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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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.