German banks the lead lenders in America
Of the around ten banks active as lead lenders in the US wind market in 2006, no less than four are from Germany, where they built up years of expertise in lending to wind projects in their home market. Together the four provided loans amounting to $4.7 billion to the US wind industry last year, or nearly half the total lent by the top ten, reports Jeff Chester of Kaye Scholer LLP, a provider of legal services. Of the two German banks heading the top ten list, Bayern LB is a nose in front of HSH Nordbank. But it is HSH Nordbank that leads the way on a new financial spin in the wind business -- loans to secure advance orders for wind turbine supply. It recently struck a deal with project developer Invenergy covering an order for 67 GE turbines (Windpower Monthly, March 2007) and Chester reports that HSH Nordbank provided a $310 million turbine supply loan to developer UPC last year.
Looking aside from the refinancing of existing wind projects in the US, HSH Nordbank confirms it underwrote just under $1.1 billion as lead arranger for new projects and turbine supply loans in the United States. Including Canada, the figure reached just under $1.2 billion.
"To get our start in the US market, we got the wind industry sector knowledge from our colleagues in Germany," says Tom Emmons, who heads the bank's New York team doing business in power, oil and gas. Wind and renewables is the largest sub-section in the power sector. "We got lots of support, learned from them and started to participate in project finance deals in 2003 and 2004. We began to seek the role of lead arranger in 2004 -- and in 2005 and 2006 we believe we were the most active bank underwriter in wind in the US," says Emmons. The New York branch was set up in 2002 by Landesbank Schleswig-Holstein shortly before its merger with another federal state-owned bank, Hamburgische Landesbank, to create HSH Nordbank in 2003.
HSH Nordbank has helped expand renewables financing in the US, says Emmons. "Most banks in the US were not familiar with these deals. But the situation evolved very dynamically and now products developed in the US are being introduced back to Europe," he says.
A case in point are turbine supply loans: "This is a new need because the turbine manufacturers want more money earlier under their contract terms. In the past they required very low, or no down payment and would defer receipt of funds until financial closing was done. Now that turbines are in short supply, the manufacturers require payments earlier, before financial closing, so money is borrowed to purchase turbines, and these loans are then refinanced by the project financing at financial closing," explains Emmons. The idea is not new, he adds. In the 1990s, similar loan types were used to finance the purchase of gas turbines in America. "Wind plants are just a different type of turbine."
More of it all
Faced with growing competition in North America, HSH Nordbank is intent on being "innovative" and "responsive," says Emmons. "We operate in an environment with many funding sources other than bank loans and look for the best ways to adapt our core product to clients' needs, as well as assist them in tapping other appropriate sources. In the future we expect more of all the following: portfolio financing, corporate financings, and investments from infrastructure and other types of funds." Innovative use of bonds is on the list too.
While predominantly focused on debt financing, HSH Nordbank is not averse to grasping other opportunities. Acquisition of a minority stake in Canadian wind project developer Skypower last year "was an opportunistic move where we saw positive prospects in the fast-growing Canadian market and came to discuss the equity stake," says Emmons. It is a permanent investment with no automatic exit, he adds. Although not an exclusive arrangement, Skypower has become an HSH Nordbank client. "We want to support their activities and increase the value of the company," says Emmons.
Europe and Asia
HSH Nordbank draws on the early experience gained by the former Landesbank Schleswig-Holstein (LSH) in the "back garage style" wind project financing that developed in Germany in the mid 1990s. When Commerzbank, once the heavyweight in the German wind market, reduced its wind market activities at the start of this decade, LSH stepped into the gap. The merger to create HSH Nordbank triggered the starting point for a new, honed focus on wind and renewable energies.
"The market was very keen on finding new sources of finance and so it was decided to establish a special group of people, taken from various departments -- project finance, international finance, corporates -- to handle only energy," says Nikolai Ulrich, HSH Nordbank's head of project and export finance. In wind energy project financing alone, the bank underwrote about EUR 400 million in Europe in 2006, he says. The lower sum in Europe compared to that in the US reflects the generally smaller project size, he says.
For the next three to five years, HSH Nordbank has no volume targets, only income targets and returns targets, says Ulrich. He sees significant growth in European renewables markets and says the bank intends to maintain its lead position. Aside from in Germany, a relatively mature market, he sees opportunities in France, Italy, the UK, Poland, the Baltic states, Belgium and Croatia with its long coast line.
"There's enough to do within a two hour flight time. We follow the manufacturers and developers and certain sponsors. Wherever they go we try to provide them with the best financing. There is often experience from previous deals; this is still a people-driven business," he says.
Back in the United States, a market expected to grow even faster than that of Europe, Emmons concurs with Ulrich's assessment. "We aim to keep up with that growth and grow with it," he says. Opportunities in Asia are currently more limited, though. "Asia is a very liquid market, they don't really need us to finance their projects," regrets Ulrich.
The bank also has its eye to the offshore market. "Whether an offshore project financing will materialise this year is hard to say. Lead times are fairly long," says Ulrich. HS Nordbank participated in the syndicate of bank lenders in the first project financing of an offshore wind farm, the 120 MW Q7 project being built in the Dutch North Sea. It has also been financial advisor to the 240 MW Butendiek "people's project" in the German North Sea, now owned by Ireland's Airtricity. "The Q7 project has shown that offshore is ready for project financing. The question is how many projects have strong enough credentials?" asks Ulrich.