Paperbacked
The alternative energy asset class is finally getting established in the securitisation market and bankers anticipate as many as four deals this year – including both solar and wind. By Michael Marray.
The securitisation of renewable energy cashflows has been a much talked about theme in Europe since the inaugural HVB-arranged Breeze 1 deal in 2004, but a follow-up transaction has been a long time coming.
However, in May the first two follow-ups were launched within weeks of one another. First, CRC Breeze Finance (otherwise known as Breeze 2) raised Eu350 million for London and New York based private equity house Christofferson Robb & Co, in a second deal arranged by HVB. Then German wind farm developer Plambeck raised Eu102 million via the Alte Liebe 1 deal, arranged by Dresdner Kleinwort Wasserstein.
The two deals are backed by wind farms located in Germany primarily, although there are some French assets included in CRC Breeze Finance.
Germany leads the world in wind energy with 17,000MW of installed wind capacity, and has a simple tariff structure that generates predictable cashflows suitable for securitisation.
Under the German system wind projects sign 20-year fixed tariff agreements at above market rates, and also benefit from priority dispatch ahead of conventional power sources. The base tariff for plants coming into operation during 2004 was 5.5 Euro cents per Kilowatt Hour.
The French system also features priority despatch rules, but has 15-year tariff agreements. The level of production during the first five years, during which a premium tariff is paid, determines the tariff for the final ten years.
The return of Breeze
In the CRC Breeze Finance deal, Christofferson Robb pooled 39 wind farms in Germany and France that it had acquired from five different sellers with the help of bridge loans. Security was taken over the wind farm assets including turbines, as well as the future receivables under power purchase contracts concluded with big electricity utilities.
Construction on the 185 wind turbines and associated infrastructure is already well advanced. Fifteen wind farms are now operational, with the other 24 coming on-stream before the end of 2007, and the notes have a one-year interest only period, which is a cushion against construction delays or various cost overruns.
The issue comprises Eu300 million of 20-year Class A notes rated Triple-B by Standard & Poor's and Fitch Ratings, with a Weighted Average Life (WAL) of 11.4 years and a coupon of 5.29%. Another Eu50 million of Class B notes were rated BB, and had a ten-year tenor with a WAL of 5.8 years.
The deal also featured Eu120 million of unrated 20-year Class C notes, and this equity-like piece is being kept by Christofferson Robb.
Typically in a wind farm project financing there would be around 25% equity and 75% bank debt. But Breeze 2 is providing close to 100% financing, with deeply subordinated debt taking the place of equity. For structural reasons there is also a very small piece of equity held by a Cayman Islands trust.
"Each wind farm is built under a fixed price construction contract by the original developer, which leaves the borrower exposed to this performance risk on these thinly capitalised entities," explains Laurence Monnier, analyst at Fitch Ratings in London. "However this risk is mitigated by the simplicity and speed of wind farm construction, and the turbine supply agreements with the suppliers, which represent more than 80% of the costs."
"Fifteen wind farms will be operational at financial close, and the original developer will remain involved in the transaction by retaining a role in the construction of the wind farms which are not yet operational, and an operating and management role for the wind farms that each of them developed," says Monnier.
Linklaters acted as project counsel, advising on the English, German, French and Luxembourg law aspects of the deal, and the firm expects it to be replicated by other issuers.
"HVB took the lead in bringing together a number of developers in a common structure, underpinned by a sale to private equity at closing," explains Andrew Jones, Energy and Infrastructure partner at Linklaters. "In a market hungry for deals but with relatively few portfolios of the necessary size, this is an approach which has potential applications elsewhere."
The basic structure is applicable for wind farms backed by similar tariff regimes in other European countries. Breeze 1 in 2004 included some Portuguese assets, while Breeze 2 included French assets. And according to Dagmar Buhl, Director at HVB in Munich, future securitisations are likely to feature multiple countries, though German wind farms will be heavily represented because of the size of the renewable energy sector in Germany.
"During the time that deals are being structured, new wind farms are getting their approvals one by one," Buhl explains. "For the Breeze 2 transaction, in the period just before closing we had to exclude some wind farms that did not get approved in time, so there could have been more countries represented in the portfolio."
In addition to country diversification, there may also be a mixture of wind and solar assets on some upcoming transactions.
"We are already looking at solar assets, and have been talking to the rating agencies about how they view the solar sector," says Buhl. "Solar and wind are not correlated with one another, since when there is a lot of sunshine there may be a lack of wind, and vice versa, so from a risk point of view it makes a lot of sense to have both in the same portfolio."
Alte Liebe
The second deal in May was for German wind farm developer Plambeck, which is based in Cuxhaven. The Eu102 million of 20-year notes were wrapped to Triple-A by Ambac Assurance UK Ltd.
