SQN Secured Income Fund (SSIF) lends to small businesses, paying a fully covered 7p annual dividend in monthly instalments. SSIF has been transformed under manager Dawn Kendall, of SQN Asset Management, who took over in August 2017. A portfolio of senior secured direct loans has been built up and legacy investments in troubled peer-to-peer platforms sold down. Dividend cover has been achieved under the new asset mix, which generates an underlying portfolio yield of 10%, more than enough to meet the target of a net 8% total return per annum.
The company is designed to take advantage of a gap in the market created by banks’ low levels of lending in the £1m-to-£20m loan size bracket due to regulatory capital requirements and the complexity of the deals. SQN tells us that this means SSIF can be highly selective and generate yields of 9%–12% on its loans.
Thanks to a historic dividend cut when the manager changed (since reversed), as well as an overhang of stock held by an investor associated with the previous management, the company has slipped onto a discount (currently 7.7%). The company therefore decided to conduct a continuation vote if net assets were less than £250m on 31 December 2019. With net assets of c. £50m at the time of writing, the company is exploring options for its future.
We understand that the managers have tabled two options for shareholders at this point. One option is that investors could choose to allow the manager to continue with the current strategy, selling down the remainder of the legacy portfolio and completing the transformation into a direct lending proposition. This could include taking advantage of the 35% gearing allowed, which could boost the dividend to up to 9.5p and, were the discount to then close, the trust could seek to scale up with further share issuance. Alternatively, if shareholders wanted the company to wind up and return cash to shareholders, the managers have estimated this would take two to three years to execute.
A related party to the previous manager, Somerston, retains 28% of the shares and so any decision will likely require Somerston’s agreement. We understand SQN is in discussion with Somerston and other shareholders to gauge their opinions on the best route forward.