Infrastructure Project Finance using Debt Fund Vehicles Ralf Garrn, Managing Director Euler Hermes Rating GmbH
Agenda 1 Introduction to Euler Hermes 2 Capital Market Union 3 Renewable Project Finance Ratings 4 Credit Funds Vienna, October 20th 2016 2
1 1 Introduction to Euler Hermes 2 Capital Market Union 3 Renewable Project Finance Ratings 4 Credit Funds 3
Euler Hermes Rating, the European rating agency Facts and Figures Rating agency since 2001 Around 500 issuer and issuance ratings Active in 15 European countries ESMA-registered rating agency and EBA-approved ECAI Corporate ratings SME ratings Financial institutions ratings Project finance ratings Structured finance ratings Investors services Owned by Euler Hermes & Moody s Investors Service A company of Allianz 4
Euler Hermes Group Euler Hermes tracks companies in markets representing 92% of the world s GDP 5
References Investors and Arranger 6 6
2 1 Introduction to Euler Hermes 2 Capital Market Union 3 Renewable Project Finance Ratings 4 Credit Funds 7
Key Principles of the Capital Marktet Union Creating more opportunities for investors: help mobilize capital in Europe and channel it to infrastructure projects Connecting financing to the real economy: the CMU is a classic single market project for the benefit of all 28 Member States... Fostering a stronger and more resilient financial system: Opening up a wider range of funding sources and more long-term investment Deepening financial integration and increasing competition: more cross-border risk-sharing and more liquid markets... 8
Capital Marktet Union Actions New rules on securitisation: create a regulatory framework for securitisation which is simple, transparent and standardized and subject to adequate supervisory control New rules on Solvency II treatment of infrastructure projects: todays legislation creates a distinct infrastructure asset class that reduces the amount of capital which insurers must hold against the debt and equity of qualifying infrastructure projects... Public consultation on venture capital: debate changes to EU venture capital investment funds to boost the use of these investment funds for SME financing Public consultation on covered bonds: major tool for long-term to the real estate market and public sector a pan-european framework to be established potentially also for SME financing Cumulative impact of financial legislation: identify possible inconsistencies, incoherence and gaps in financial rules, as well as unnecessary regulatory burdens and factors negatively affecting long-term investment and growth... For more information view this link: https://www.youtube.com/watch?v=rvvgsm3tn7a 9
Agenda 3 1 Introduction to Euler Hermes 2 Capital Market Union 3 Renewable Project Finance Ratings 4 Credit Funds 10
References Renewable Energy Projects Broad coverage of the (renewable) energy sector and the value chain Project ratings in PV, Wind-Onshore, Wind-Offshore (total volume > 3 billion) Investment Fund related Structured Finance Ratings (total volume > 1 billion) Broad acceptance with investors and arrangers Europe Renewable Deal of the Year 11
Project Financing in Renewable Energy Public Entities Equity Sponsor Renewable Energy Project Debt Insert text Banks, Institutional Investors, Insurance Companies (Don t change the size of the notepad. Textbox without color!) Off-Taker(s) Concessions, Permits, etc. Regulatory Support (i.e. FIT), Power Purchase Agreement (PPA) Operator Contractor(s) Operations- and Maintenance Agreement (OMA) Construction Agreement (CA) 12
Rating Methodology: Overview Project Risk Operational Risk Potential adjustments to the anchor rating as a result of the operational risk assessment lead to a stand-alone rating. ANCHOR RATING Modifier 1 STAND ALONE RATING Financial Risk Insert text The combination of project risk and financial risk determines the anchor rating via standardised and analysts based weightings. (Don t change the size of the notepad. Textbox without color!) The additional consideration of various notching factors leads to the final project rating. Modifier 2 Notching Factors PROJECT RATING 13
