables Discount 5.4%-10.8%
debt energy rate
Private TMT 255,035,982 Market comparables Discount 7.1%-12.6%
debt rate
Private Transport 29,728,545 Market information Trading activity N/a
debt
Private Transport 225,579,880 Market comparables Discount 6.3%-14.4%
debt rate
Private Transport 119,539 Market information Trading activity N/a
debt assets
Private Utilities 101,995,521 Market comparables Discount 8.5%-29.3%
debt rate
Private Other 160,103,551 Market comparables Discount 7.1%-15.1%
debt rate
Securitisations Transport 31,524,777 Market information Unadjusted N/a
(ABS) assets broker quote
----------------- --------------- -------------- ------------------- ----------------- ------------
1,241,581,769
--------------
The following table shows the Directors' best estimate of the
sensitivity of the Subsidiary's Level 3 investments to changes in
the principal unobservable input, with all other variables held
constant.
Possible 31 March 2020 31 March 2019
reasonable effect on net effect on net
change in assets and assets and profit
input profit or loss or loss
Unobservable input GBP GBP
Yield +1% (15,339,864) (10,241,221)
-1% 16,641,452 11,266,545
-------------------- ------------- ---------------- -------------------
The possible changes in the yield of 1% are regarded as
reasonable in view of the current low level of global interest
rates.
Valuation techniques for the investment portfolio of the
Subsidiary
With effect from 18 April 2017, the Company engaged PwC as
Valuation Agent, with responsibility for reviewing the valuations
applied by the Investment Adviser in relation to the acquisition of
loans and bonds. The principles and techniques utilised by the
Investment Adviser and reviewed by PwC during the year in
calculating the valuations are described below.
Performing Portfolio Loans and Bonds
Valuations of performing portfolio loans and bonds are based on
actual market prices (bid-side prices) obtained from third-party
brokers and syndicate desks if available (such brokers to be agreed
with the Investment Adviser); if such prices are not available,
then valuations are calculated by discounting future cashflows at a
yield appropriate to comparable infrastructure loans or bonds (with
such yield assessed primarily from publicly available sources and
secondarily in consultation with brokers and syndicate desks).
Spread data will also be cross-referenced to recently priced
primary market transactions if possible.
When identifying comparable loans or bonds, for the purpose of
assessing market yields, the following will be taken into
account:
-- Project type: jurisdiction, sector, project status,
transaction counterparties such as construction companies, facility
management providers;
-- Structural characteristics: maturity and average life,
seniority, secured/unsecured, amortisation profile, cash sweeps,
par versus discount; and
-- Credit characteristics: credit ratios (e.g. equity cushion,
asset cover/LTV, debt service coverage ratios or equivalent,
debt/EBITDA), ratings and ratings trajectory.
In calculating the net present value of future cashflows on
loans with uncertain cashflows (such as cash-sweep mechanisms),
"banking base case" cashflows are used unless there is clear
evidence that the market is using a valuation based upon another
set of cashflows.
In the case of discount loans with step-up margins, the
assumption will be that market discounts are calculated on a
yield-to-worst basis, unless there is clear evidence that the
market convention for that loan is different.
For variable rate loans and bonds, for the purposes of
projecting cashflows, the market convention of simple compounding
to the next interest payment date is used and swap rates for
subsequent interest payments, unless there is clear evidence that
the market convention for that loan or bond is different.
Non-performing Portfolio Loans and Bonds
Valuations of non-performing portfolio loans and bonds are based
on actual market prices obtained from third-party brokers if
available, otherwise the net present value of future expected loan
cashflows will be calculated, estimated on the basis of the median
outcome and discount rate that reflects the market yield of
distressed/defaulted loans or bonds.
In assessing the median outcome cashflows, a project/corporate
model that reflects the distressed state of the project will be
used in order to assess a range of potential outcomes for expected
future cashflows with regards to, for example, interest or
principal recoveries and timing. The Investment Adviser will work
closely with the Valuation Agent and they will have access to the
Investment Adviser's own model, analysis and internal valuations.
These valuations are subject to a high degree of management
oversight and ultimate approval by the Investment Manager.
At 31 March 2020, in the opinion of the Investment Adviser,
there were two non-performing loans in the portfolio, both advanced
to the same borrower group.
