German financing revolution

almost exclusively on individual private investors for its equity requirements. Opportunities for commercial and corporate investment have been few and far between. Suddenly, though, the tables have turned. Big money is arriving. German wind power may never be quite the same again

Three years of weak winds and months of political turbulence over the new renewable energy law have severely depressed the traditional enthusiasm of the German people for putting their savings into wind power projects. But what looks like an unfavourable climate from within Germany is apparently looking rosy from without. Big commercial and institutional investors, presented with an opportunity where there was none before, have begun stalking the German market.

What they are snapping up is finished projects that for one reason or another have not attracted the interest of the usual customers for buying into "closed-end wind funds," a German speciality for raising wind project equity. The huge interest in small-scale, private investment commanded in the wind development boom years of 2000-2002 has become a thing of the past, at least for the time being. Wind project developers and the small German companies specialised in providing them with finance are discovering they are sitting uncomfortably long on projects that previously they would have quickly sold on. It has become a buyer's market.

difficulties

"Many German wind developers struggled to sell their projects through 2003 and into 2004. There were difficulties both in raising equity and in getting bank loans," says Catrin Petersen of BGZ Holding, a combined wind energy developer and financier. Her observation is supported by funds analyst Stefan Loipfinger. He reports that private investment in closed-end wind funds was down 20.6% to EUR 343 million in 2003, compared with EUR 432 million in 2002. For this year, he forecasts a fall to EUR 250 million. The drop in wind fund equity last year was 2% greater than the 18.5% decrease in the wind industry's overall turnover, EUR 3.08 billion.

wind funds dry up

Traditional customers for stakes in wind funds -- often well-heeled professionals looking for relatively safe (and ethical) investment opportunities -- shied away from them for a number of reasons. Wind plant insurers had instigated a radical revision of their policy terms after a run of turbine component failures, especially gear units and blades. Some wind stations had outrun their turbine guarantee period and faced problems in getting new insurance after insurers cancelled contracts. In the weak wind period 2001-2003, many newly commissioned wind stations did not achieve expected output. A wind indexing system commonly used as a baseline to establish the energy content of the wind (used for claiming insurance for turbine under-performance) was shown to be flawed. Some wind funds hit financial difficulties and investors had to forgo their supposedly guaranteed returns. The combined effect of it all was that the trustworthiness and capability of the entire wind development industry was called into question as some companies not only failed, but also came under legal scrutiny like developers Provento, which is no longer in business. Press reports were scathing.

As wind funds dried up as the main source of equity, lenders got cold feet too. The Commerzbank, previously a major player accounting for about 30% of wind project loans, decided it was over-exposed in the wind sector and sharply reduced activities in 2003. Its wind work is now concentrated in one office in Hamburg and it intends to continue with selected wind projects only at a significantly reduced level.

"It took a while for other banks to fill the gap," says Petersen. Even though Hypovereinsbank now seems close to assuming the status previously held by Commerzbank, all banks are stricter about granting loans in the aftermath of the events of the past three years. "This is why exclusion of projects at low wind sites from receiving premium payments under the new renewable energy law is not such a tragedy -- the banks would probably not have financed the projects anyway," comments Ubbo de Witt of Projekt Ökovest.

Taking wind seriously

With the market awash with wind projects seeking buyers, mainstream commercial investment companies are lumbering to the scene, both from within Germany and without. According to Frank Trauboth of financial risk management company Envisory in Munich, institutional investors started taking wind power seriously after Shell's acquisition of 40% of a large Spanish wind plant known as La Muela (Windpower Monthly, August 2003). But it is early days yet and while project developers are keenly waving welcome signs, the German wind market still takes some getting to know. Finished deals are so far few and far between.

"Germany was always very different to other markets," explains Jerome Guillet at Dexia Credit in Paris, a European bank. Projects were smaller, equity was in plentiful supply thanks to tax incentives for private individuals, and local banks dominated the business. It was their job to administer the "soft" loans at low interest rates being offered by the national development bank, KfW. "International banks just weren't competitive, and, anyway, standards of due diligence and so on were much lower than elsewhere," says Guillet, referring to the exhaustive "due diligence" searches of every conceivable aspect of a project's structure and its participants conducted for the project finance approach to wind power that has been customary in North America, Britain, Australia, Spain and elsewhere.

"But what in Germany was previously cottage industry financing is now approaching international standards," says Commerzbank's Torsten Hinsche. Guillet agrees. "Financing standards are getting much tougher in Germany -- and closer to what we are doing," he says. But it takes time to spin the necessary web of legal advisors, banker's engineers, technical advisors and due diligence experts. Wind source measuring is a case in point. Where non-German buyers are accustomed to seeing results of site-specific wind measurement, German projects generally only present wind speed forecasts based on average values emerging from multiple wind studies and correlated with wind indexes. It is a "huge problem" in the eyes of the new entrants into German wind power ownership.

Who they are

Corporate and commercial investors prepared to navigate these obstacles include electric utilities and oil firms, pension funds and private equity funds looking to place at least EUR 20 million over a 15 year term and to achieve a post-tax internal rate of return of more than 13%, says Trauboth.

"We have registered interest from British, American and Danish investors in particular," says Angela Meins, wind expert at the Vereins and Westbank, currently merging with the Hypovereinsbank. Big international investors are looking at portfolio financing, creating bigger projects with the possibility of longer tenors and better ratios," says Dexia's Guillet. He thinks they can beat the typical cheap loan financing traditionally provided by the KfW development bank because this is "not so flexible and less-suited to financing portfolios of wind installations."

