Unicredit s Involvement in Renewable Energy Project Finance in Italy and in the CEE Region

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1 Verona, 7-8 October 2010 Unicredit s Involvement in Renewable Energy Project Finance in Italy and in the CEE Region Application Prospects in Russia Paolo Bozzolo Project and Commodity Finance Corporate and Investment Banking

2 Project Financing in the Energy Sector Significant Growth Strong local roots in 22 European countries Approx. 162,000 employees Approx. 9,600 branches Operating income EUR 6,806 mn Operating profit EUR 2,928 mn A/Aa3/A long-term ratings 2 (S&P, Moody s, Fitch Ratings) Core tier I stable at 8.45% (-2 bps q/q) Home markets Germany, Italy, Austria, Central and Eastern Europe (CEE) Unrivalled network in CEE with local banks in: Azerbaijan Bosnia-Herzegovina Bulgaria Croatia Czech Republic Estonia Hungary Kazakhstan Kyrgyzstan Latvia Lithuania Poland Romania Russia Serbia Slovakia Slovenia Turkey Ukraine 22

3 European Project Finance Loans 2009 MLAs Global project finance renewables H MLAs Volume USD mn No of Deals 1 Santander 3, BBVA 2, UniCredit Group 1, SG CIB 1, Calyon 1, BNP Paribas SA 1, Sumitomo Mitsui Banking Corp 1, Caixa Geral de Depositos 1, Caja Madrid 1, La Caixa 1, Source: Dealogic Best Project Finance House in CEE Best Project Finance House in CEE Best Deal of the Year 2009 Volume USD mn No. of Deals 1 Santander BBVA Bank of Tokyo-Mitsubishi UFJ La Caixa UniCredit Group Crédit Agricole Group Caja Madrid Dexia Group Société Générale HSH Nordbank Source: Infrastructure Journal European Gas Deal of the Year 2009 European Infrastructure Deal of the Year 2009 Asia Pacific Oil & Gas Deal of the Year 2009 Tatneft Nord Stream Phase 1 R1 Expressway Slovakia PNG LNG 33

4 Power generation market facts, characteristics and trends Global electricity consumption (in TWh; CAGR in %) Global power market investments ( E, in USD bn) CAGR 04-19: +4.2% E 2019E Source: HSBC; Frost & Sullivan, EIA CAGR Rest of World +4.6% Emerging Asia+9.3% Europe +1.2% United States +0.9% Source: HSBC, McCoy Gas Coal Nuclear Renewables (incl. Hydro) Rest of World Emerging Asia Europe United States Conventional power plant instal E (in GW) , , ,0 165,0 48,0 47,5 0 Europe US Emerging Asia Replacement of old capacity Capacity expansion Source: HSBC Comments Global electricity consumption expected to rise within the next 10 years with ca. 4% p.a. mainly due to increasing energy use per capita in growing emerging markets Despite the boom in the renewables industry, more than USD 1,000 bn are expected to be invested in gas and coal fired power generation plants over the next decade Investments in transmission lines expected to be over USD 2,000 bn for E but to be mainly covered by national and regional utility companies 4 4

5 5 Project Financing in the Energy Sector Significant Growth

6 6 Project Financing is a financing technique utilized to provide debt capital for investments in energy and other types of infrastructure, including facilities dedicated to the generation of renewable energy (photovoltaic/wind/hydroelectric and biomass).

7 Project Financing in the Renewable Energy Sector The Fundamental Concepts Separation of the specific initiative from the other businesses conducted by Sponsors. Segregation of the project s assets and cash flows from a structural standpoint. Non-Recourse reimbursement of debt solely based on the project s capacity to generate revenues and on lenders ability to dispose of security package. Relevance of Public Incentives returns on investments in the renewable energy sector are at the moment underpinned by subsidised schemes/tarifs which vary acording to the jurisdiction where they are located. 7

8 Project Financing of a Renewble Energy Project: The Risk Identification and Allocation Process (1) Regulatory Risks Legal framework: completeness, clarity and certainty, stability. Permits/Authorizations - related Risks Dealt with through compliance with all applicable legislation (state, regional, local). All permits and authorisations must be in place before first debt utilisation (first drawdown). Construction Risks Delivery delays, failure to achieve performance standards, increased construction costs. Usually dealt with through an EPC Contract. Generation Volume Risk Level of solar irradiation/wind resource, energy transformation rates below base case expectations. Dealt with through the selection of reliable suppliers and EPC Contractors. Appropriate DSCR ratios. 8

9 Project Financing of a Renewble Energy Project: The Risk Identification and Allocation Process (2) O&M Risk Pannel degradation/wind turbine availability below Base Case expectations. Dealt with through the selection of reliable operators unde solid O&M contracts. Solid DSCR cover ratios. Market/Price Risks Limited to a small portion of revenues. Financial Risks Risk of interest rates increases. Dealt with through the requirement imposed upon the project company to enter into hedging instruments. Country Risk Currency Devaluation/Transfer Risk. Expropriation 9

