SQN.L Regulatory News (SQN)

20 January 2020

SQN Asset Finance Income Fund Limited

Anaerobic Digestion Assets

SQN Asset Finance Income Fund Limited (the "Company") has invested in a total of 15 Anaerobic Digestion ("AD") plants since its launch. Four have subsequently been exited profitably and 11 remain in the ordinary share portfolio.

At the time of the publication of the Annual Report and Accounts for the year ended 30 June 2019, which were released on 30 September 2019, the Company reported all of the AD plants had completed construction and that six were in the ramp-up phase which often involves continuous refinement until the plants reach optimum output. As reported in the results, this process has proven to take longer than anticipated and occasionally requires additional capital which can affect the overall economics of the investments. This led the Company to make an impairment at that time of £3.2 million across two of these AD plants.  

In preparation for the review of the interim accounts for the six months ended 31 December 2019, the Company is undertaking a review of the models and projections supporting the carrying values of the AD plants. Three of the AD plants have not yet reached targeted operational capacity. A further three AD plants are performing at or above the targeted operational capacity but feedstock costs have been higher than originally anticipated.

As a result, the Investment Manager has undertaken an assessment of the valuation of these assets. Given the large number of variables and the high degree of sensitivity of each of those variables when modelled over the more than 20 year lives of the assets, the range of potential values is large. If the range of values were to be accepted and deemed appropriate for purposes of the interim accounts, a potential impairment of between 4.6 pence to 13.2 pence per ordinary share would have to be recorded. Given the wide range of potential values, and in the interests of prudent risk management, the Board intends to appoint a third-party valuer to provide an independent assessment of the valuation of these assets, which will then be reflected in the 31 December 2019 net asset value ("NAV"). The six assets, in aggregate, had a valuation of £127.7 million, as at 30 November 2019.

The C share portfolio has no exposure to AD assets.

In light of this ongoing assessment, the publication of the 31 December 2019 NAV for the ordinary shares is expected to be delayed and a further update will be released as soon as possible. The 31 December 2019 NAV for the C shares is expected to be announced later this week.

The Investment Manager will continue to work with the asset operators to achieve optimisation of each of the AD plants with the intention of monetising these assets in due course, together with the five AD plants operating in-line with expectations. It should be noted that the four AD plants that have been exited to date have achieved yields of between 11% and 20%, the highest return being on an investment that went into default and required a complicated workout.

The Company has a triennial continuation vote, with the next vote to be held at its AGM this year and the Board intends to consult with shareholders in due course.

This announcement contains Inside Information as defined under the Market Abuse Regulation (EU) No. 596/2014.

LEI: 2138007S3YRY3IUU4W39

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