The effect of COVID-19 on the Net Asset Value
While the process outlined above did not itself change as a
result of COVID-19, there was a need for a very high level of care
in, firstly, determining appropriate benchmarks or comparable
infrastructure loans or bonds for valuation purposes (given the
very high levels of volatility in the financial markets in March
2020), and, secondly, ensuring that the underlying cashflow
assumptions were appropriate given the economic disruption caused
by COVID-19. This was especially important in sectors directly
exposed to the disruption, such as transport infrastructure,
aircraft leasing and midstream assets, or other assets exposed to
oil or gas prices. The Investment Adviser worked closely with the
Valuation Agent to ensure that these assumptions were indeed
appropriate and were subject to a high level of oversight by the
Investment Manager and the Audit Committee. Given the continuing
uncertainty around how the COVID-19 pandemic and disruption to oil
and gas markets will evolve, the Board and its advisers will
continue to monitor developments closely in order to maintain the
same level of rigour in the valuation of the Company's investments
going forward.
Finalising the Net Asset Value
Once the appropriate position price has been determined to be
applied to each investment, the calculation of the Subsidiary's net
asset value is finalised through the following steps:
-- Conversion of each investment into GBP based on month end foreign exchange rates;
-- Reconciliation of any interest accrued since issue of the most recent coupon; and
-- Aggregation of the investments into a single Fund NAV
position statement (clean and dirty price).
As at 31 March 2020, the Company had the following outstanding
commitments in respect of open forward foreign exchange contracts,
by currency and by counterparty.
31 March 2020
Selling Currency Unrealised Unrealised Net unrealised
currency amount Buying currency GBP amount gains losses gains/(losses)
GBP GBP GBP GBP
USD 1,152,967,700 GBP 890,275,485 245,742 (36,463,660) (36,217,918)
EUR 558,600,000 GBP 488,495,036 3,595,541 (11,242,816) (7,647,275)
NOK 218,000,000 GBP 17,684,148 884,667 - 884,667
AUD 75,000,000 GBP 38,841,991 1,903,527 - 1,903,527
-------------- --------------- --------------- ---------------
1,435,296,660 6,629,477 (47,706,476) (41,076,999)
-------------- --------------- --------------- ---------------
Unrealised Unrealised Net unrealised
gains losses gains
Counterparty GBP GBP GBP
AFEX - (281,684) (281,684)
Global Reach - (953,425) (953,425)
Investec Bank 98,429 (10,297,404) (10,198,975)
Macquarie 3,579,048 (7,964,160) (4,385,112)
Monex - (6,080,817) (6,080,817)
Moneycorp 508,840 (3,728,461) (3,219,621)
RBSI 2,443,160 (18,400,525) (15,957,365)
--------------- --------------- ---------------
6,629,477 (47,706,476) (41,076,999)
--------------- --------------- ---------------
31 March 2019
Selling Currency Unrealised Unrealised Net unrealised
currency amount Buying currency GBP amount gains losses gains/(losses)
GBP GBP GBP GBP
USD 735,967,700 GBP 564,652,969 4,617,878 (2,640,923) 1,976,955
EUR 293,600,000 GBP 259,290,881 5,743,006 (71,560) 5,671,446
NOK 129,900,000 GBP 11,503,375 24,025 (84,391) (60,366)
PLN 21,500,000 GBP 4,515,099 213,341 - 213,341
AUD 75,000,000 GBP 40,141,297 - (623,886) (623,886)
-------------- --------------- --------------- ---------------
880,103,621 10,598,250 (3,420,760) 7,177,490
-------------- --------------- --------------- ---------------
Unrealised Unrealised Net unrealised
gains losses gains
Counterparty GBP GBP GBP
Global Reach 1,070,672 (132,659) 938,013
Investec Bank 3,740,521 (150,498) 3,590,023
Monex 1,614,879 (223,915) 1,390,964
Moneycorp 1,053,554 (925,653) 127,901
RBSI 3,118,624 (1,988,035) 1,130,589
--------------- --------------- ---------------
10,598,250 (3,420,760) 7,177,490
--------------- --------------- ---------------
All forward foreign exchange positions at the year end were held
with AFEX Markets plc, Global Reach Partners, Investec Bank
(Channel Islands) Limited, Macquarie Bank Limited, Monex Europe
Limited, the Royal Bank of Scotland International or TTT Moneycorp
Limited, as noted above. There are no master netting arrangements
in place.
The forward foreign exchange positions at the year end have
various maturity dates ranging from 2 April 2020 to 28 February
2022 (2019: 8 April 2019 to 14 April 2020).
