This is the third part of what will be a 10–part series of blog posts, which will ultimately be published in full as a single report. Two parts will be published each week for the coming weeks.
The early projects
|Name||Q7 (later renamed “Prinses Amalia”)|
|Sponsors||ENECO, Econcern, EIH|
|Turbines||60 Vestas V80 – 2 MW|
|Financial Close||25 October 2006|
|Debt amount||EUR 219 M|
|Initial lenders||EKF, Dexia, Rabobank, BNPParibas|
|Key contractors||Vestas, Van Oord|
In 2005, when Dexia and Rabobank started working on the financing of the Q7 offshore wind project in the Netherlands, two things were clear: (i) this has never been done before (technically, the very first offshore wind project to benefit from non recourse debt was North Hoyle (60 MW), as part of the wider refinancing of a much larger operational wind portfolio operated by RWE/nPower in the UK. The project represented roughly 15% of the capacity of the portfolio and 25% of its production, and was operational at the time of the transaction) and (ii) the banks would need to bear construction risk, as the project owners were simply not able to finance the project otherwise, not having the requisite funds (half of the project was owned by a consortium of Econcern and EIH, both relatively small developers, while the other half was owned by ENECO, one of the four main Dutch utilities). With that precondition in mind, the bankers set out to identify what could make it possible to take the risk on reasonable terms.
Project finance lenders are generally not interested in the “normal” scenario – they want to make sure that the project can survive adverse circumstances and still pay off the debt. So a key part of the initial work, together with independent technical advisors, was to think about what could go wrong, how that could be solved or mitigated if it happened, and what it meant in terms of delays or extra costs. The idea was to identify what additional period, and what contingency budget (i.e. a supplementary budget available only in case of problems) would be sufficient to cater for most adverse scenarios, and make sure that such additional time and budget were available from the start, and would still allow the debt to be repaid.
This lead to work over a period of a year with the project team, the technical advisors and the contractors, plus the insurance brokers, to go through construction planning, to identify critical paths (items that constrain the timetable: if they are delayed, the whole project is delayed), knock-on effects (tasks that are dependent on an earlier one to take place), possible buffers, potential backups and alternatives for a wide variety of circumstances. A lot of “what ifs” where brought up, and those that were deemed plausible were analyzed extensively.
In the end, it was quickly identified that work in the winter months was difficult – with work at sea possible maybe one day in ten statistically in the worst months, as opposed to 8 or 9 days out of ten in the summer, and that such period should be excluded altogether from all construction planning. That meant that if work was not completed by October, it could only be restarted by April the following year: tasks that required several days at sea could not reliably be planned in the winter season. Any adverse scenario thus needed to be able to absorb a delay of six months in addition to the time actually required. In terms of cost, this might mean having the funds to mobilize the requisite vessels twice (i.e. two consecutive warm seasons) to complete the task of installing the turbines.
The analysis was obviously a lot more detailed, but the simplified description above brings the essential substance of it, and the focus on the worst possible risk to size the necessary reserves of money and time made sense and was sufficient (in Germany a few years later that would be delays in the construction of the grid connection by the grid operator).
The financing structure thus included a “base case” scenario of things going according to plan, and a “downside scenario” including various delays and problems, and the project needed to be able to repay its debts in both – obviously it would be less profitable for investors in the second case, but it would not go bankrupt and would still show some minimal level of return in that case.
In this project, Vestas, the Danish turbine manufacturer, was involved, and this allowed EKF, the Danish export credit agency (ECA), to participate to the financing. ECAs are usually involved in project to cover political risk or local counterparty risk, but in this case EKF actively helped make the Vestas contract happen by providing a substantial portion of the contingent funding to the project, thus justifying its mission of supporting exports from Denmark. This helped create larger buffers for adverse scenarios and allowed the commercial banks to be more comfortable taking the overall construction risk: with no funding beyond the committed buffers available to solve possible problems, having these buffers mainly funded by EKF provided substantial additional comfort to all (including Vestas).
The particular incident of the crane falling on the quayside was not identified as such during that structuring process, but the buffers and precautions that had been put in place to cater for other incidents proved sufficient to manage the aftermath of that particular event and the project was successfully completed with some of the contingent funding and time to spare.
|Name||C–Power phase 1|
|Sponsors||DEME, EDF, SRIW, Socofe, Nuhma (originally)|
|Turbines||6 Repower 5M (5 MW)|
|Financial Close||25 May 2007|
|Debt amount||EUR 126 M|
|Initial lenders||Dexia, Rabobank|
|Key contractors||Repower, DEME|
The financing of the first phase of the C-Power project took place not long after that, essentially involving the same participants (Dexia and Rabobank as lenders, and several advisors which had been involved in Q7), with the same principles followed. As a lot of the lessons learnt in the Q7 process were brought forward, the negotiations went quite fast, carried forward by a strong project team and a committed group of investors including industrial groups and local Belgian public investment bodies. It helped that 2007 was a year of general optimism and lenders and investors were willing to take risks that they would not necessarily have taken in other periods. With strong competition and a quest for yield, financing a partly new sector was seen as a way to get better remuneration while still taking understandable risks.
