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Ouch! SQN Asset Finance Income Fund. Buying opportunity?
Jezzer
Posted: 25 April 2017 10:07:55(UTC)
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http://citywire.co.uk/in...82.616743071.1493114145

Ouch indeed. I have 5% of my pf in this. But perhaps, with a yield now approaching 7%, SQN is really quite a buying opportunity. Thoughts?
xcity
Posted: 25 April 2017 12:17:45(UTC)
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Jezzer;46194 wrote:
Ouch indeed. I have 5% of my pf in this. But perhaps, with a yield now approaching 7%, SQN is really quite a buying opportunity. Thoughts?

I don't know SQN, but there are a lot of really bad loans out there waiting to be found out.
Economies still looking up, but interest rates turning. At some point economies will too. I would be very cautious about the loans market.
2 users thanked xcity for this post.
Mr Helpful on 25/04/2017(UTC), dlp6666 on 24/07/2017(UTC)
Jezzer
Posted: 25 April 2017 12:39:22(UTC)
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xcity;46196 wrote:
Jezzer;46194 wrote:
Ouch indeed. I have 5% of my pf in this. But perhaps, with a yield now approaching 7%, SQN is really quite a buying opportunity. Thoughts?

I don't know SQN, but there are a lot of really bad loans out there waiting to be found out.
Economies still looking up, but interest rates turning. At some point economies will too. I would be very cautious about the loans market.


Thanks, although as someone pointed out at the end of the article, SQN is more of a lease finance company, so actually owns the asset that the 'loan' has been spent on. So in theory, in extremis, it could repossess and re-sell the asset for something. The entire 'loan' seems to have been written out of the fund's NAV, which seems far too pessimistic and so all the risk exposure to that lease has already been removed from the fund's value/price. Assuming the firm recovers following Chapter 11, this would be a good buying opportunity for the fund as all the remaining value retained in the lease, or (worst case) the repossessed asset, would presumably end up back in the NAV.

This isn't an existential threat to SQN, which is now sitting with a yield of 6.7%.

Having thought about it some more, I've just bought a little more...to top back up to 5% of my pf.
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dlp6666 on 27/04/2017(UTC)
S Dobbo
Posted: 25 April 2017 12:57:34(UTC)
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Last Wednesdays RNS with more detail:-

http://www.investegate.c...ate/201704191040017131C/
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Jezzer on 25/04/2017(UTC), Mr Helpful on 25/04/2017(UTC)
xcity
Posted: 25 April 2017 13:23:17(UTC)
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The asset in this case is plant for making solar cells.
I can appreciate why they thought it worth another $4m to try the legal case route.
I have no view on the value of SQN.
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Jezzer on 25/04/2017(UTC)
mattyboy
Posted: 28 April 2017 09:49:43(UTC)
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I own a slice of SQN, so was disappointed with this news. They say that they are also pursuing the parent company of the manufacturer in default for the outstanding value of the lease. What I'm struggling to understand is why SQN are stumping up the €4m to chase the claim, rather than the parent company?
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Jezzer on 28/04/2017(UTC)
Mr Helpful
Posted: 28 April 2017 11:04:31(UTC)
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Jezzer;46197 wrote:

SQN is more of a lease finance company, so actually owns the asset that the 'loan' has been spent on. So in theory, in extremis, it could repossess and re-sell the asset for something. The entire 'loan' seems to have been written out of the fund's NAV, which seems far too pessimistic and so all the risk exposure to that lease has already been removed from the fund's value/price. Assuming the firm recovers following Chapter 11, this would be a good buying opportunity for the fund as all the remaining value retained in the lease, or (worst case) the repossessed asset, would presumably end up back in the NAV.

This isn't an existential threat to SQN, which is now sitting with a yield of 6.7%.

Having thought about it some more, I've just bought a little more...to top back up to 5% of my pf.



Like others constantly looking for alternatives to conventional debt instruments such as Gilts, due to their unduly high pricing. SQN therefore passed across the radar some time ago.

