Renewable energy project finance A product that FITs? Chris Rodgers 19 Mar 2014
Agenda Renewable Energy Finance 1. Introduction to Close Brothers & our Energy Team 2. The current 1-15m renewable energy project finance market supply vs. demand 3. Project finance a workable compromise? 4. Our opinion of future finance offerings & the future of project finance 5. Making your project financable Strictly confidential 2
Close Brothers Energy Team Company Information The Bank FTSE 250 company Over 2,700 employees principally in the UK Tier 1 Capital Ratio of 13.2% Moodys Rating Baa1/P2 Investment Grade The New Energy Team Team of 5 senior personnel moved across from the Co-op Bank s renewable team Core team that was responsible for lending 700m into the sector New senior debt project finance lending platform Current approval for 300m of lending into the renewables sector with a further 200m for energy efficiency projects Finalising sector papers and processes Vast experience covering onshore wind & hydro with strong in life loan servicing experience Strictly confidential 3
Close Brothers Energy Team Our Offering Sectors Onshore wind; Hydro; Ground mounted solar; Energy efficiency. Lending Parameters 1m- 15m per project; Construction loan of up to 18 months; 15 year amortising term loan with break after 7 years of operations; P90 DSCR covenant of 1.25-1.35x; No cash sweeps or lock ups to reduce bullet repayment (the developer knows where they stand). Strictly confidential 4
Barriers to Embedded Projects Senior Debt Capital Only One Contributor Embedded Small and Medium projects ( up to 15m) are key to Indigenous Development and retaining economic prosperity locally in communities; Liquidity in Capital Markets is only one of the key issues Political Regulatory Financial Impact of large rent and impact on Equity Contributions required ( 10 12.5% of turnover) Equity Capital New market entrants offering tranches of senior debt but tied to equity participation i.e (50%). Encourages high leverage to maximise equity returns but equity and debt provider has benefit of having senior debt levels of security. A very simple but clever product being offered by some VCTs but higher value leakage and risk for developer. However, need less or no equity.. Strictly confidential 5
Project finance - supply vs. demand Is there market failure for sub- 15m renewable energy finance? Project Demand Onshore wind and hydro with urgent financing requirement due to degression on FIT Supply Limited capital pool and issues with deliverability causing programme risk. What if a deadline is missed grid? commissioning? Term Finance Fully amortising mortgage style loan with loan term mirroring the life of the asset Senior debt product secured by the project cashflows. Extremely strong demand for sub 5m financing. Short term loans amortised over the asset life with large bullet repayments semi perm structure creates future interest rate and affordability risk. Funds, equity, some project finance, asset backed lending. Portfolio finance with cross securitisation. Control Having the ability to take key project decisions maximising upside. Detailed Facility Agreements setting out terms of finance and how you run your project. FIT technologie s All technologies from 250kW wind to 2MW hydro schemes Finance restricted to 1m and upwards loans with a market focus on onshore wind. In FIT market the manufacturer and supply chain is key (vendor based finance). Strictly confidential 6
Project finance Finding a compromise Term Finance Control Roadblocks Basel 3 Capital requirements Bank s need to make a return on investment to remain in business! There are not enough players in the market and each must conform to their own credit requirements High leverage on transactions will mean the majority of project risk lies with the funder Will it work for a Developer? Semi-perm structures secure finance and provide options at the refinance point the project performance will dictate where the balance of power lies at the refinance - Close Brothers - Santander - ING (larger) - Triodos - Nord LB (larger) - Gravis - GIB in future? - Equity funds offering debt The funders interests will be aligned with your own for the majority of points All FIT technologie s Due diligence costs are high and do not vary with project size. Sector and financiers have not spent the required time developing standardised documents and efficient processes (no reason not to reach FC in 6-8 weeks) There is a limited expertise in the finance market outside onshore wind. Sub 1m project finance is not economically viable for a developer Close Brothers have standardised processes and working on standard legal documentation and financial models. Strictly confidential 7
Future finance offerings Our opinion Continuing market focus on relationship clients More alignment to vendor finance financial strength of manufacturer crucial Issues we needed to address for our credit committee to enter the sector: FIT degression - hugely significant to hydro sector Future ROC price predictions and issues with market saturation Need for long term PPA with flexibility to maximise liquidity in energy trading EMR Independence? Grid Strictly confidential 8
The future for Project Finance Our view 1) Listed debt fund offering long term funding Significant amount of equity funds listed last year/this year but have equity risk. If assets are de-risked through construction then the investor has the opportunity to invest with first ranking security. Banks warehousing deals at the smaller/medium end to aggregate into larger ticket size of operating assets Good technology mix required Is the fund rated or privately placed? Infrastructure debt funds popular in North America & Australia 2) Opportunities in bond market 3) Community investment debentures i.e. Abundance Generation model Finance sector needs greater level of expertise at this funding level Strictly confidential 9
Project Finance Making your project financable How you can develop your project to get to the top of a funders queue Choose an established technology manufacturer. Employ legal advisors experienced in the sector ensure contracts are drafted in standard and bankable formats from the outset. Early dialogue with funders will ensure appropriate template documents are used. Land issues are the biggest a clear COT is crucial or title indemnity insurance. Employ a financial advisor experienced in the sector. We use a standard financial model. Use experienced contractors. Some banks focus on the balance sheet strength of civils contractors, we focus on local experience of similar projects and ground conditions Ensure cash is available (retention or otherwise)to remobilise contractors to site. Performance bonds are unpopular and less effective at achieving this Present bankable assumptions. There is large variability in wind and hydrology assumptions so where onsite data is not available ensure appropriate errors and discount methodology are used in your P90. Strictly confidential 10
Contact Details Scotland Based Team CHRIS RODGERS 1 st Floor, Lomond House, 9 George Square, Glasgow, G2 1DY E: chris.rodgers@closebrothers.com M: 07718 114 758 SARAH QUEEN Saltire Court, 3 rd Floor West Wing, 20 Castle Terrace, Edinburgh, EH1 2EN E: sarah.queen@closebrothers.com M: 07725 218 358 Strictly confidential 11