Bonds offer a way out of finance stalemate

PROJECT FINANCE: Alternatives to bank debt are increasingly being sought to finance wind farms, with bond issues proving popular with developers of all sizes.

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At first glance the proposed $2 billion, 468MW Cape Wind offshore wind farm in Massachusetts and the £6 million, 4MW wind project at the UK's South Staffordshire College could hardly be more different.

However, both hit the headlines in May as it was revealed they were likely to be funded by bond issues. This is a means of finance traditionally associated with utilities, which issue corporate bonds against their entire (and substantial) balance sheets rather than individual projects.

Project finance, where bank debt is secured against individual wind farms or a portfolio rather than against the company behind them, has long been the financing vehicle of choice for wind developers. Most firms cannot match the utilities' scale and have been unable to tap the capital markets due to sub-investment grade credit ratings.

However, as bank debt dried up following the global financial crisis, developers large and small began to search for alternative sources of debt to the banks.

South Staffordshire College's 4MW wind farm stands to be the beneficiary of a new kind of issue suited to raising relatively low levels of capital - retail bonds.

Following in the footsteps of green elecrticity supplier Ecotricity, which issued a retail bond last year, UK-based developer Wind Prospect launched its Rebonds product in May. Purchasable online for a minimum of £500 (EUR573), these bonds will pay out at 7.5% per annum, and Wind Prospect is aiming to raise £10 million from the issue by its close on 20 July.

"We are employee-owned and have no access to large reserves of cash," Wind Prospect chief executive Euan Cameron tells Windpower Monthly.

"This issuance provides access to capital to develop projects and working capital to bring forward the next ones in the queue."

Cameron stresses that the Rebonds, far from being alternatives to project finance, will help Prospect hold on to equity on some of their projects rather than selling them off in entirety to private equity firms once they have consent.

Plugging the debt gap

At the other end of the scale, however, bond issues are seen as a way of plugging a gap left by a shortage of bank debt.

In looking at a project bond, Cape Wind is treading a relatively well-worn path, with several major onshore US wind farms having successfully issued bonds as part of a project financing package. Examples from 2010 include the refinancing of the $190 million High Lonesome Mesa wind farm in New Mexico and the $1.9 billion greenfield financing of Shepherd's Flat, Oregon.

Shepherds' Flat was able to raise $525 million in bond financing thanks to US government guarantees giving the project an investment-grade credit rating. Cape Wind is hoping to do the same.

A similar approach is required in Europe. Significant bond market liquidity in Europe only really exists for credit ratings at BBB+/A and above, but the underlying rating of infrastructure projects typically falls short of this.

As a result, project bonds have been few and far between since the collapse of the monoline insurers that provided "wraps"

- first-loss instruments that enhanced the credit ratings of a project. Government bodies across the continent are now looking at providing credit-enhancement products.

Mainstream Renewable Power finance director Fintan Whelan says the need to raise money from the capital markets is particularly pressing for offshore wind farms, due to the large amounts of capital they require.

"The issue for bonds is that they need to be investment grade," says Whelan. "It is doubtful whether it is possible for a bond raised on a single offshore wind farm to attain an investment-grade credit rating."

In May the European Investment Bank closed its consultation on its "2020 Project Bond Initiative", which proposed the bank offer some kind of first-loss debt facility to projects to protect most of their senior debt and make them investment grade.

A similar first-loss debt facility is being considered by the UK for its proposed Green Investment Bank, while late last year in Italy credit export agency SACE guaranteed Italy's first-ever project bond for a solar power plant in a EUR200 million financing.

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