US Solar Fund plc (USF) is an investment trust in which we are one of the biggest shareholders. The company owns and operates solar power assets primarily in North America and it aims to provide investors with attractive and sustainable dividends with an element of capital growth.
After several engagements with USF since 2019, we still have concerns about various issues. We explain here how we will vote in the upcoming AGM.
Engagements since 2019
As we disclosed a few times before, we have engaged with USF since it listed in 2019, but most intensively since the spring of 2022. The main aim of our engagement has been to ensure that USF’s board acts in the interests of shareholders. After a turbulent period for the company’s shares, we asked USF’s board to develop a strategy to dismantle the portfolio and return money to shareholders, as there were weak prospects for growing the company.
In response to shareholder engagements, USF entered a strategic review process in mid-October 2022 where it explored three options: sale of the company, sale of its assets and hiring a new investment manager. There was little progress until Q2 2023 and in our view, there was a lack of communication from USF’s board.
In partnership with two other investors, CCLA and Fidelity, we made several attempts to galvanise the USF board to act. We also communicated to the company our preference to pursue the option of unwinding the fund, as well as distributing any proceeds from the sales of USF’s assets to shareholders.
Strategic review did not progress
In May 2023 the board disclosed that its strategic review had not made progress due to a lack of attractive options. At last year’s AGM in May, having advised the board of our voting intentions in advance, we voted against the chair and abstained on three other directors. This was done on the grounds that “the board has failed to make a timely and satisfactory strategic shift to preserve shareholder value; and communication has remained poor through this process, as much as it was since the IPO.”
In July 2023 we arranged a meeting with the board alongside five other major USF investors. The board explained the reasons that prevented it from selling the company assets or the company as a whole. They contended this was due to the macroeconomic environment and the effects of the US Inflation Reduction Act making US operational renewable energy assets less attractive than development assets.
The investors reiterated their preference and shared a list of action points they expect from the USF board.
New investment manager and strategy
The board made a strong case for appointing a new investment manager as the only remaining option. In August 2023, USF announced Amber Infrastructure Group (Amber) as their preferred candidate for this role. The board and Amber consulted with shareholders on a new investment strategy, which they put to a vote in November. We voted for the proposal after engagement with the board.
We have since seen some improvement in the quality of communication provided by the new investment manager, but communication at board level remains weak.
In April 2024, the company announced a decision to return $19 million of its cash proceeds to shareholders. This comes from $52.5 million that the company received after selling one of its assets (MS2) in June 2023. It will be done via a tender offer, which is put to a shareholder vote at a special meeting on 21 May 21 2024. We are planning to support the offer vote.
From the company’s most recent disclosures and our recent communications with Amber, we were pleased with the progress that Amber has made in implementing the strategy since being appointed the investment manager of USF. They have worked hard to understand and address the operational problems with some of the assets, negotiate new service contracts and also propose a way to improve the way the debt load is managed.
However, following the disclosure of the debt’s amortisation profile, we are concerned about the level of oversight the board performed on cash flow modelling. With the step up in amortisation, the dividend has had to be cut. We believe this is something that the board could have forecast. In our view, they have failed to manage the dividend and cash flow profile of the vehicle as effectively as they could. We are disappointed that only a small part of the proceeds from the sale of the MS2 assets have been returned due to this poor cash flow management.
We acknowledge that a reprofiling of the debt may be the correct course of action for the vehicle. However, in doing so, we would like to ensure that this enhances the value of assets in the event of a sale and does not create a situation where there is an expensive prepayment clause (or other penalties) that make the assets less attractive to prospective buyers. Investors would appreciate further disclosure on this strategy.
The USF share price discount to net asset value (NAV) per share now exceeds 10%, which means a discontinuation vote will be held at the AGM. The approval requires 75% of votes cast.
How we will vote at the 2024 AGM
Item 5. Re-elect Gillian Nott as Director. Sarasin voting intention: Against.
Rationale: We are dissatisfied by the quality of leadership and investor communications that board chair Gill Nott has provided over the past four years. In our view, this has manifested itself in the failure to implement the company’s growth strategy, failure to complete the strategic review in good time and to the benefit of shareholders, the substantial discount of the share price to NAV, poor cash flow management and unmitigated dividend volatility.
Item 13. Approve Discontinuation of Company as an Investment Trust. Sarasin voting intention: For
Rationale: We believe unwinding the fund remains the best option for shareholders. In our view, the poorly implemented growth strategy has resulted in the company having subscale assets in an unfavourable macro environment, despite the recent efforts of the new manager to restore shareholder value.
We are going to vote in line with the board recommendations on all other items of the AGM agenda.
We encourage other investors to follow suit in voting against the board chair and in support of the discontinuation vote.
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