Direct project sale to corporate investors and private equity funds has several other advantages over classic wind fund financing. "It cuts out soft costs, which include drawing up and marketing wind fund prospectuses that can amount to ten per cent of total project costs," says Trauboth. Money changes hands all at once, rather than trickling in bit by bit from private investors in the wind fund mechanism. Another advantage is that unlike private investors, corporate investors and equity funds are not primarily focused on leveraging tax breaks. This should bring both developers and turbine suppliers welcome relief from the tenterhooks waiting-game, followed by end-of-year stampede in German wind development. Private investors have habitually waited until their tax situation for the year became apparent before making their investment decisions, creating havoc for wind industry cash flows.

Of the few corporate deals done, utilities have been the most active buyers so far. Dutch utility Essent's German wind company, Winkra, bought a 62 MW portfolio from long time wind project developer Windkraft Nord WKN, part of the BGZ group. Spanish energy company EHN, which has stakes in 2500 MW of wind plant, mainly at home, bought 32 MW in Brandenburg from Eno Energiegesellschaft Nordost. And giant utility RWE, through subsidiary Pfalzwerke, has a two-year-old agreement with small wind project developer Jüwi to buy at least some of its completed wind plant.

long term partnership

Among the ranks of private equity investment companies, Denmark's Difko, with a 20-year history in the wind industry, made a splash two months ago by announcing its intention to buy the 20 MW Schönhagen wind station in the state of Brandenburg in the east, its first purchase in Germany. The EUR 30 million project was developed and built by WKN, which, in the words of director Astrid Zielke, is "delighted" by Difko's interest and looks forward to a "long term partnership." Difko's Robert Skjodt also stresses the interest of "our 40,000 Danish investors" in purchases of further German wind projects.

Behinds the scenes, more foreigners are stalking. HgCapital, a leading investor in the European private equity market, is currently considering two German wind portfolios of around 100 MW each, as well as some individual projects. At Dexia Credit, Guillet says his firm "sees strong possibilities for the future." And Babcock & Brown, an international investment firm in which Hypovereinsbank (HVB) has a stake, is currently investigating 100 MW of potential acquisitions, ranging from projects at the development stage to operating wind farms, to add to its other wind interests in Europe, the US and Australia. "We are optimistic about acquiring assets in Germany. There is an advantage to larger portfolios as transaction costs can otherwise be quite high," says the company's Dan Badger.

It is a point that has not escaped the notice of Energiekontor, one of the most established German wind developers that saw its turnover halve in the first six months of the year (Windpower Monthly, October 2004). Like other of its developer competitors, it is inviting corporate and institutional investors to take a seat at the table. Energiekontor's innovative structure for refinancing a portfolio of five operating wind stations in Germany and three wind stations in development in Portugal has prompted praise from the wind finance community. A special-purpose vehicle named Max Two, arranged by HVB to raise money for the Breeze One portfolio, issued EUR 100 million in bonds, with redemption in 2024. The emission was rated at BBB- by international rating agency Standard & Poor's -- good for a non-recourse project financing -- and was the first of its kind for a dedicated wind station financing in Europe (see box next page).

Not all for sale

Other wind developers are evolving other strategies to cope with the disappearance of the traditional investors and lenders, including not selling their projects at all. Plambeck Neue Energien is offering stakes in developed wind stations in an effort to retain the majority share in its asset portfolio and generate "a continuous flow of income from the electricity sales" to allow it to develop more projects. BGZ, with just 6 MW of wind power assets on its books right now, also says it intends to "successively expand its wind energy portfolio" instead of selling projects on as in the past. And Prokon Nord Group will raise money for its pilot 5 MW Multibrid offshore turbine at an onshore site near Bremerhaven using a new investment structure aimed at private individuals. It is currently offering short-term investment opportunities, with an annual interest rate of up to 7% and security for repayment of the investment in full, to private individuals in EUR 5.5 million of its wind plant portfolio. The offering is being exclusively handled by Umweltbank. Most of the money raised will be spent on a biomass project, but some of it will to go the 5 MW prototype.

negotiations

Indeed, opportunities at the private savings level have far from disappeared. In Denmark, stakes are being energetically offered in wind projects over the German border by specialised wind plant operator companies, complete with tax breaks, right down to the level of EUR 1 million per hit and less. Back in Germany, financing company WPD has quietly slipped into action to mop up casualty projects, so far buying about a dozen. "In the large part, we can compensate for earnings deficits through savings in operator costs. With responsibility for more than 500 turbines, we can negotiate better conditions with manufacturers, insurers and banks than individual operators. In many cases we can employ our experience on the technical side to achieve better earnings," says the company.

Last but not least, while the classic wind fund may have lost popularity for the moment, wind project financiers have by no means given up on the evergreen favourite. "Just like the new market era, the excitement has passed and sense now prevails. More effort is required but there is more quality. Wind funds were never as good as they are now," claims Marcus Brian of Das Grüne Emissionshaus and points to his company's latest EUR 24.5 million closed-end fund for 61.5 MW of turbines in operation at four German sites since 2003, built for EUR 88.9 million. Marketing of the fund is underway in co-operation with Deutsche Structured Finance, a 100% subsidiary of the Aareal bank, the company says.