But having worked in and with manufacturing at various points and seen companies fold, it was bothersome to note that such assets are seldom worth anything near original cost to an outside buyer.
The question is therefore; what are such assets worth in distressed sale(s); and would return on the other good loans compensate?

At some price SQN would be good value.
The challenge is to determine that price!
2 users thanked Mr Helpful for this post.
Jezzer on 28/04/2017(UTC), Guest on 28/04/2017(UTC)
Jezzer
Posted: 28 April 2017 11:19:38(UTC)
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Thanks Mr Helpful. Yes, I've worked in businesses that have used lease finance so have some personal experience of the issue to which you refer. I guess the residual value depends on the nature of the asset. Hopefully the goods are in demand (solar manufacturing is a growth industry) so hopefully they will get 50c in the dollar or thereabouts. Who knows? I'm sure they will do the best they can and hopefully it won't come to that anyway. They say that they have enough to pay the expected dividend this year anyway, so hopefully they will swallow the loss until it's either recovered or is crystallised. I'm keeping this fund down to 5% of my pf anyway, so it's not the end of the world - this loss even if fully realised would be around 0.3% of my portfolio value. In the meantime I've topped up while it's a bit cheaper...

Jez
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Mr Helpful on 28/04/2017(UTC)
Broomtree
Posted: 02 May 2017 02:24:23(UTC)
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I bought SQN for the income and was pleasantly surprised to it producing a good capital gain alongside the income; I bought more of the recent 'C' share issue [which is not affected by the recent default yet the shares have taken a hit]. I did start to get twitchy when some recent defaults caused serious issues for others like RANGER but the lease idea reassured me - capital gain all but wiped out but income still coming in.

On reflection I might have been wise to rebalance when the price soared to £1.17 but lesson learnt.... don't be greedy! I have done a fair bit of reading and it looks like a worse case scenario will be a 50% write down on the loan, as most of that seems to be in the price I'm holding for the moment as things seem to be driven by confidence or lack there of but watching to buy some more if it slips to a discount.
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Guest on 02/05/2017(UTC), Jezzer on 03/05/2017(UTC)
Jezzer
Posted: 03 May 2017 11:54:37(UTC)
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Yes I bought the C share issue too. Interesting that it's been kept separate and wasn't affected by the write-down of the loan. Could that have been a pre-emptive measure as they saw the default coming, I wonder? Anyway, I didn't particularly want the C shares so sold them with some gain soon after. Am hanging onto the rest, although yesterday they were sitting at a 10% loss on my pf. Anyway, so long as the yield holds up I don't mind...
2 users thanked Jezzer for this post.
Guest on 04/05/2017(UTC), Richard Lambert on 30/05/2017(UTC)
Dhandho Funds
Posted: 26 May 2017 11:58:02(UTC)
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Hi everyone i an new here.
Micawber
Posted: 26 May 2017 13:10:43(UTC)
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Dhandho Funds;47200 wrote:
Hi everyone i an new here.


Hi. Noting your user name, please refer to the Citywire terms and conditions before posting further. Especially the following:

"8.3 Contributions must not:
...(iii) offer to buy, sell or broker an investment;
...(v)  involve commercial activities and/or sales without prior written consent from us
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Jezzer on 26/05/2017(UTC)
Alan Selwood
Posted: 26 May 2017 22:39:24(UTC)
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Dhandho Funds:

Welcome to the forum.

As long as you don't do what others fear you might do (given your choice of forum user name), you should be fine!

PaulSh
Posted: 30 May 2017 10:44:50(UTC)
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According to The Times today, the US government is considering applying emergency import tariffs to solar cells, so it looks like the plight of SQN's delinquent lessee and probably other solar cell companies in a similar position is getting some attention.
Jon Snow
Posted: 22 July 2017 22:16:33(UTC)
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Looks like it's stick or fold time with this one now (investment trust insider Z scores update).

As I read it SQN haven't taken any impairment costs onto the balance sheet yet, so (as the article says) it appears a binary choice win/lose at law. I don't like those odds especially when there's so much uncertainty surrounding the solar companies/countries/politics involved.

