Financing offshore wind

Financing offshore wind Copenhagen 4 November Marie de Graaf m.degraaf@green-­‐giraffe.eu +31646318495 green-­‐giraffe.eu Financing offshore wind Table of contents 1.  GGEB introduc7on 2.  How projects are financed 3.  The debt market 4.  Risk analysis by the lenders 5.  How to approach project finance 6.  What GGEB can do for you 2 1. GGEB introduc7on – the offshore wind finance specialists We have an unparalleled track record in successfully closing deals for our clients •  19 professionals in London (UK), Paris (FR), Utrecht (NL) and Hamburg (DE) •  Project & structured finance, full scope equity advisory and contrac\ng exper\se •  Focus on renewables and specifically offshore wind Advisor to C-­‐Power to raise project finance debt 325 MW Advisor to Northwind to raise project finance debt 216 MW Non-­‐recourse financing of 25% stake in Walney offshore wind farm 367 MW (Sponsor) Belgium 2010 Belgium 2012 UK 2012 Advisor to WindMW to raise project finance debt 288 MW Financial advisory services French offshore wind tender 1,428 MW Advisor to Highland in the acquisi7on of the Deutsche Bucht project 210 MW Highland Group Holdings Germany The Blackstone Group
Germany 2011 ®
(Sponsor) France 2012 2012 3 Financing offshore wind Table of contents 1.  GGEB introduc\on 2.  How projects are financed 3.  The debt market 4.  Risk analysis by the lenders 5.  How to approach project finance 6.  What GGEB can do for you 4 2. How projects are financed “Balance sheet” vs “non recourse finance” Large projects are typically developed through a stand alone project company •  Owned by the project investors •  With its own revenues & balance sheet and thus the ability to raise debt on its own merits There are only two discrete sources of funding •  By the owners (directly via equity or shareholder loans, or indirectly via guarantees) •  By banks without recourse to the equity investors – this is “project finance” Equity Debt Sponsor(s) Lenders Dividends Debt service Project company The way a project is funded will have a material impact on how it deals with contractors •  In a project finance deal, you need to deal with the banks’ requirements! Direct contractors have a direct incen7ve to understand who will be funding the project 5 2. How projects are financed – non recourse debt No recourse No upside Recourse to investors is contractually limited Lenders receive a fixed remunera7on •  Lenders rely on project revenues only Capital intensive projects requiring long term financing •  Lenders need LT opera\onal performance •  Lenders do not benefit from beeer performance Low single digits margins vs high leverage •  Risks to be commensurate to remunera\on Lenders need to make sure that the project works on a standalone basis, with no third party commitments than those made at financial close. Such commitments must be realis;c, credible and durable, both contractually and economically Lenders need risks to be measurable and to have probabili;es of occurring in the low single digits for investment to make sense. Risks which are (seen as) well understood are thus easier to bear This typically entails very detailed contractual frameworks and extensive due diligence Project finance lenders will usually have priority access to cash-­‐flows (aGer certain pre-­‐agreed opera;on expenses necessary to keep the project running) and security on all assets, contracts and equity of the project 6 2. How projects are financed – non recourse debt Revenue side constraint Capital expenditure constraint Total capital expenditures
C
O
N
S
T
R
U
C
T
I
O
N
Turbines
Foundations
Electricals
Installation
Insurance
Construction engineering
Development costs
F
I
N
A
N
C
E
Offshore DSCR constraint: 1.50 with p50 or 1.30 with p90 Equity and
quasi equity
Senior Debt
MLA and due diligence costs
Debt fees (arranging + commitment)
Interest during construction
DSRA
Debt : Equity < 70:30 • 
No or very limited price risk on revenue side • 
Limited tolerance for junior debt mechanisms • 
Net availability number in the 90-­‐92% range • 
Limited tolerance for pre-­‐comple\on revenues • 
Conserva\ve O&M cost assump\ons • 
Strong requirement for equity to be paid upfront 7 2. How projects are financed – non recourse debt Debt structuring principles Revenues Finance documenta\on Capex (hardware) Opera\onal costs Commercial contracts Capitalised (financing) costs Cash flow available •  Opera\onal cash flows •  Approximately: •  EBITDA – tax •  Banks calculate debt capacity assuming a safety margin • 
