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Investors trust wind despite uncertainty

EUROPE: With an ongoing sovereign debt crisis, stricter bank capital requirements, turbine-manufacturers' profit warnings and adverse policy developments in some markets, you would not expect it to be easy to obtain finance for wind projects in Europe.

The resilience of the wind sector is bringing optimism in the face of a fairly gloomy financial background (photo: Iberdrola)
The resilience of the wind sector is bringing optimism in the face of a fairly gloomy financial background (photo: Iberdrola)

Yet the picture varies considerably from country to country, and there are some places where the finance backdrop is far from bleak. At the same time, the unimpressive performance of European stock markets has highlighted the benefits of wind investments for a growing number of institutional investors, and this could help provide support to the market.

Asset finance for wind in Europe fell to $20.9 billion (€16 billion) last year after a 2010 peak of $26.2 billion, according to figures from Bloomberg New Energy Finance (BNEF). "The first three quarters of 2012 have produced financings of just $8.7 billion and, even if some more deals come to light from that period and we see a relatively good fourth quarter, the 2012 total looks set to be well down on last year," says Angus McCrone, a senior analyst at BNEF.

There are a number of reasons for this, he says, including major cutbacks to support for wind energy in countries such as Spain and Italy, policy uncertainty in other markets and debt financing difficulties. The fact that some of Europe's onshore markets are mature also means, quite simply, that relatively few development opportunities are being offered.

Encouraging resilience

On the brighter side, prices for European wind assets have generally proven to be resilient. While some utilities - such as Spanish wind giant Iberdrola - are reducing their presence in wind to bring down debt, there is growing interest from institutional investors, which is helping to support prices. "There are many insurers and pension funds that are increasingly looking into these long-term, yield-generating assets that in many ways are less risky than corporate bonds or stock-market investments," says Mortimer Menzel, a partner at London-based merchant bank Augusta & Co.

Even in Spain, which is on the blacklist of some investors after announcing an indefinite moratorium on new capacity from 2013 and a retroactive tax on power generation, the situation for developers seeking to sell wind assets is not as bad as might be thought. "Transaction prices for wind assets have gone down in Spain, but not to disastrous levels," says Menzel, noting that developers can still realise a substantial profit on selling good projects post-completion. "Prices in the UK, France and Germany are higher, roughly speaking, just about 10% off peak levels."

Italian uncertainty

Menzel adds that there is uncertainty over the values that will be placed on asset sales in Italy, where many wind farms are up for grabs as developers and operators pull out of the market. Lack of clarity on the regulatory front has muddied wind asset values for almost two years, but now that a new market framework is in place, there is room for optimism, says David Jones, head of renewable energy at Allianz Capital Partners.

"There is now increased confidence about investing in Italian wind assets and there will be a resurgence of transactions in 2013," says Jones. Allianz has invested in onshore wind farms in Italy, Germany and France, and remains interested in all three markets, says Jones.

In Germany, investor interest is high, he says, with demand for good projects exceeding supply, making it difficult to conclude deals at sensible prices. Investor interest in French wind assets is also high, although many are waiting for a European Court of Justice ruling on the legitimacy of the country's incentive scheme, expected mid-2013, before proceeding with investments.

Investment diversity

Other institutional investors have also been looking towards wind. "In a challenging macro-economic environment where yields remain low, especially on government bonds, institutional investors are looking for diversified sources of stable income," says Ian Berry, fund manager of UK insurer Aviva, which last year acquired a 49MW Spanish wind farm

"Wind offers a relatively stable long-term cash flow," adds Jones. "While it may be volatile from year to year, it is totally uncorrelated to the volatility of capital markets, so it also provides a good hedge as part of a diversified investment portfolio."

