Infigen’s Lenders Should Be Restless
Infigen’s Lenders Should Be Restless
Credit Suisse set the geese amongst the turbines this week with a research note suggesting Infigen Energy’s lenders were getting restless. The share price has fallen from $0.50 just a month ago to $0.33 today – it’s back trading near the value of its unencumbered assets**.
Infigen’s lenders should be restless; they signed up to a very stupid loan at the height of the credit bubble. The facility they provided carries a margin of just 90 basis points (0.9%). For comparison, a substantially better credit, Sydney Airport, just issued a bond that carries a margin of 210 basis points.
The Infigen loan doesn’t have to be repaid until 30 June 2022 and only has one covenant: the debt-to-EBITDA ratio must be less than 8.5 to 30 June 2016, less than 6 from then until 30 June 2019 and less than 3 for the last three years of the loan.
Issued today, such a loan would carry a margin of at least 400 and more likely 500 basis points. It’s no surprise the lenders are looking for a way out. If it were on my balance sheet I’d be looking in every nook and cranny to find a way to get my money back.
Similarly, Infigen should be doing everything it can to hang on to it. The loan currently requires Infigen to apply all surplus cashflow to retiring the debt but it’s in no position to be paying distributions anyway. If it can repay a decent chunk of the debt over the next five years while only paying a margin of 90 basis points on its debt, Infigen’s owners will be very well served.
The current price assumes the existing wind farms are almost worthless*. That will be the case if Infigen breaches its covenant but, other than that, the banks can get as restless as they want. Infigen is under no compulsion to give the money back.
*For an explanation of Infigen’s structure and how the debt and existing wind farms are separate from the substantial cash balance, read the March Quarterly Report.
**This post has been amended to change 'unencumbered cash' to 'unencumbered assets'. The unencumbered assets include cash ($163m) and the Woodlawn Windfarm (estimated $50m cost). The $213m total is still less than the current $250m market capitalisation.
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Dear Steve,
How do you get unencumbered cash at around $0.33? At 31 Dec 2011, the half yearly report stated that their cash was $163m which comes out to be $0.21.
Thanks,
Rich
Hi Rich, sorry, I should have said unencumbered assets instead of cash. They've also got the Woodlawn Windfarm, which looks to be about a $50m investment, outside the lending facility.
That still doesn't add up to the $250m market cap - you are paying something for the option on the levered wind farms. But, as I said in the quarterly report, I think there's a lot better chance that this option is worth something than in the case of Alinta Energy. I'll fix up the copy above.
Hi Steve, Thanks for the clarification. Did you get a copy of the Credit Suisse report? Do you have a view on management i.e. are they trust worthy. In these type of situations I think that is of upmost important. I thought that Allco group had enough assets to cover their liabilities (NTA not just good will) when they were falling dramatically but with dishonest management we realise how illusionary those assets can be. It is comforting to know that TCI was still buying shares as late as April (though Rodney Alder was still buying shares in HIH just before it went under).
Cheers,
Rich
Hi Rich, sorry, I should have said unencumbered assets instead of cash. They've also got the Woodlawn Windfarm, which looks to be about a $50m investment, outside the lending facility.
That still doesn't add up to the $250m market cap - you are paying something for the option on the levered wind farms. But, as I said in the quarterly report, I think there's a lot better chance that this option is worth something than in the case of Alinta Energy. I'll fix up the copy above.
Steve, do you know if the loan stays in place if there was a change of ownership (takeover)?
david
Hi Steve,
I just read your analysis in the March newsletter where you state that "Businesses like Infigen need a price of somewhere between $100 and $120 per REC to justify building a new windfarm".
My understanding is that they need the combined value of the REC and the wholesale electricity price to exceed $100 (refer slide 8 of their presentation of 3 May). In that presentation, Infigen expect that about half of this could be delivered by increases in the REC price and half delivered by increases in the wholesale electricity price. Under the legislation, Retailers have the option of paying a shortfall charge of $65 per MWH rather than buying RECs (recently increased from $40) and so this puts an effective cap on the price of a REC.
In your analysis, you say that if REC prices return to $100, then Infigen's assets will be worth as much as $700 million more than their current debt. I wanted to know whether you analysis was based on the price of an REC getting to $100 or whether this was the bundled price of a REC and the wholesale electricity price.
Cheers
Jim
I notice from the latest annual results presentation that IFN has a residual EUR116 million euro denominated debt outstanding, with no offsetting euro assets, and has not hedged the liability. It is now quite exposed to the AUD/EUR exchange rate for no reason, and it has moved against them quite a bit in the last few days. Further, the cash balance went down signifantly in the last six months. That margin of safety seems to be evaporating quite quickly.
Hi Jim, the cash has been used to construct the Woodlawn windfarm, which also sits outside the lender group. It may not be worth the construction cost, but it's definitely worth something. They expect the cash burn to be $4-5m in future, all of which is going towards maintaining currently undeveloped sites.
As for the EUR borrowings, I have no idea why they would do that. The 30 June rate was 74 though, and today it's 72, so the move hasn't been particularly detrimental yet. There doesn't seem any logical reason for Euro borrowings though without Euro assets.
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