Max two breezes into the bond market

The revolution in German wind plant financing -- from projects owned by limited partnerships to large scale commercial financing -- is no better demonstrated than by Energikontor's successful approach to the bond market to finance and re-finance a portfolio of existing and new projects in Germany and Portugal. The Max Two/Breeze One deal, just completed, is Europe's first serious bond market financing of a wind project portfolio.

The idea for the bond financing was developed by Hypovereinsbank after Energiekontor, an established development company for smaller wind stations, had approached the bank with questions about structuring the financial side of its expanding business. What emerged was a "structured basket bond covering a portfolio of stand-alone projects," says the bank's Kai Frömert.

A special purpose vehicle, Max Two Ltd, was set up as the issuer of EUR 100 million of notes to raise money for eight projects, five operating wind plant in Germany and three under development in Portugal. The actual transaction was dubbed Breeze One.

The German wind stations in the portfolio, with a combined capacity of 47.5 MW, had all been financed with closed-end wind funds using cheap loans from development bank KfW (main story). There was no real need to refinance these stations, but an " optimisation" was possible, raising the rate of return for the owners, says Frömert. The optimisation was achieved largely by lengthening the financing period from 12 or 15 years to 20 years. Free cash was generated, dividends and rate of return were raised.

The interest rate was slightly higher than the KfW rate, but this was compensated for by stretching the financing over 20 years. Releasing the projects from the KfW loans was not a problem. It took five working days to cancel them and there was no premium to pay.

It was important to mix existing wind farms with green fields developments, says Frömert. The track record of the operating plants pleased both investors and the rating agencies. In rating the bond, Standard & Poor's took the weakest link approach: the rating of BBB- was determined by the weakest project, one of the German wind plant. The average rating would have been higher, but Standard & Poor's did not indicate what this would have been.

Institutional investors

The bond was sold to institutional investors in Europe, mainly in the UK. Buyers were "between five and ten institutions mainly banks and insurance companies." The roadshow to market the bonds was in July and August. Pre-marketing contacts had been made to get tips for fine tuning and the product was ready at the end of August. It took about a month to sell. The bond price was 175.6 points above the price of a ten-year government bond issue, says Frömert.

The cross-border portfolio of German and Portuguese projects came about by chance. Energiekontor happened to be developing the three projects in Portugal, with a combined capacity of 33.8 MW, and Hypovereinsbank decided to combine them into the portfolio to add diversification and because the Portuguese market structure, like that in Germany, provides guaranteed purchase prices.

Indeed, in giving the bond emission a rating of BBB-, Standard & Poor's stated: "The key support for the senior debt is in the benign regulatory regime in Germany and Portugal for renewable energies, which provide for long term offtake arrangements and price stability." The rating agency added that the "key weakness" was "exposure to wind as a fuel source that cannot be controlled and that can vary substantially over time."

Having spent a lot of time on this first bond issue, Hypovereinsbank is keen to develop and market follow-up products. Checking the cash flows of each individual wind station in the portfolio was time consuming, as was the documentation, including credit contracts with each individual wind station, it points out. The bank already has contact with several wind station operators, developers and manufacturers "with whom possibilities are being explored."

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