I'm minded to sell and take the loss now, anyone have a view, particularly those who hold/held it.
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dlp6666 on 24/07/2017(UTC)
Andrew Smith 259
Posted: 23 July 2017 07:46:07(UTC)
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Although I have never invested in SQN it looks like John Baron is still happy to stay invested with SQN. In his Winter portfolio on his web site.
srg751
Posted: 23 July 2017 08:18:57(UTC)
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Andrew Smith 259;49120 wrote:
Although I have never invested in SQN it looks like John Baron is still happy to stay invested with SQN. In his Winter portfolio on his web site.


And Nick Train stuck with Pearson.


@Jon Snow..
Jon, the balance sheet issue may or may not be resolved but the bigger problem now is restoring confidence in potential as well as existing trust investors. It won't be easy as they've had another wake up call after chasing yield.. I remember the 'Juridica story', what on earth could possibly go wrong?

I recall you purchasing RCP recently. When you've got some time, it may be worse spent than taking a look at Seneca global income and growth IT. Or in the fund space, TB Wise Income and Hawksmoor Distribution. Compare them with Troy, Ruffer and RCP. I'm sure you won't be disappointed.

3 users thanked srg751 for this post.
Jeff Liddiard on 23/07/2017(UTC), Vince. on 24/07/2017(UTC), dlp6666 on 24/07/2017(UTC)
Broomtree
Posted: 23 July 2017 23:57:46(UTC)
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It's becoming a hard call; I sold my 'C' shares before they crashed; the main holding is now down about 4% from being up 8% but is still well covered by income - Not sure how they can be planning to merge the 'C' shares until this is resolved..... I can sense a divi cut in the wind but if there is a result then the premium should reinstate fairly quickly - Holding on whilst covered by income
2 users thanked Broomtree for this post.
Jon Snow on 24/07/2017(UTC), dlp6666 on 24/07/2017(UTC)
Mr Helpful
Posted: 24 July 2017 07:08:31(UTC)
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Jon Snow;49114 wrote:
Looks like it's stick or fold time with this one now (investment trust insider Z scores update).

As I read it SQN haven't taken any impairment costs onto the balance sheet yet, so (as the article says) it appears a binary choice win/lose at law. I don't like those odds especially when there's so much uncertainty surrounding the solar companies/countries/politics involved.

I'm minded to sell and take the loss now, anyone have a view, particularly those who hold/held it.


The reason we decided not to take on this debt instrument, was the uncertainty around the resale value of the underlying assets in the event of some kind of default/distress. All as mentioned earlier.
And asking why these type of manufacturers cannot obtain funds elsewhere at lower rates ?

Have no special insight so cannot offer any clinching view to assist.
But if looking for faintly similar comparisons then compare business model and price histories of SQN with GCP, another debt instrument, both now off their price peaks.
GCP with lower yield we do have a modest holding, but that in itself is no good reason to favour !!!
martin verlaine
Posted: 24 July 2017 11:16:53(UTC)
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These type of Funds are typical of the never ending surge for income in a low interest environment.

As with Debt/Loan/Airplane Funds, you need to appreciate that the yield is not guaranteed and something can go wrong, this is more likely to happen as the economy slows down. With leasing the assets are obviously worth less as they age so at some stage the asset value will not support the yield and a yawning premium to NAV occur. I think you can see this with Plane leasing firms now.

The issue with SQN is whether Trump is going to smash into Chinese imports at a time when other issues in the far east are hardly going the way the USA prefer. As with the recent problems of Ranger Direct Lending this seems to be a small proportion of the assets but it could be indicative of a wider concern as to the quality of the underlying assets. Not sure they had much choice but to throw extra cash at it but not great to be in that position in the first place when this is a very typical ' Bond Proxy' so yield is the only game in town

You have to trust Trump and that this is a one off to buy at this level just for the yield. I leave others to decide if this combination is a valid reason to top up or average down

Probably needs to be on an indicative yield or nearer to 10% and at a discount to ' stated NAV' for me. I always remember the cradle stuff for investment ' the higher the yield, the higher the risk' A mantra that never fails



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Mr Helpful on 24/07/2017(UTC)
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