The net (losses)/gains on forward foreign exchange contracts in
the year comprises both realised and unrealised losses as
follows:
Year ended Year ended
31 March 31 March
2020 2019
GBP GBP
Net realised gains/(losses) on forward foreign
exchange contracts during the year 262,036 (19,680,903)
Net unrealised losses on forward foreign exchange
contracts during the year (48,254,489) (6,953,997)
------------- -------------
Net losses on forward foreign exchange contracts
during the year (47,992,453) (26,634,900)
------------- -------------
During the year, due to the weakness of Sterling, margin calls
were made by certain of the Company's counterparties against the
Company's loss-making forward foreign exchange positions. As at 31
March 2020, GBP24.7 million (2019: Nil) was held as collateral in
margin accounts.
7. CASH AND CASH EQUIVALENTS
31 March 31 March
2020 2019
GBP GBP
Cash held on call or overnight deposit accounts 37,581,698 27,633,414
----------- -----------
37,581,698 27,633,414
----------- -----------
Under the terms of its forward foreign exchange trading
agreements with AFEX Markets plc, Global Reach Partners, Investec
Bank (Channel Islands) Limited, Macquarie Bank Limited, Monex
Europe, Royal Bank of Scotland International and TTT Moneycorp
Limited, the Company may be required in certain circumstances to
retain balances in collateral accounts representing the applicable
margin on each facility. As at 31 March 2020, GBP24,716,033 (2019:
GBPNil) was held in collateral accounts.
8. INVESTMENT INCOME
Year ended Year ended
31 March 31 March
2020 2019
GBP GBP
Interest income on financial assets carried
at amortised cost:
Cash and cash equivalents 14 48,771
Interest income on the Company's non-derivative
financial assets at fair value through profit
and loss 115,453,935 106,668,371
------------ ------------
115,453,949 106,717,142
------------ ------------
9. RELATED PARTIES AND OTHER MATERIAL CONTRACTS
Directors' Fees
Robert Jennings is entitled to a fee in remuneration for his
services as Chairman of the Board of Directors at a rate payable of
GBP66,800 per annum (increasing to GBP75,000 per annum with effect
from 1 April 2020). The remaining Directors are entitled to a fee
in remuneration for their services as Directors at a rate of
GBP44,300 each per annum (unchanged with effect from 1 April
2020).
Jan Pethick, Jon Bridel and Sandra Platts are also each entitled
to a fee of GBP7,000 per annum in respect of their roles as Chair
of the Management Engagement Committee, Chair of the Risk Committee
and Chair of the Audit and Remuneration Committees respectively
(increasing to GBP10,000 per annum with effect from 1 April
2020).
Sandra Platts is entitled to an additional fee of GBP5,000 per
annum for serving as the Senior Independent Director (increasing to
GBP7,700 per annum with effect from 1 April 2020).
During the year, Robert Jennings, Jan Pethick, Jon Bridel and
Sandra Platts each received a listing fee of GBP6,000 in connection
with the Open Offer, Ordinary Share Placing and Offer for
Subscription on 27 June 2019, which was subject to admission.
Following a review of the Company's remuneration policy, the
Directors determined that they would henceforth forego any such
fees, and therefore no fee was paid in connection with the Open
Offer, Ordinary Share Placing and Offer for Subscription on 3 March
2020.
Ordinary shares held by related parties
The shareholdings of the Directors in the Company were as
follows:
31 March 2020 31 March 2019
Name Number of Number of
ordinary Percentage of ordinary shares ordinary Percentage of ordinary shares
shares in issue shares in issue
Robert Jennings (Chairman)
(with other members of his
family) 242,666 0.01% 240,000 0.02%
Jan Pethick (with his spouse) 263,820 0.02% 263,820 0.02%
Jon Bridel (with his spouse) 10,452 0.00% 10,452 0.00%
Sandra Platts (in a family
Retirement Annuity Trust
Scheme) 26,776 0.00% 19,073 0.00%
------------------------------ ---------- ------------------------------ ---------- ------------------------------
During the year, Robert Jennings acquired 22,666 ordinary shares
in the Open Offer, Placing and Offer for Subscription on 3 March
2020. A holding of 20,000 ordinary shares previously deemed to be a
connected holding has been disaggregated where this is no longer
the case.
During the year, Sandra Platts acquired 2,384 ordinary shares in
the Open Offer, Placing and Offer for Subscription on 27 June 2019
and 5,319 ordinary shares in the Open Offer, Placing and Offer for
Subscription on 3 March 2020.
