HICL Infrastructure confident in dividend guidance despite Carillion collapse

HICL Infrastructure Company updated the market on its activity since 1 October on Monday, reporting that its portfolio now consisted of 116 investments located in the UK, France, Ireland, the Netherlands, Canada, the USA and Australia.

The FTSE 250 company noted that, as it also reported in is interim report, in November it acquired an incremental 33.3% equity interest in the Addiewell Prison public-private partnership (PPP) project for approximately £12m.

HICL now held 66.7% of the equity and loan stock.

On 19 December, construction was completed on the N17/18 Road - a PPP project to finance, construct, operate, and maintain 57km of dual carriageway between Gort and Tuam, Ireland - for the National Roads Authority in Ireland.

During the period the group also subscribed for its shareholder loan commitment of €4.0m.

Looking at its portfolio performance, HICL said the majority of its portfolio was continuing to perform in line with expectations, with no material issues affecting investment performance.

Cash generation from the portfolio, excluding the 15 projects affected by the Carillion liquidation, had been in line with expectations.

Demand-based assets, which were correlated to local GDP, represented around 16% of portfolio value, below the 20% self-imposed limit agreed with the board and previously communicated to shareholders.

Within the demand-based assets, toll road traffic and revenue continued to perform ahead of expectations, while its High Speed 1 investment performed in line with expectations.

The group said its regulated asset investment, Affinity Water, continued to perform “broadly in line” with expectations.

Both HICL and InfraRed were continuing to “actively engage” in preparations for the 2019 price review, the board said.

On the Carillion collapse, HICL said 10 projects within its portfolio had facilities management subcontracts with Carillion subsidiaries, and the liquidation triggered loan agreement defaults at most of those projects.

There were a further five projects where Carillion was the original construction contractor and held responsibility for latent defect risk, and those were therefore also technically in default under their loan agreements.

“Projects will be unable to make distributions whilst they remain in default, which is expected to remain the case for a number of months until negotiations with lenders are completed, after which any residual locked-up cash should be capable of being distributed,” HICL’s board said in its statement.

At the time of its interim results, the company took a provision of £9.4m in respect of counterparty exposure.

The provision was based on a probability-adjusted scenario using the information available at that time as to Carillion's financial situation.

It did not assume a compulsory liquidation, the board said, nor did it make an assessment of the potential impact of such an outcome on the discount rates used to value the affected projects.

On 26 January, the company released an estimate of the financial impact on the company, taking into account the actual circumstances of Carillion's liquidation.

That estimated impact was reaffirmed on Monday as approximately £50m of net asset value, equivalent to 2.8p of NAV per share, or 1.8% of NAV per share as at 30 September, which was incremental to the earlier provision.

“The analysis is based on the information currently available and utilises the judgement of the board and the investment adviser, which is informed by previous experience of managing the abrupt failure of PPP subcontractors,” the board said.

It added that the estimated impact on NAV included adjustments to cash flow and a valuation adjustment for incremental costs for the transition phase and the anticipated timing and costs of securing long-term replacement facilities management contractors; potential costs associated with historic liabilities where, following Carillion's liquidation, the risk was borne by equity; and a view of the possible increase in discount rates used to value the projects at 31 March, assuming negotiations to resolve the issues were continuing.

“Each of these three parameters contributed significantly to the assessment of the financial impact, although none represents the majority of this figure.”

HICL said it had made “good progress” implementing its contingency plans to transition facilities management service provision from the administered Carillion subsidiaries into new contractual arrangements.

In the short term, it said all projects remained stable, with services running as normal; and one project - representing 1.3% of portfolio value at 30 September 2017 - had already terminated its facilities management contract with Carillion and transferred to an interim arrangement with a new service provider.

The company said it was continuing to work with all stakeholders to secure long-term replacement contractors, which would provide assurance on long-term service provision and release projects from distribution lock up in due course.

On the financial front, HICL claimed it remained on track to deliver aggregate dividends of 7.85p per share in the current financial year, and the board reaffirmed the 8.05p dividend guidance for the next financial year to 31 March 2019, and the additional guidance of 8.25p for the financial year ending 31 March 2020 that was announced in November.

The board said the investment adviser had estimated that the group would have drawings on its revolving credit facility of approximately £130m at 31 March.

“The board continues to be comfortable with this level of drawing.”

“The majority of the portfolio continued to perform in line with expectations during the period, however the compulsory liquidation of Carillion impacted a number of HICL's PPP projects,” commented HICL Infrastructure Company chairman Ian Russell.

“As an immediate priority, the company and investment adviser activated contingency plans at the affected projects and are working closely with other stakeholders to ensure continued operations.

“This has been and will continue to be a period of intense activity and the Board would like to recognise and thank everyone involved in maintaining services and the process of transitioning to new providers.”

Russell said that in parallel, the investment adviser's asset management team was working with Carillion's liquidator to ensure funds continued to flow to staff and suppliers, and to pursue the twin objectives of enacting a smooth transition of services to interim arrangements and securing long-term replacement contractors.

“At the time of its Interim Results the Company took a provision against counterparty risk, although the abrupt compulsory liquidation of Carillion was not anticipated.

“The severity of this outcome necessitated a reassessment of the potential financial impact on the company.”

A revised estimate was announced on 26 January, which Russell said was the product of a “thorough analysis” by the investment adviser of the actual circumstances of the liquidation.

He said it represented a “prudent view” of the likely outcome, informed by current information and the experience of both the board and the investment adviser.

“The board remains confident in the company's investment proposition and the benefits of a large and diversified portfolio - 116 investments with, at 30 September 2017, a portfolio value of £2.8bn.

“The board's confirmation of the dividend guidance to March 2020, in the context recent events, demonstrates the resilience of the portfolio's cash flows and hence the value to shareholders of diversification.”

Russell added that the board was also conscious of increased commentary around public-private partnerships, however he added that the directors were continuing to believe there was an “important” role for private investors, including HICL, to provide efficient and well-managed infrastructure assets.

“The company takes its role as a responsible investor very seriously and has a long-term, sustainable approach that prioritises working closely with its public sector clients.”