Up to 6.8% of the capital in SQN Asset Finance Income Fund, $29.9m (£23.18m), has been exposed to the downturn in the US solar panel asset market after a manufacturer the fund lent to was forced to file for bankruptcy.
In August 2015, SQN agreed a 5 year financing arrangement with a US solar cell manufacturing company that was secured against its manufacturing and production equipment and supported by a parental guarantee from a public company.
SQN said in a portfolio update that since 2015 there has been a rapid decline in the market price for solar cells driven by imports flooding the US markets ‘in contravention of established international trade agreements and in circumvention of tariffs put in place to protect the US solar industry.’
The manufacturer has suspended production and filed for protective bankruptcy after advice from SQN, while the manufacturer seeks redress from the US trade regulator. This would allow SQN to possibly acquire the business, a full redress of the investment to the fund and for the manufacturer to pick up where it left off.
“In such a scenario, it is expected that SQN would make a full recovery of its principal plus all current and future interest, as well as have an interest in the on-going enterprise,” it said.
As part of the bankruptcy proceedings, SQN will provide an agreed amount of additional financing to the manufacturer under a ‘debtor-in-possession’ motion and have oversight of the manufacturer while the trade case is being pursued. SQN said it expected resolution from the regulator by the end of 2017, which it said was a legitimate case and preferable to pursuing the security. SQN has sought demand for payment from the parent of the manufacturer.
“If a favourable decision is not reached, the Company could experience a principal loss in the event that the amount recovered through the parental guarantee and the proceeds received from the sale of the equipment are less than the outstanding exposure,” said SQN.
“It is expected that the Company will not receive income from this investment, which is exclusively part of the ordinary shares portfolio, for 9 to 12 months as this matter is resolved. However, in the absence of unforeseen circumstances, the Company should have sufficient excess income from other investments in the ordinary shares portfolio to maintain its dividend at the current level.”