Project financing terms vary significantly from country to country. Good terms may still be obtained, for example, for onshore wind projects in Germany. "They have the benefit of support from German development bank KfW, which offers refinancing and can help save a lot of money on interest costs," says Eriks Atvars, global head of power and environment project and commodity finance at UniCredit Corporate. The interest rate for project-financing deals may be 3.5% or less, while debt equity ratios of 80:20 are possible, he says. The portion of debt available may even be higher at good wind sites.

In comparison, for investors seeking wind project finance in countries like Italy or Spain, the starting point is an interest rate of 7 or 8%. Project financing deals in these markets have been few and far between, and, according to Atvars, deals that have been done typically have lower debt-equity ratios as a result of the higher interest rates on the loans. In other words, because the debt is more expensive to pay off, developers must take less of it and put in more of their own money.

Policy backdrop

Issues surrounding the regulatory backdrop and tariffs for wind energy have compounded the problems due to these countries' difficult economic situations.

Not surprisingly, financing is on hold in Greece, which, in late November, just managed to hammer out the details of the latest economic rescue package from international lenders. In emerging markets such as Bulgaria, Romania and Poland, investors' and lenders' confidence has been hit by government actions, such as Bulgaria's series of anti-wind measures, which included cutting the wind tariff by 20% and introducing a retroactive grid-connection fee.

The project financing market is also not immune to difficulties affecting a number of turbine suppliers. "As a financier, I'm happy with and often require a long-term service contract, but then I have to take a view on whether the project counterparty will be around in ten years," says Atvars. "There are some suppliers where there are increasing questions about this." In some cases, this may lead to a request for additional guarantees, or may cause a deal to fail.

"Some banks have withdrawn from the market and others are offering only sevenor eight-year tenors on their loans, instead of the customary 15 years," says BNEF's McCrone, as refinancing difficulties faced by lenders have shortened the time period over which they are able to lend.

Often, financing is done through so-called mini-perm financing deals, which calculate repayment profiles as if the tenor were much longer but require the project to make one large repayment at the end of the loan period. However, projects then face the risk of having a large amount of debt that they are unable to pay off or replace with new debt.

Offshore turbulence

Offshore, the financing backdrop is also cloudy. The number of banks providing offshore project financing doubled to about 30 between 2008 and 2010, but has since decreased. Banks that financed German developments in 2010 and 2011 are busy working with projects that now face grid interconnection problems and delays. While some key offshore project finance deals have closed, such as Centrica's Lincs project - the first to include construction risk in the UK - Atvars notes that the amount of project financing available offshore is a lot less than expected just two years ago.

"Nevertheless, there are still banks out there that are ready to support well-structured deals," he says.

PROJECT BONDS FOR 2020 EUROPEAN INVESTMENT BANK GETS GO-AHEAD FOR FINANCE INITIATIVE

With the objective of bringing back capital market financing for infrastructure projects without increasing public debt, the Europe 2020 Project Bond Initiative received its final European Commission approval last November, with the aim of seeing the first project signatures in early 2013.

Implemented by the European Investment Bank (EIB), the pilot phase will benefit from €230 million from the EU budget and will focus on stimulating capital market contributions of as much as €4.4 billion for infrastructure investment in energy, transport and communications.

Boost for UK transmission

The EIB notes that there has been a significant reduction in long-term funding availability for infrastructure since 2008, as Basel II and Basel III capital requirements have put banks under pressure, and no new projects have been wrapped up by monoline insurers.

Projects with confirmed eligibility include UK offshore transmission links, vital for the development of offshore wind.

Under the initiative, bonds will continue to be issued by project companies, but the EIB will help bring the credit ratings of bonds issued by project companies to a rating level that is attractive to investors, and to lower the project's overall financing costs.

Pension funds push

Initiatives such as this could help pave the way for pension funds and other institutional investors in Europe to come into renewable energy debt financing.

"Institutional investors face restrictions as to what assets they can invest in, and typical project finance is usually on the edge of investment grade," says Eriks Atvars of UniCredit Corporate. "But if you can improve the risk profile of debt and get a strong investment grade rating, then that can help mobilise this investor base."

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