10 ERG EOLICA GINESTRA S.R.L Example of a Project Financing in the Italian Wind Sector 40 MW WIND PARK Unicredit has structured the financing for the construction of a 40 MW wind power park located in the Campania Region of Italy sponsored by ERG S.p.A., a major Italian corporate. The financing, with a duration fo 15 years and for an amount equivalent to circa. 75 ml, consists of two financing tranches: A Senior Tranche, covering 75% of project investment costs; A VAT Tranche, covering related VAT expenses. Reimbursement of debt has been sculpted on the basis of available cash flow deriving from the sale of electric energy and green certificates (under a 15-year special regime). 10

11 Indicative Term Sheet for a Wind Park Project Finance in Italy Availability Period: up to 24 months Tenor : up to 15 years post-construction Leverage: 80:20 D/E Reimbursement Profile Fully amortising throughout loan life Minimum and Average Debt Service Cover Ratios: 1,45-1,50 (probability of exceedence = P75) Cash Sweeps: Depending upon structure VAT Facility: 100% financed 11

12 ASI Cellino San Marco Srl Example of a Project Financing in the Italian PV Sector 41 MW PV PARK Unicredit has structured the financing for the construction and operation of a 41 MW PV power park located in the Puglia Region of Italy sponsored by AES Solar., a major US player. The financing, with a duration of 18 years and for an amount equivalent to circa. 111,4 ml, consists of two financing tranches: A 95,7 ml Senior Tranche, covering 80% of project investment costs; A 15,7 VAT Tranche, covering related VAT expenses. Reimbursement of debt has been sculpted on the basis of available cash flow deriving from the sale of electric energy and green certificates (under a 15-year special regime). 12

13 Indicative Term Sheet for a PV Park Project Finance in Italy Availability Period: up to 12 months Tenor : up to 18 years post-construction Leverage: Up to 80:20 D/E Reimbursement Profile Fully amortising throughout loan life Minimum and Average Debt Service Cover Ratios: 1,30-1,35 (probability of exceedence = P50) Cash Sweeps: Mild VAT Facility: 100% financed 13

14 AES GEO ENERGY OOD Example of a Project Financing in the Wind Sector in a CEE Country ( Bulgaria) 156 MW WIND PARK UniCredit together with EIB and EBRD has structured the financing for the construction and operation of a 156 MW Wind power park located in the Kavarna Region of Bulgaria sponsored by AES, a global player headquartered in the US. The financing, with a duration of 16.5 years (1.5y + 15y) and for an amount 223 ml, consisting of two financing tranches: A 198 ml EBRD and IFC A/B term loan A 25 ml VAT Tranche, covering related VAT expenses. Reimbursement of debt has been sculpted on the basis of available cash flow deriving from the sale of electric energy (under a 15-year special regime). 14

15 Indicative Term Sheet for a Wind Park Project Finance in the CEE Region (Bulgaria) Availability Period: up to 18 months Tenor : up to 15 years post-construction Leverage: Up to 75:25 D/E Reimbursement Profile Fully amortising throughout loan life Minimum and Average Debt Service Cover Ratios: 1,20-1,25 (probability of exceedence = P90) Cash Sweeps: Mild VAT Facility: 100% financed 15

16 The Credit Crunch Changes in the Market Overview Worsening market conditions in 2008 precipitated during Q4 leading to the nationalisation/bail out of a number of financial institutions. Nationalisations are leading to a forced refocus on home/core markets and core clients ( regionalisation of liquidity ). Pervasive constraints on bank capital have resulted in reduced appetite for new business as well as for holds in each transaction. The market is virtually closed for underwritings leading to the implementation of new transactions on a Club Deal basis. Large project finance transactions may fail without the intervention of multilateral institutions/governement agencies. Pricing for new transactions is being set at record-high levels due to the high funding costs banks are currently subject to. 16

17 The Credit Crunch Impact on Project Finance for Photovoltaic Projects Fewer Project Finance players (due to nationalisations, changes in bank strategy, regionalization of liquidity and reduced availability of long term funds) are available to finance the sector. Reduction in Banks hold appetite and unavailability of underwritings have resulted in a series of transactions being financed on a Club Deal basis. Club Deal approach requires a book building philosophy where management of available liquidity is key. Club Deals are resulting in more robust structures dictated by the lowest common denominator. Financing structures favor top sponsors and panel manufacturers/suppliers, EPC wraps (Contratto di Costruzione/Fornitura Unico), conservative initial Debt/Equity ratios, conservative Debt Service Cover Ratios, conservative tenors (leaving a 2-year tail between the final maturity date and the end of the conto energia period. Increased closing risk for transactions. 17

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