As at 31 March 2020, the Investment Adviser held an aggregate of
3,263,680 ordinary shares (2019: 3,073,079 ordinary shares), which
is 0.21% (2019: 0.28%) of the issued share capital.
As at 31 March 2020, the members of the Investment Adviser's
founding team held an aggregate of 681,643 ordinary shares (2019:
681,643 ordinary shares), which is 0.04% (2019: 0.06%) of the
issued share capital.
As at 31 March 2020, the Investment Manager held an aggregate of
50,000 ordinary shares (2019: 50,000 ordinary shares), which is
0.00% (2019: 0.00%) of the issued share capital.
Transactions with Investment Manager and Investment Adviser
Investment Manager
International Fund Management Limited (the "Investment Manager")
was appointed as the Investment Manager with effect from 28 January
2015. With effect from 1 December 2016, the Investment Manager was
entitled to receive a management fee for AIFM services calculated
as follows:
-- if the Company's NAV is less than GBP200 million, 0.075% per
annum of the value of the Company's NAV; plus
-- if the Company's NAV is more than GBP200 million and less
than GBP400 million, 0.05% per annum of the Company's NAV not
included above; plus
-- if the Company's NAV is more than GBP400 million and less
than GBP500 million, 0.04% per annum of the Company's NAV not
included above; plus
-- if the Company's NAV is more than GBP500 million, 0.015% per
annum of the Company's NAV not included above.
The fee is subject to an annualised minimum of GBP80,000 and,
with effect from 2 May 2017, was capped at GBP320,000 per annum,
subject to an annual inflation-linked increase, payable monthly in
arrears.
During the year, the Investment Manager received a fee of
GBP6,000 for services rendered in connection with the Open Offer,
Placing and Offer for Subscription on 27 June 2019, a fee of
GBP1,500 for services rendered in connection with the Placing of
ordinary shares on 24 September 2019, and a fee of GBP6,000 for
services rendered in connection with the Open Offer, Placing and
Offer for Subscription on 3 March 2020.
The Investment Management agreement can be terminated by either
party giving not less than 6 months written notice.
Investment Adviser
Sequoia Investment Management Company Limited (the "Investment
Adviser") was appointed as the Investment Adviser with effect from
28 January 2015. With effect from 1 September 2018, the Investment
Adviser is entitled to receive from the Company a base fee
calculated as follows:
-- 0.74% of the market value of the investments (excluding
committed but not yet invested investments and cash) owned by the
Subsidiary up to GBP1 billion; plus
-- 0.56% of the market value of the investments (excluding
committed but not yet invested investments and cash) owned by the
Subsidiary in excess of GBP1 billion.
Prior to 1 September 2018, the Investment Adviser was entitled
to receive from the Company a base fee calculated as follows:
-- 0.5% per annum of the value of the listed debt securities owned by the Subsidiary; plus
-- if the Company's NAV is less than GBP250 million, 0.9% per
annum of the value of the Company's other investments (excluding
listed debt securities and cash); plus
-- if the Company's NAV is more than GBP250 million and less
than GBP500 million, 0.8% per annum of the value of the Company's
other investments (excluding listed debt securities and cash) not
included above; plus
-- if the Company's NAV is more than GBP500 million and less
than GBP750 million, 0.7% per annum of the value of the Company's
other investments (excluding listed debt securities and cash) not
included above; plus
-- if the Company's NAV is more than GBP750 million, 0.6% per
annum of the value of the Company's other investments (excluding
listed debt securities and cash) not included above.
All such fees are payable quarterly. With effect from 1
September 2018, 10% of the Investment Adviser's fee (prior to 1
September 2018: 25%) is applied in subscribing for ordinary shares
in the Company, which the Investment Adviser shall retain with a
three-year rolling lock-up (such that those ordinary shares may not
be sold or otherwise disposed of by the Investment Adviser without
the prior consent of the Company before the third anniversary of
the date of issue of the relevant ordinary shares).
On 18 April 2019, the Company issued 177,165 ordinary shares to
the Investment Adviser in relation to fees payable for the quarter
ended 31 March 2019.
On 18 July 2019, the Company issued 200,477 ordinary shares to
the Investment Adviser in relation to fees payable for the period
ended 30 June 2019.
On 17 October 2019, the Company issued 225,522 ordinary shares
to the Investment Adviser in relation to fees payable for the
period ended 30 September 2019.
On 17 January 2020, the Company issued 235,293 ordinary shares
to the Investment Adviser in relation to fees payable for the
period ended 31 December 2019.