Anchor Rating: Project Risk Quality of Cash flows Predictability and stability of revenues (e.g. resource risk, price risk) Quality and structure of offtake arrangements (e.g. EEG, PPA etc.) Counterparty risk associated with off-takers Diversification of cash flows Market Competitiveness & Regulatory Environment Cost competiveness of project (e.g. electricity generation costs vs. market price) Quality of support from the regulatory environment (e.g. FIT regime) Stability of the regulatory environment (e.g. track record) Technical Risk Quality of & experience with deployed technology Warranties / performance guarantees from OEMs Contractors experience and creditworthiness Assessment of (new) technology risk based on jointly developed standards with Fraunhofer ISE / VDE / Allianz Climate Solutions Operating Risk Quality of the Operation & Maintenance Agreement (OMA) Experience / creditworthiness of the O&M provider Creditworthiness of the sponsor Risk assessment supported by Allianz Climate Solutions Sub Factor Scoring Range AAA-CCC Sub Factor Scoring Range AAA-CCC Sub Factor Scoring Range AAA-CCC Sub Factor Scoring Range AAA-CCC Standard & Analyst based weightings PROJECT RISK 14
Example: Project Risk AA A BBB BB B CCC Quality of Cashflows X Markt Competitiveness & Regulaory Environemnt X Technical Risk X Operating Risk X Quality of Cash flows low resource risk by conservative probability scenarios (i.e. P90/P99) low price risk through c.100% contract coverage during the full financing term (i.e. FIT or PPA) low counterparty risk with off-takers (i.e. Germany / Siemens) Market Competitiveness & Regulatory Environment little risk of a change in law or of supportive regulation eroding of time (Germany) the price for renewable energy is near prices for other renewable energy sources (offshore wind) Technical Risk proven technological or limited experience (i.e. in Siemens SWT-6.0-154) warranties and/or performance guaranties for equipment from creditworthy vendor (i.e. Siemens) Operating Risk O&M contract with highly recognized and creditworthy operator (i.e. DONG Energy) Sponsor commitment (i.e. contingencies) 15
Anchor Rating: Financial Risk Financial Analysis Repayment Schedule Amortising Structure (Full/Partial Amortisation) Debt Service Coverage Ratio (DSCR) Cash flow Available for Debt Service (CFADS) FFO / Total Debt CFADS / Debt Service Scenario Analysis Focus: Debt Service Coverage Stress Tests Simulation Monte Carlo Simulation FINANCIAL RISK PROJECT RISK ANCHOR-RATING 16
Example: Financial Risk YIELD SCENARIO AVAILABILITY SCENARIO COST OVERRUN SCENARIO WAKE LOSS SCENARIO Average ADSCR Minimum ADSCR Base Case P 50 96% 100% 2% 1,60 1,50 NA Rating Case P 90 94% 150% 8% 1,35 1,35 BBB Stress Cases P 99 90% 200% 10% 1,07 1,00 NA Rating Renewable Energy Projects without Operating Track Record EHR will use the most likely cash flow projections (e.g. P 90) applying own assumptions on operating parameters (Rating Case) running sensitivity cases (e.g. overrun on OPEX, CAPEX etc.) Different Valuation Schemes depending on Project Structure full amortizing structure non-amortizing structure 17
Modifiers: Operational Risk Management: Strategy, Track-Record, etc. Organisational structure / Governance: Project complexity, etc. Insurance coverage: preferably all-risk insurance, including business interruption Construction risk: preferably turnkey, fixed price, date certain, EPC contract, etc. Event risk: unexpected events, etc. 18
Example: Operational Risk/Notching UPWARDS UNCHANGED DOWNWARDS Construction Risk Liquidity X X Refinancing Risk X Structural subordination Recovery X X Construction Risk Further adjustments depend on the ratio of construction risk vs. project risk Further adjustments depend on EPC contractor and the contractual agreement Further adjustments depend on liquidity reserves in case of delays and cost overruns Liquidity Further adjustments depend on the quality of the Debt Service Reserve Account (min. 6 month) Refinancing Risk Further adjustments depend on the ratio of original vs. outstanding debt balance at maturity Structural Subordination Further adjustments depend on the ratio of consolidated debt at project level Recovery Further adjustments depend on the outcome of the recovery analysis 19