CFADS •  Safety margin expressed as Debt Service Coverage Ra\o (DSCR) •  CFADS (Cash Flow Available for Debt Service) equals cash flow divided by DSCR Total investment cost Senior debt: DSCR constraint Junior debt: DSCR constraint 2 Total debt capacity •  Sculpted modeling to op\mize debt capacity One of the goals of financial structuring is to ensure that all constraints bring the same ul\mate amount of debt (or as close to that as possible) so that no poten\al debt capacity goes unused or wasted Senior/Junior op\misa\on Vendor loans Pre comple\on revenues Tax equity Subsidies • 
Ways to do that (other than nego\a\ng different values for the key parameters like the DSCR or gearing) include modifying investment budgets or opera\ng costs (by switching one into the other), or bringing subordinated sources of funding by third par\es as quasi-­‐equity Equity requirement IRR / dividend yield 8 Financing offshore wind Table of contents 1.  GGEB introduc\on 2.  How projects are financed 3.  The debt market 4.  Risk analysis by the lenders 5.  How to approach project finance 6.  What GGEB can do for you 9 3. The debt market – lessons learned from the early years The banking market is there if the transac\ons are well structured Lessons learned from the first projects – now up and running •  The first projects using project finance closed in the “early years” (2006-­‐2009) are now in opera\on. Construc\on has never been easy (it is a full-­‐\me job for the banks as well) but mechanisms to limit the risk have proved to be successful and all projects using PF have been built on \me and within budget (including con\ngencies) • 
An ac7ve PF market becoming mature Offshore wind project financed volumes
2500
Installed capacity (MW) - brought forward 2 years (est)
37%
• 
Most ac\ve market ever, despite the crisis and the atmosphere of gloom • 
No bank or individual ins\tu\on is indispensable • 
Debt sizing principles are quite stable and predictable • 
Due diligence standards and main covenants are similar across transac\ons • 
The same rules apply in different countries and with different banks involved 33%
2000
Project financed capacity (MW)
35%
1500
0%
1000
41%
5%
500
32%
0
2006
2007
2008
2009
2010
2011
2012
10 3. The debt market – some recent highlights A number of large transac\ons have taken place Notable transac7ons: •  C-­‐Power – Belgium – 2010: billion-­‐euro senior debt can be raised with construc\on risk for a project with new turbine • 
Meerwind – Germany – 2011: private equity enters into the market and uses PF • 
Walney – UK – 2012: first commercial financing of a minority stake 11 3. The debt market – current market – volumes available Commercial banks The bank market is broader and broader •  More than 30 banks have taken offshore wind risk today • 
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More than 20 banks have construc\on exposure Experienced banks – an ac\ve pool of banks able to structure and lead transac\ons: • 
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Rabobank, KfW-­‐IPEX, Unicredit, BoTM, SocGen, BNPP, Santander, Commerzbank, (Dexia) HSH, NordLB (German focus) Many banks were involved in recent deals in the last 2 years: • 
Lloyds, ING, KBC, Siemens Bank, Deutsche Bank, NIBC, ASN • 
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Calyon, BayLB, NAB, Helaba, SEB, Deka, DnB Nor, Na\xis, NIBC, Sabadell, Nordea, BBVA, LBBW, Mizuho, SMBC RBS, HSBC (UK focus) More have expressed their appe\te An average EUR 100 M available per bank per year • 
EUR 30-­‐150 M exposure per bank per year, in 1-­‐3 deals At least EUR 2.5 billion available per year 12 3. The debt market – current market – volumes available Public Financial Ins\tu\ons Several ac7ve public financial ins7tu7ons •  EIB – historic key player with cheaper funds (support to European offshore projects), but generally conserva\ve • 
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EKF – offshore wind’s “best kept secret”: par\cipa\on linked to Danish exports, up to EUR 250 M per transac\on Euler-­‐Hermes – par\cipa\on linked to German exports, can do large \ckets • 
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KfW – poten\ally large amounts available (in Germany): able to provide cheaper funding in significant volumes GIB – UK Green Investment Bank, first involved in Walney Their role has been instrumental to get deals done • 