As at 31 March 2020, the Investment Adviser held 3,263,680
ordinary shares (2019: 3,073,079 ordinary shares) in the
Company.
On 20 April 2020, the Investment Adviser acquired 252,347
ordinary shares in the market in relation to fees payable for the
quarter ended 31 March 2020.
The Investment Advisory agreement can be terminated by either
party giving not less than 6 months written notice. The Investment
Adviser's appointment will be automatically terminated upon
termination of the Investment Manager's appointment under the
Investment Management Agreement.
Other Material Contracts
Administrator
With effect from 28 January 2015, Praxis Fund Services Limited
(the "Administrator") was appointed as the Administrator. With
effect from 1 June 2016, the Administrator is entitled to receive
from the Company a base fee calculated as follows and payable
monthly:
-- if the Company's NAV is less than GBP300 million, 0.07% per
annum of the value of the Company's NAV; plus
-- if the Company's NAV is more than GBP300 million and less
than GBP400 million, 0.05% per annum of the Company's NAV not
included above; plus
-- if the Company's NAV is more than GBP400 million, 0.04% per
annum of the Company's NAV not included above.
The base fee is subject to a minimum of GBP65,000 applied on a
monthly basis and is capped at GBP300,000 per annum. The
Administrator is also entitled to a fee for company secretarial
services based on time costs.
In addition, the Administrator received a fee of GBP10,500 for
services rendered in connection with the Open Offer, Placing and
Offer for Subscription on 27 June 2019, a fee of GBP3,500 for
services rendered in connection with the Placing of ordinary shares
on 24 September 2019, and a fee of GBP21,000 for services rendered
in connection with the Open Offer, Placing and Offer for
Subscription on 3 March 2020.
The Administration agreement can be terminated by either party
giving not less than 90 days written notice.
Subsidiary Administrator
With effect from 28 January 2015, TMF Luxembourg S.A. (the
"Subsidiary Administrator") was appointed as the administrator of
the Subsidiary. With effect from 1 January 2020, the Subsidiary
Administrator is entitled to receive an annual fee of EUR26,344
(with effect from 1 January 2019: EUR25,434 per annum, prior to 1
January 2019 EUR24,935) and, in addition, a fee for NAV
reconciliation and reporting services based on time costs but
capped at EUR6,150 per annum.
Custodian
With effect from 27 February 2015, The Bank of New York Mellon
(the "Custodian") was appointed as the Custodian. The Custodian is
entitled to receive fees, as agreed from time to time, for services
provided as portfolio administrator, depositary, calculating agent,
account bank and custodian.
The amounts charged for the above-mentioned fees during the year
ended 31 March 2020 and outstanding at 31 March 2020 are as
follows:
Amounts outstanding at
Year ended 31 March 2020 Charge for the year 31 March 2020
GBP GBP
Investment Adviser's fees 10,165,841 2,599,692
Administration fee 425,066 15,972
Investment Manager's fees 344,933 -
Directors' fees and expenses 226,782 -
Sub-administration fee* 32,312 9,815
Fees payable to the Custodian* 681,282 209,716
------------------- ----------------------
11,876,216 2,835,195
------------------- ----------------------
Amounts outstanding at
Year ended 31 March 2019 Charge for the year 31 March 2019
GBP GBP
Investment Adviser's fees 7,312,391 1,986,030
Administration fee 405,541 15,010
Investment Manager's fees 320,000 -
Directors' fees and expenses 216,601 -
Sub-administration fee* 32,852 10,683
Fees payable to the Custodian* 498,449 116,732
------------------- ----------------------
8,785,834 2,128,455
------------------- ----------------------
* Includes expenses of the Subsidiary
Overdraft facility
On 15 February 2016 the Company entered into an overdraft
facility with the Royal Bank of Scotland International Limited with
a limit of GBP1,500,000. As at 31 March 2020, this facility had not
been utilised.
Loan collateral
With effect from 18 December 2019, security for a revolving
credit facility of GBP280 million (GBP200 million with effect from
14 May 2019, GBP150 million with effect from 9 August 2018) (see
note 15) with the Royal Bank of Scotland International Limited was
provided by, inter alia, a charge over the bank accounts of the
Company, a charge over the shares in the Subsidiary held by the
Company and a charge on the assets of the Subsidiary.
10. TAX STATUS
The Company is exempt from Guernsey income tax and is charged an
annual exemption fee of GBP1,200 under The Income Tax (Exempt
Bodies) (Guernsey) Ordinance 1989.