Modifiers: Notching Factors Strength of Security / Financing Structure: Non-recourse structure, sponsor capital, (sponsor) guarantees, L/C, ECL, credit insurance, etc. Strength of Liquidity Facilities: DSRA, MRA, etc. (min. of 6 month required) Refinancing risk: outstanding debt balance, etc. Structural subordination: ranking / waterfall, etc. Recovery 20
Agenda 4 1 Introduction to Euler Hermes 2 Capital Market Union 3 Renewable Project Finance Ratings 4 Credit Funds 21
Unitranche Credit Funds Credit funds as equity investment Securitized credit funds Corporate Loans Leveraged Loans Mezzanine capital Infrastructure loans Trade receivables Leasing Assetclass Fondstype Sector Corporates Renewable energy Real estate Aircraft Shipping 22
Procects Neuere Entwicklungen Corporates /SME s Asset classes Corporate Loans Leveraged Loans Mezzanine capital Low yield and low demand with German corporates Attractive investments in Spain, Italy, etc. Higher yield and collateral Dominated by classical securitzation transactions Regional diversified Attraktive yield Some German transactions High transaction specific safety mechanisms necessary Infrastructure / Real estate Trade receivables Leasing Attractive yield in exotic countries Predominantely renewable energy, real estate and aircraft Extensive expertise in risk evaluation necessary Often very complex finance structures Demand especially in supply chain finance Globale transactions High transaction complexty Often very special leasing debt Generally good risk return balance Depending on sector often high expertise in risk evaluation necessary 23
Assessing Credit Funds Minimum number of underlying assets: 20 for corporate debt, 5 for infrastructure debt Corporate loans, mortgage loans, consumer loans, project financing, lease receivables,... Underlying assets Risk assessment Credit opinions for non-granular portfolios (20 50) Model-driven risk assessments for semi-granular portfolios (50 500) Statistical approach for highly granular portfolios (>500) Monitoring throughout the life of the portfolio Periodic re-assessment of credit risk Ongoing monitoring through additional sources of information Monitoring 24
Portfolio loss vs. loss coverage Portfolio loss distribution Estimation through Monte Carlo simulation based on portfolio parameters and assumptions Portfolio rating = two-stage approach Stress and sensitivity scenarios Cash flow model Estimation of expected debt service coverage based on cash reserve, credit enhancement, tranching,... Debt service: Repayment of investment and coupon throughout the life of the portfolio 25
The modelling exercise Portfolio loss distribution Frequency Quantile underlying assets interest rate = 5% p.a. 12.00% 120.00% 10.00% 100.00% confidence level 8.00% 80.00% fees = 1% p.a. 6.00% 60.00% 4.00% 2.00% 40.00% 20.00% investors coupon rate = 3.25% p.a. 0.00% 0.00% 0.69% 1.37% 2.06% 2.74% 3.43% 4.11% 4.80% 5.48% 6.17% 6.85% 7.54% 8.22% 8.90% 9.59% 10.27% 10.96% 11.64% 12.33% 13.01% 13.70% 14.38% 15.07% 15.75% 16.44% 17.12% 17.81% 18.49% 19.18% 19.86% 20.54% 21.23% 0.00% excess spread = asset interest rate fees issue coupon rate = 0.75% p.a. excess spread over the life of the portfolio (10y) = 7.5% 26
Beyond pure quantitative considerations... Structured finance instrument is issued via Insolvency-remote special purpose vehicle (set up mainly in Luxembourg or Ireland) Comparable structure Issuance rating is based on portfolio rating and adjusted for qualitative assessments such as Realisation of assumed recovery rates over time Appropriate choice of obligors and underlying assets Reactions to worsening of portfolio rating Legal issues relating to agreements or prospectuses Reliability and creditworthiness of service providers Characteristics during ramp-up and divestment periods Legal and regulatory risks 27
The full picture Modular design of the rating process for more transparency Risk assessment of underlying assets Portfolio risk assessment Credit Fund Rating Cash flow modelling Qualitative assessment 28
Contact Ralf Garrn, Managing Director Torsten Schellscheidt, Lead Analyst Renewables Euler Hermes Rating GmbH Friedensallee 254 22763 Hamburg Phone: +49 40 88 34-640 Fax: +49 40 88 34-6413 E-mail: ralf.garrn@eulerhermes-rating.com E-mail: torsten.schellscheidt@eulerhermes-rating.com Vienna, 29 October 20 th, 2016 29