Financial sector awake to great prospects
Bigger projects and many more of them in ever more countries are factors that are changing the face of not only the wind industry, but the financial business that is growing up around it. The parallel evolution of the two businesses is striking. Both are seeing the entry of large new players and the transformation of existing players into far stronger entities. Just as the shift is towards bigger and more numerous global projects, it is also towards deeper pools of debt and deeper pockets from investors.
On the wind industry side, large companies like GE Energy and Siemens are moving into turbine supply, while the existing companies are building muscle, Vestas through its merger and new capitalisation, Gamesa through its acquisitions and expansion. On the financial side, private equity institutions are becoming wind plant owners, and the existing players, the banks, are doing innovative portfolio deals, even across national borders. The logic of it is clear. The growth of the wind industry is inextricably linked to the willingness of the financial industry to grow its wind business.
To get off the ground, wind projects need equity investors for shareholder capital and providers of debt to lend the rest of the money. The returns expected by both are a significant part of a project's costs. Equity investors, who bear most risk, expect to see more. In the provision of both debt and equity there are radical shifts at play.
Five years ago, the majority of wind farms were owned either by individuals or by a handful of utilities and wind companies. Today the trend towards ownership by new, larger institutions has begun in earnest. Private equity institutions Englefield Capital and Crescent Capital were together the majority investors in the £400 million acquisition of UK wind farms from Innogy. One of their peers, Bridgepoint Capital, acquired a 23.75% stake in Spanish developer and wind farm owner Corporación Eólica SA earlier this year. While direct investment by individuals in wind farms will certainly continue, it will be the larger institutions, including those set up specifically to invest only in wind, which will play an increasingly large role.
Although putting money into wind farms will remain the main area of investment in the sector by private equity institutions, they actually have a longer history in wind turbine and component manufacture. This dates from the involvement of UBS in the flotation of Denmark's Nordtank Energy Group in 1995 and subsequent merger of Nordtank with Micon to form NEG Micon. More recently there has been Citigroup's acquisition of Flender, which supplies gear units to the wind industry, and Doughty Hanson's acquisition of rotor blade maker LM Glasfiber. The hot news of past weeks is Allianz's acquisition of gear box manufacturer Hansen and Citigroup's investment in Indian wind manufacturer Suzlon (Windpower Monthly, October 2004).
Providing debt to wind farms is also bringing in new players. The biggest potential shift is the ability to have wind farms financed by the bond market instead of the bank market. The benefits of bond market finance include, typically, longer term loans and the ability to borrow very large amounts of debt. Accessing the bond markets requires large deals -- often greater than EUR 100 million -- as well as credit ratings from the rating agencies. Two highly significant developments for wind have been last year's successful bond issues in the US by FPL Energy and the newly minted bond issue for the Breeze One transaction in Europe (page 58). These are the first true wind deals to reach the bond market and they demonstrate that the wind sector has grown and matured to the point where the bond markets are now receptive.
The bank market for wind farms is also demonstrating innovation. Five years ago wind project financings were smaller in size, often dominated by domestic banks. With a few exceptions, like the IVPC financings of the large volume of wind power it has developed in Italy, most deals were for single wind farms, not for portfolios of them. Today the deals are continuing to get larger, usually feature international syndicates of lenders working off commonly agreed financing principles, and portfolio financing is favourably viewed. The debt repayment tenors have also been inching out further and further. With a deeper, more uniform and innovative banking market, and an increasingly accessible bond market, debt finance for wind has never been better.
A further innovation, at least to the wind farm sector, is the use of mezzanine debt, which is essentially debt that takes more risk than usual debt, but less than owners of wind farms. It can be a helpful tool for wind farm owners to increase their returns and to lower the amount of investment required. "True" mezzanine is typically too expensive to make sense in wind farms, but a nascent and important development is the emergence of specialist mezzanine providers for wind finance. A recent mezzanine transaction in wind was the EUR 10 million facility for German wind farm developer owner and operator Volkswind, which was sourced and structured by Ethos Partners (page 46).
Lastly, and back on the wind equity side, is the stock market. Five years ago there were just a few listed wind companies, all of them turbine manufacturers whose stock prices rose and fell dramatically, as did their fortunes following the series failure of NEG Micon gear units. In the intervening time there have been two developments. First, the stock markets are no longer being accessed just by the supply side of the industry, but also the demand side: some project developers have become listed companies, such as Energiekontor and Plambeck in Germany. Second, the wind analysts and investors are no longer looking at the industry as an amorphous whole, but making an increasingly clear differentiation between the perceived "winners" and the "also-rans." The refinement is giving much improved analysis.
The stock market has proven that it continues to be receptive to new equity issuance, as evidenced by Vestas' successful EUR 282 million rights issue earlier this year. That is not to say that rights issues for companies perceived to have weaker prospects than Vestas will be as well received, or indeed possible.