11. SHARE CAPITAL
The Company's ordinary shares and C shares are classified as
equity. Incremental costs directly attributable to the issue of
ordinary shares and C shares are recognised as a deduction in
equity and are charged to the relevant share capital account,
including the initial set up costs.
The Company undertakes that it shall ensure that its records and
bank accounts are operated in such a way that the assets
attributable to the ordinary shares and the C shares can be
separately identified. On the conversion of C shares to ordinary
shares, C Shareholders shall be allocated an appropriate number of
ordinary shares, calculated by reference to the conversion
ratio.
The authorised share capital of the Company is represented by an
unlimited number of shares of nil par value, to which the following
rights are attached:
(a) Dividends: ordinary Shareholders and C Shareholders are
entitled to receive, and participate in, any dividends or other
distributions resolved to be distributed from their respective
pools of assets in respect of any accounting period or other
period, provided that no calls or other sums due by them to the
Company are outstanding.
(b) Winding Up: On a winding up, the ordinary Shareholders and C
Shareholders shall be entitled to the surplus assets remaining in
their respective pools of assets after payment of creditors.
(c) Voting: ordinary Shareholders have the right to receive
notice of and to attend, speak and vote at general meetings of the
Company and each holder being present in person or by proxy shall
upon a show of hands have one vote and upon a poll one vote in
respect of every ordinary share held. C Shareholders have no right
to attend or vote at any meeting of the Company, except that the
consent of C Shareholders is required for any alteration to the
Memorandum or Articles of the Company; for the passing of any
resolution to wind up the Company; and for the variation or
abrogation of the rights attached to the C shares.
The Company may acquire its own ordinary shares, up to a maximum
number of 14.99 per cent. per annum of the ordinary shares in
issue.
There were no C shares in issue during either the current or
prior years.
Issued share capital
Ordinary shares
31 March 2020 31 March 2019
Ordinary shares Ordinary shares
Number Number
Share capital at the beginning of the year 1,060,975,849 748,315,757
Share capital issued and fully paid 593,695,599 312,660,092
Total share capital at the end of the year 1,654,671,448 1,060,975,849
--------------- ---------------
Issued share capital
Ordinary shares
31 March 2020 31 March 2019
Ordinary shares Ordinary shares
GBP GBP
Share capital at the beginning of the year 1,072,031,030 746,867,128
Share capital issued and fully paid 655,705,218 329,991,907
Share issue costs (8,670,739) (4,828,005)
Total share capital at the end of the year 1,719,065,509 1,072,031,030
--------------- ---------------
On 27 June 2019, the Company issued 200,000,000 ordinary shares
at an issue price of 108.0p, of which 127,505,908 ordinary shares
were issued pursuant to an Open Offer (including the Excess
Application Facility) and 72,494,092 ordinary shares were issued
pursuant to a Placing and Offer for Subscription.
On 24 September 2019, the Company issued 125,000,000 ordinary
shares through a Placing of ordinary shares at an issue price of
111.0p per share.
On 3 March 2020, the Company issued 267,857,142 ordinary shares
at an issue price of 112.0p, of which 184,908,573 ordinary shares
were issued pursuant to an Open Offer (including the Excess
Application Facility) and 82,948,569 ordinary shares were issued
pursuant to a Placing and Offer for Subscription.
During the year, 838,457 ordinary shares have been issued to the
Investment Adviser in relation to fees payable for the period from
1 January 2019 to 31 December 2019, at an average issue price of
113.9p per ordinary share (see note 10). Subsequent to the year
end, the Investment Adviser acquired 252,347 ordinary shares at a
price of 103.0p per ordinary share in relation to fees payable for
the quarter ended 31 March 2020.
13. BASIC AND DILUTED EARNINGS PER SHARE
Year ended Year ended
31 March 2020 31 March 2019
(Loss)/profit for the financial year GBP(65,361,405) GBP69,170,832
--------------- --------------
Weighted average number of ordinary shares 1,298,389,127 925,240,797
--------------- --------------
Basic and diluted (loss)/earnings per ordinary share (5.03)p 7.48p
--------------- --------------
The weighted average number of ordinary shares is based on the
number of ordinary shares in issue during the year under review, as
detailed in note 12.
There was no dilutive effect for potential ordinary shares for
the year ended 31 March 2020.