In the Alte Liebe deal the actual owners of the eight wind farms, which total 142MW in generating capacity, are hundreds of small retail investors who bought into tax shelter funds. The proceeds of the bonds will refinance bank loans made to the wind farms.
Plambeck Neue Energien was sole sponsor, and is one of the largest developers in Germany, but in the past it raised a lot of equity via these tax shelter products. However, after a review by the German tax authorities, such retail tax shelter products are no longer widely available. Instead, today wind farms today typically have small and medium sized companies as investors and developers, and the retail element has largely disappeared.
"The eight wind farms in the Alte Liebe portfolio have been in operation for around four years on average, and though they were developed and are managed by Plambeck, they are owned by retail investors via limited partnerships," explains Jens Rosebrock, Managing Director, Head of Utility Debt Origination, at Dresdner Kleinwort Wasserstein in London.
"Wind farm bonds are a relatively new asset class, and investors need to get to understand the structure, so for Alte Liebe we decided that it was best to use a monoline wrap," Rosebrock adds.
"From the point of view of the sponsor, once the negotiations have been completed with the monoline there is very little execution risk, and also lot more certainty in terms of pricing, since Triple-A spreads are fairly predictable," he says.
Monolines are expected to be involved in more deals. For the monolines it is a new sort of risk, with very limited correlation to the other risk in their portfolios. For the issuer, once the negotiations with the monoline are concluded, and the wrap is in place, there is great certainty of execution, as Triple-A wrapped bonds are easy to place with institutional investors.
In the case of Alte Liebe, Dresdner has initially kept the bonds on its own book, and will decide at a later date whether to place them with institutional investors.
Portfolios build
The most fertile ground for asset-backed bonds is large renewables portfolios, as opposed to many projects owned by different small- and medium-sized companies. And over the past 18 months there has been a clear trend in Germany for large global players to buy up wind assets on the secondary market – though initial approvals, permits and construction is still typically undertaken by German companies with local knowledge.
Last year GE acquired seven wind farms in Germany, with a total capacity of 166MW. These included the Alsleben project, acquired from German developer EAB Technology Group which will continue to act as technical adviser on the project. GE is itself a major manufacturer of wind turbines and Alsleben uses 37 GE 1.5MW turbines.
And early in 2006 Babcock & Brown Wind Partners acquired a portfolio of existing and planned wind farms from Plambeck. With 30 individual wind farms scheduled to have a total capacity of over 300MW this is the one of the biggest portfolio deals yet seen in the German wind sector.
More deals involving private equity firms and global infrastructure funds are expected this year. For some buyers, capital markets funding plays a crucial role in the wind farm acquisitions. Christofferson Robb is specifically looking for assets that can be securitised.
The arrival of capital markets take-outs in this sector is going to be a challenge and a blessing for some of the German big bank lenders. Up to now German wind has largely been funded by German banks. For example, last year Bremer Landesbank provided Eu35 million of debt into the Windpark Koethen project in Saxony Anhalt. Nord/LB put in place Eu60 million of debt for GE to acquire the Alsleben and Krusemark projects near Magdeburg and in Saxony Anhalt. Also last year, HVB was sole provider of Eu38.8 million of debt to Renewable Energy Holdings, to help it acquire two German wind farms from French utility EDF.
In large deals, two or three banks typically come in together on a club basis, while for deals around Eu40 million or less a single lender often takes the full amount on its balance sheet.
These banks fund their loan via special renewable energy credit programmes provided by Kreditanstalt fur Wiederaufbau, which allow the commercial banks to provide fixed rate loans. But the banks have been resisting pressure from wind developers to go out beyond 15 years, whereas the capital markets are going out to 20 years.
More issuance likely
The prospect of having loans refinanced after only a few years, as big portfolios are acquired and securitised by international investors, is not an entirely welcome one for the established wind energy bank lenders. That said, some German banks now have so much wind exposure that they are cutting back on lending to on-shore projects. And one of the attractions of the Breeze 2 bonds to bank buyers in countries such as the UK was that they were able to invest in a sector where they have no exposure because they do not do any lending there.
Capital market take-outs are particularly efficient for German developers, because of the long term fixed rate tariffs. And bankers expect that the next round of securitisations will likely feature countries that have some sort of fixed rate feed-in tariff with predictable cashflows, such as Spain or Portugal.
The UK will prove more challenging for securitisations, since it employs a system of Green Certificates that give renewable generators a second revenue stream. These Green Certificates trade in an illiquid market and are subject to wide price fluctuations. Modeling long term cashflow predictions to satisfy both the rating agencies and bond market investors will be difficult.
One solution may be to sell the Green Certificates long term to a creditworthy offtaker for a fixed price, and use this revenue stream alongside power purchase agreement revenues to back the bonds, but this would clearly have to be done at a discount.
In the meantime, arrangers are focussing their efforts on countries that have simple feed-in tariff regimes, and more deals are expected to be launched before year-end.
