Jefferies cuts Foresight Solar Fund to “hold” after Australian asset sale pause

Investing.com -- Jefferies downgraded Foresight Solar Fund (LON:FSFL) to “hold” from “buy” rating on Friday after the planned sale of its Australian solar assets was paused, a move that leaves the fund’s gearing elevated in the near term and limits its ability to reduce debt.

The downgrade follows the suspension of the sales process for 170 megawatts of Australian solar assets after bids received were deemed non-deliverable. 

Jefferies said the sale had been expected to materially reduce borrowing by allowing repayment of a large portion of the revolving credit facility, or RCF. 

With the process paused, Jefferies said gearing is now likely to remain around 40% of gross asset value, or GAV, until other asset disposals are completed.

Foresight Solar Fund’s GAV gearing has increased in recent periods, largely reflecting declines in portfolio valuations, the brokerage said. 

As of Sept. 30, the fund’s RCF stood at £91.7 million drawn, which later fell to £72.7 million after the use of cash distributions from the portfolio. Jefferies said the lag in summer cash flows contributed to the earlier higher balance.

The fund still plans to sell 75 megawatts of additional operational solar assets. Jefferies said a sale at carrying value could be sufficient to fully repay the RCF if the assets are in the U.K., based on an implied valuation of about £1.05 million per megawatt peak. 

However, the brokerage said private market transaction activity for operational U.K. solar assets is currently very limited, particularly amid the ongoing consultation by the Department for Energy Security and Net Zero on renewable support mechanisms.

If the assets sold are in Spain, Jefferies said recent private market transactions suggest proceeds of under €1 million per megawatt, which would likely be insufficient to repay the RCF in full. 

Recent Spanish transactions cited in the report showed valuations averaging about €0.8 million per megawatt. 

The fund also has a 57-megawatt development asset in Spain that is approaching ready-to-build status, which Jefferies said could add to disposal proceeds if sold.

Despite the higher gearing, Jefferies noted that Foresight Solar Fund retains headroom to its 50% gearing limit under its investment policy. 

The brokerage said this would remain the case even if net asset value were reduced by about 10% under a potential freeze in indexation of renewable subsidies outlined in the government consultation.

Jefferies kept its “hold” rating while noting the fund’s shares were trading at an estimated 37.8% discount to net asset value, with a prior closing price of 63.70p and a market capitalization of £351.1 million at the time of the report.