14. TRADE AND OTHER RECEIVABLES
31 March 2020 31 March 2019
GBP GBP
VFN interest receivable 88,878,671 59,789,705
Prepaid finance costs 1,074,022 716,679
Other prepaid expenses 55,641 16,097
------------- -------------
90,008,334 60,522,481
------------- -------------
15. LOAN PAYABLE
On 6 December 2017, the Company executed a 36-month GBP100
million multi-currency revolving credit facility ("RCF") with the
Royal Bank of Scotland International Limited ("RBSI") as lead
arranger. On 9 August 2018, the Company exercised a GBP50 million
incremental accordion tranche of the RCF, with the same maturity
date as the initial RCF. During the year, the facility was extended
by a further GBP130 million to GBP280 million and the maturity date
extended by a year to 6 December 2021. The proceeds of the loan are
to be used in or towards the making of investments in accordance
with the Company's investment policy. The loan is secured by, inter
alia, a charge over the bank accounts of the Company, a charge over
the shares in the Subsidiary held by the Company and a charge on
the assets of the Subsidiary. Should the value of the underlying
assets held in the Subsidiary fall below a certain level, further
margin calls may be made by RBSI, however no margin calls were made
during the year. Interest on the loan was charged at a rate of
LIBOR (or EURIBOR for any loan denominated in Euro) plus 2.1% per
annum. Loan interest of GBP5,262,292 (2019: GBP2,713,261) and
upfront, facility and break fees of GBP589,471 (2019: GBP459,396)
have been incurred on the loan during the year.
For the year ended 31 March 2020
GBP facility USD facility Total
GBP GBP GBP
Balance brought
forward 60,000,000 53,875,164 113,875,164
Drawdowns 373,305,000 77,006,769 450,311,769
Repayments (398,305,000) (132,944,054) (531,249,054)
Foreign exchange revaluations - 2,062,121 2,062,121
-------------- -------------- --------------
Balance carried
forward 35,000,000 - 35,000,000
-------------- -------------- --------------
For the year ended 31 March 2019
GBP facility USD facility Total
GBP GBP GBP
Balance brought
forward - 39,238,068 39,238,068
Drawdowns 187,532,967 72,716,647 260,249,614
Repayments (127,532,967) (59,197,105) (186,730,072)
Foreign exchange revaluations - 1,117,554 1,117,554
-------------- ------------- --------------
Balance carried
forward 60,000,000 53,875,164 113,875,164
-------------- ------------- --------------
The carrying value of the loan is considered to be a reasonable
approximation of its fair value.
15. TRADE AND OTHER PAYABLES
31 March 2020 31 March 2019
GBP GBP
Investment Advisory fee payable 2,599,692 1,986,030
Loan interest payable 145,605 155,748
Other payables 394,897 222,840
------------- -------------
3,140,194 2,364,618
------------- -------------
16. COMMITMENTS
As at 31 March 2020, GBP86.0 million (2019: GBP98.7 million) was
committed to new or existing investments. These commitments will be
settled from the existing cash reserves of the Company and the
Subsidiary and through drawdowns from the Company's revolving
credit facility.
17. SUBSEQUENT EVENTS
On 16 April 2020, the Company declared an interim dividend of
1.5625p per ordinary share in respect of the quarter ended 31 March
2020. The dividend was paid on 22 May 2020.
On 20 April 2020, the Investment Adviser acquired 252,347
ordinary shares at a price of 103.0p per share in relation to fees
payable for the quarter ended 31 March 2020.
There have been no other significant events since the year end
which would require revision of the figures or disclosures in the
Financial Statements.