Will typically bear approximately half of the risk and/or funding of a transac\on • 
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Will normally take the same risks as the commercial banks, but they usually run their own internal assessment Some geographical / na\onal restric\ons • 
Small deal teams, so availability is a constraint Can contribute as much as the commercial banks 13 3. The debt market – current market – financial condi7ons Market trends Structures have been quite stable since 2007 • 
Long-­‐term debt is s\ll available • 
Consensus on 70% leverage • 
DSCR reflects price risk in the UK Typical project finance condi\ons offshore Debt is not that expensive • 
Margins rise reflects higher bank cost of funding rather than higher cost of risk, but the overall cost of debt is stable • 
Recent deals have seen overall cost of >15-­‐year debt at 6.0% or less Leverage Maturity post-­‐comple\on Margins Maximum underwri\ng 2006-­‐2007 60:40 10-­‐15 years 150-­‐200 bp 50-­‐100 M 2009 70:30 15 years 300 bp 30-­‐50 M 2010-­‐2011 65:35 12-­‐15 years 250-­‐300 bp 50-­‐75 M Current market 70:30 10-­‐15 years 275-­‐375 bp 30-­‐50 M Banks have refocused on known clients, core countries and strategic sectors of ac7vity • 
The good news is that offshore wind is unambiguously “strategic” for many banks today • 
Countries where offshore wind is developing are seen as “safe” (Germany – un\l now) and core for most banks 14 Financing offshore wind Table of contents 1.  GGEB introduc\on 2.  How projects are financed 3.  The debt market 4.  Risk analysis by the lenders 5.  How to approach project finance 6.  What GGEB can do for you 15 4. Risk analysis by the lenders Risks are different in each project phase Development phase Construc7on phase Opera7onal phase No project! No permits No tariff / PPA No contracts Not enough money Delay and cost overruns Scope gaps Contractor delays Adverse weather Accidents Lost revenue Lower availability Higher O&M cost Lower prices Less wind Mi7ga7on cascade Project management Detailed planning Commieed sponsors Project coordina\on Solid contracts (LDs) Con\ngency budget Insurance Project management LT O&M contract Turbine manufacturer commitment Insurance 16 4. Risk analysis by the lenders Stuff happens, offshore A monopile sank and was damaged A crane collapsed in the marshaling harbour 17 4. Risk analysis by the lenders Offshore wind adds new risks to tradi\onal PF risks Regulatory / poli7cal risk – no to permisng risk, yes to (some) regulatory change risk Price / market risk – no to volume risk, yes to (some) price risk Counterparty risk – increasing aeen\on as projects grow in size Technology risk – core risk, but banks have shown willingness to bank new turbines Wind risk – easier offshore than onshore; wake effect is key worry Construc7on risk – s\ll the toughest risk (mul\-­‐contrac\ng), not done in London market yet Opera7ng risk – taken on the basis of long term O&M agreements with WTG manufacturers Offshore wind is one of the most complex industries to be project-­‐financed 18 4. Risk analysis by the lenders Construc\on risk and mul\-­‐contrac\ng Banks do take construc7on risk •  Really non-­‐recourse • 
Commercial terms of contracts not substan\ally different from contracts with non-­‐banked clients Focus on project management capacity and project 7metable •  Overall risk dealt with through conserva\ve project schedule and con\ngency mechanism (both \me and money) • 
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iden\fica\on of cri\cal path / long lead items / knock on risks Specific aeen\on to availability of vessels, including for extended periods, and availability of “plan Bs” They actually prefer mul7-­‐contrac7ng (2 to 8 contracts) • 
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Easier to make interfaces visible and deal with them explicitly in the contracts and project \metable Makes due diligence more transparent Ac7ve due diligence and involvement in contract nego7a7ons • 
Sub-­‐contractors, supply chains, quality control procedures, creditworthiness & infrastructure of suppliers • 
More detail on turbine supply and long term O&M than to other contracts 19 4. Risk analysis by the lenders Security package Offshore wind transac7ons require a tradi7onal PF security package •  Pledge of all accounts, assets and rights of the project • 
Pledge on the shares of the project company Equity reten7on clauses are more stringent than usual •  Lenders are very sensi\ve to both who owns and who manages the project • 
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Share reten\on and ownership clauses are stronger than in other sectors This is linked to payment commitments during construc\on, but also to the perceived need for strong owners in the early years of opera\ons when problems are perceived as more frequent • 
This has been a topic of difficult nego\a\ons between lenders and project sponsors Requirement for direct agreements and oversight of commercial contracts •  Tradi\onal in PF but more systema\c (and with more counterpar\es) in offshore wind • 
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Lenders also want stronger involvement in commercial contracts (right to allow or veto changes) Confiden\ality issues with contractors are quite sensi\ve • 
More intrusive due diligence in contracts & subcontractors and more informa\on provisions 20 Financing offshore wind Table of contents 1.  GGEB introduc\on 2.  How projects are financed 3.  The debt market 4.  Risk analysis by the lenders 5.  How to approach project finance 6.  What GGEB can do for you 21 5. How to approach project finance You cannot improvise a project finance deal It needs to be an early decision by investors •  A lot of the value from project finance discipline comes at an early stage, when choosing the contractual structure and nego\a\ng the relevant contracts • 
The good news is that a lot of that work can be done without involving large banking groups, by using a small number of specialised advisors It requires experienced advisors •  Bring in at your side en\\es which have credibility as lenders’ advisors and ask them to look at the project from the perspec\ve of lenders • 
Technical advisors (Moe, Sgurr) are indispensable • 
We believe we can also bring value in pre-­‐packaging a deal that banks will accept Investors and contractors need to be commiged to it •  Counterpar\es will accept to incorporate banks’ requirements in their commercial offers only if they really believe that the project will not happen without external financing • 
Do take into account the feedback from specialised advisors, otherwise it won’t work 22 5. How to approach project finance Project finance for offshore wind is not just about leverage It helps improve risk discipline for the project •  More external eyes on contracts, interfaces and detailed project structure • 
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Specific focus by banks and their advisors on poten\al downside scenarios Project can “work” on a stand-­‐alone basis (which makes it easier to sell) It can help investors – and contractors! – obtain more favorable contractual terms • 
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Using banks as a “bad cop” can be useful in contractual nego\a\ons (true for both investors and contractors!) 3-­‐way nego\a\ons can allow you to get away from zero-­‐sum nego\a\ons It’s really non-­‐recourse • 
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Banks take construc\on risk on the basis of the contracts and commieed con\ngency mechanisms While sponsor involvement is valued, banks evaluate deals with no expecta\on of addi\onal cash in It’s no longer so expensive • 
Recent deals have seen overall cost of >15-­‐year debt at 6% 23 5. How to approach project finance – Conclusion: PF is available for well-­‐structured projects How to make a deal bankable Structuring a deal is 7me-­‐intensive •  Non-­‐recourse finance requires a specific discipline and approach to project risks • 
Mul\ple complex tasks to run in parallel, with numerous third par\es (with owen contradictory requirements) • 
Several cri\cal paths to manage •  ongoing development work • 
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external advisors contract nego\a\ons • 
internal approvals The quality of the contracts can help bridge the difference • 
The more « bankable » the contracts are, and the more flexible banks will be on equity issues • 
The stronger the contractual commitments, the less important the owner will be • 
No zero-­‐sum game: enhancing some terms can lead to win-­‐win-­‐win solu\ons Offshore wind projects have access to a very diverse project finance universe, as long as some rules are respected • 