ADDITIONAL INFORMATION
OFFICERS AND ADVISERS
Directors Registered Office
Robert Jennings, CBE (Independent non-executive Sarnia House
Chairman) Le Truchot
Sandra Platts (Senior Independent non-executive
Director) St Peter Port
Jan Pethick (Independent non-executive
Director) Guernsey GY1 1GR
Jon Bridel (Independent non-executive
Director)
Investment Adviser Investment Manager
Sequoia Investment Management Company
Limited International Fund Management Limited
Kent House, 6(th) Floor Sarnia House
14-17 Market Place Le Truchot
London W1W 8AJ St Peter Port
Guernsey GY1 1GR
Administrator and Secretary Independent Auditor
Praxis Fund Services Limited KPMG Channel Islands Limited
Sarnia House Glategny Court
Le Truchot Glategny Esplanade
St Peter Port St Peter Port
Guernsey GY1 1GR Guernsey GY1 1WR
Broker (with effect from 15 January
Subsidiary Administrator 2020)
TMF Luxembourg S.A. Jefferies International Limited
46A, Avenue JF Kennedy 100 Bishopsgate
L-1855 Luxembourg London EC2N 4JL
Valuation Agent Broker (up to 15 January 2020)
PricewaterhouseCoopers LLP Stifel Nicolaus Europe Limited
7 More London Riverside 150 Cheapside
London SE1 2RT London EC2V 6ET
Registrar Legal Adviser (as to Guernsey Law)
Computershare Investor Services (Guernsey)
Limited Mourant
1(st) Floor Tudor House Royal Chambers
Le Bordage St Julian's Avenue
St Peter Port St Peter Port
Guernsey GY1 1DB Guernsey GY1 4HP
Custodian Legal Adviser (as to UK Law)
Cameron McKenna Nabarro Olswang
Bank of New York Mellon LLP
1 Canada Square 78 Cannon Street
London E14 5AL London, EC4N 6AF
Communications Adviser Independent Consultants
Tulchan Communications LLP Tim Drayson
85 Fleet Street Kate Thurman
London EC4Y 1AE
Alternative Performance Measures used in the Annual Report
-- Portfolio yield-to-maturity/Gross portfolio return
Portfolio yield-to-maturity is the total annualised return
anticipated on a portfolio of interest-bearing investments,
discounted for the time value of money and based on the assumption
that the investments are held to their maturity. This provides a
useful measure of likely projected returns on a portfolio.
-- NAV per ordinary share
NAV per ordinary share is a calculation of the Company's NAV
divided by the number of ordinary shares in issue and provides a
measure of the value of each ordinary share in issue.
-- Ordinary share (discount)/premium to NAV
Ordinary share (discount)/premium to NAV is the amount by which
the ordinary share price is lower/higher than the NAV per ordinary
share, expressed as a percentage of the NAV per ordinary share, and
provides a measure of the Company's share price relative to the
NAV.
-- Internal rate of return ("IRR")
Internal rate of return is a calculation of the prospective or
retrospective annualised profitability of an investment over a
number of years, the IRR being the discount rate that would make
the net present value of the actual or potential cashflows from the
investment equal to zero. This provides a useful measure of the
profitability of an investment, on either a NAV or share price
basis.
-- Total NAV return
Total NAV return is a calculation showing how the NAV per share
has performed over a period of time, taking into account dividends
paid to shareholders. It is calculated on the assumption that
dividends are reinvested at the prevailing NAV on the last day of
the month that the shares first trade ex-dividend. This provides a
useful measure to allow shareholders to compare performances
between investment funds where the dividend paid may differ.
For the period
For the year from 1 April
ended 2019 to 28 February
31 March 2020 2020
Opening NAV per share 103.41p 103.41p
Closing NAV per share (a) 96.69p 106.36p
Dividends paid (b) 6.1875p 6.1875p
Weighted average NAV per share on
month end ex-dividend (c) 103.19p 103.19p
Dividend adjustment factor (d =
b / c +1) (d) 1.0600 1.0600
Adjusted closing NAV per share (e
= a x d) (e) 102.49p 112.74p
Total NAV return (0.9)% 9.0%
------------------------------------------ --------------- ---------------------
-- Ongoing charges ratio ("OCR")
The ongoing charges ratio of an investment company is the annual
percentage reduction in shareholder returns as a result of
recurring operational expenditure. Ongoing charges are classified
as those expenses which are likely to recur in the foreseeable
future, and which relate to the operation of the company, excluding
investment transaction costs, financing charges and gains or losses
on investments. The OCR is calculated as the total ongoing charges
for a period divided by the average net asset value over that
period.
Year ended 31 March 2020 Year ended 31 March 2019
The Company The Subsidiary Total The Company The Subsidiary Total
GBP GBP GBP GBP GBP GBP
Total expenses 18,993,666 655,453 19,649,119 12,952,943 391,096 13,344,039
Non-recurring
expenses (6,315,226) - (6,315,226) (3,642,374) - (3,642,374)
------------ --------------- -------------- ------------ --------------- ------------
Total ongoing
expenses 12,678,440 655,453 13,333,893 9,310,569 391,096 9,701,665
------------ --------------- -------------- ------------ --------------- ------------
Average NAV 1,385,345,942 951,775,752
Ongoing charges
ratio (using AIC
methodology) 0.96% 1.02%
------------------- ------------ --------------- -------------- ------------ --------------- ------------
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR KKQBDCBKDKAB
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June 25, 2020 02:00 ET (06:00 GMT)
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