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the contractual package has to include banks requirements as early as possible experienced advisors consulted upstream • 
\ming adapted to the banking process 24 Financing offshore wind Table of contents 1.  GGEB introduc\on 2.  How projects are financed 3.  The debt market 4.  Risk analysis by the lenders 5.  How to approach project finance 6.  What GGEB can do for you 25 6. What GGEB can do for you – our value added What GGEB brings to the table •  Specialised competence & exper7se with regard to debt & equity raising and structuring, project development and contrac\ng for complex transac\ons •  Credibility in the equity markets through a strong and proven track record in buy/sell side advisory and brokerage in the wind and solar industry •  Access to an extensive and first class network with investors, EPC/technology suppliers, banks, advisors and intermediaries in the renewables market which we leverage to the benefit of your project •  The lessons we have already learned (some\mes the hard way) will enable you to op\mize the project development process and avoid costly mistakes and delays •  We are deeply commiged to the success of our clients and we offer you highly compe77ve fees structures including success oriented schemes The services we can offer Strategic financial advisory • 
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Renewable energy strategic development Technology and project bankability assessment Business plan analysis, financial modelling and valua\on Assis\ng in bidding process Debt and equity raising and structuring •  Detailed financial analysis and valua\on •  Prepara\on of all necessary support materials (informa\on memo, financial models, management presenta\ons, etc.) •  Draw tailor made commercial proposi\on to banks/investors •  Ac\ve marke\ng of your project(s) to a selec\on of poten\al debt and equity investors from our extensive network •  Commercial nego\a\ons with investors or banks •  Transac\on documenta\on Assistance in project contract nego7a7ons •  Review of contrac\ng strategy to ensure bankability •  Review of commercial terms (EPC warran\es, availability,...) We have a proven track record in closing transac7ons and maximising value for our clients and their projects 26 6. What GGEB can do for you – roadmap to financial close GGEB’s comprehensive approach •  Check robustness of Logis7cs partners •  Verify input (on a no commercial terms •  Assess (financial) impact Contrac7ng •  Request indica7ve term sheets term sheets Project Financing •  Develop effec7ve equity raising strategy financing strategy •  Valua7on •  Select most preferred bank consor7um and •  Effec7ve process effec7ve process management management •  Comparison of offers and final nego7a7ons •  Nego7ate commiged terms from banks •  Finalisa7on of transac7on documents •  Finalisa7on of financing documenta7on Added Value GGEB: Added Value GGEB: •  Exper7se to perform •  Experience with all key •  Proven track record •  Proven track record •  Extensive network with •  Extensive network with detailed review incl. financial modeling •  Many lessons learnt for quotes, etc. and 7metables project contracts (some the hard way..) •  Ensure process discipline and contain (legal) costs poten7al investors Financial Close •  Develop effec7ve Added Value GGEB: •  Sanity check on process Permits •  Nego7ate commiged Equity raising Added Value GGEB: •  Informal market sounding Equity Financing •  Process management Financing of opera7ng decisions Input Business plan Project •  Nego7ate main names basis) with shortlisted suppliers Insurance •  Selec7on of EPC and other business plan Technology PPA Project contracts and Start construc7on Business plan Draw down of funds Prepara7on financing banks •  Independent posi7on •  Independent posi7on •  Provide comprehensive •  Provide comprehensive process management process management Project organiza7on Financing 27 Green Giraffe Energy Bankers Paris Utrecht 8 rue d’Uzès, 75002 Paris Maliebaan 83a, 3581 CG Utrecht tel: + 331 4221 3663 tel: + 31 30 820 0334 email: fr@green-­‐giraffe.eu email: nl@green-­‐giraffe.eu London Hamburg 30 Crown place, London EC2A 4EB tel: + 4475 5400 0828 tel: + 4917 6551 28283 email: uk@green-­‐giraffe.eu email: de@green-­‐giraffe.eu 28