The project was in a different country, with a different tariff mechanism, and used a completely different turbine, the Repower 5 MW, which had that time had only been deployed 4 times, with two prototypes installed onshore and two more offshore. This was quite important for future transactions as it ensured that the precedents created by the first projects were not too narrowly defined.
For a lot of reasons, lenders love (successful) “precedents” – something that has been done before and has worked is a lot easier for them to approve again and do again. Part of that if that once you have made the effort to understand a particular technology, or regulatory framework, or category of risk, it is much easier to assess a project that falls in the same basket. Part of it is that a history of profitable transactions in a sector is more conducive to doing more business in that same sector than if losses have been incurred. A less flattering reason is that banks prefer to be wrong in groups than right alone – so doing something that a lot of other peers are doing already is seen as reputationally safe.
In any case, here, it meant that just before the great financial crisis of 2008 struck, there had been two separate offshore wind transactions, in different countries, with different contractors and turbine models, and different price mechanisms. The sector was therefore “real”, validated by serious players in the market, and not seen as something completely alien, and that validation applied without restrictions to a single country, or player, or other narrow criteria that could conceivably be applied. (Ironically, the one narrow criterion that remained for years was that only one technical advisor, involved in both transactions, was seen as acceptable by lenders as it was the only one with experience – that only changed when an individual involved in these transactions changed employer and brought his recognized track record and reputation on these transactions to that new company).
In any case, despite the J–tube incident mentioned earlier (in Part 1 of the series), the C–Power (phase 1) project was also built on time and within the contingent budget allocated by lenders, thus setting a second successful reference point for the sector.
|Sponsors||Econcern, SHL, Parkwind|
|Turbines||55 Vestas V90 (3 MW)|
|Financial Close||24 July 2009|
|Debt amount||EUR 219 M|
|Initial lenders||EKF, EIB, Dexia, Rabobank, ASN|
|Key contractors||Vestas, Van Oord|
By 2009, when the next project to be financed came to the final contractual negotiations, the financial environment had completely changed. Projects financed using non–recourse debt were faring quite well in general (i.e. their performance and business models were usually not affected by the financial crisis), but the lenders in the sector had to cope with adverse circumstances across the board, and some of them were in difficult situations themselves, so project finance volumes were significantly reduced, with banks focusing much more narrowly on core countries, key clients and strategic sectors.
This applied to renewable energy in general, and offshore wind, as the “new kid on the block” was inevitably impacted. What helped was that (i) projects were mostly in North European countries that were seen as amongst the safest, (ii) the investors in the sector, utilities and infrastructure funds, were seen as safe and solid clients for the most part, and (iii) green energy was already becoming something that lenders and investors wanted more of rather than less. So overall, within a much less favorable financing environment, offshore wind was still seen as something that could be done by banks.
Belwind replicated a lot of what had been done in the earlier two projects (it was in Belgium like C–Power, and used Vestas and Van Oord as key contractors, like Q7). The main novelty, other than its larger size, was the proposed participation of the European Investment Bank (EIB) in the financial structure, alongside Danish ECA EKF, allowing to reach the requisite level of funding, which at ca. EUR 500 million, was substantially larger than previous transactions.
The financing was largely agreed in early 2009, despite the fact that one of the key participants, Dexia, had been one of the most visible victims of the financial crisis and had to be bailed out in September 2008. For Dexia, the project was in its home market of Belgium, and infrastructure financing being its core activity, this particular transaction was something that fit the substantially narrower criteria applying to the bank and what it was still allowed to finance after benefitting from massive public support. Then, in May 2009, the leading sponsor, Econcern, itself went belly up, in one of the most high profile bankruptcies in the Netherlands, after overextending itself across too many projects.
It is a testament to the robustness of the proposed financing structure that the project was nevertheless able to go forward soon afterwards, and the financing closed in July 2009. A new group of investors was put together to take over the project from Econcern, led by the investment arm of Belgian retail group Colruyt, which already had extensive experience in renewable energy. The commercial and financial structure was essentially unchanged, with the main requirement to transfer key personnel from Econcern to the project company in order to make sure that it had the requisite core competences in‑house without depending on a now unavailable parent. Together with the technical and legal advisors, the banks identified the relevant people and contracts – it turned out that just 7 people were deemed essential to the project and the transaction.
Closing a transaction when one of the stakeholders was the judiciary administrator of the estate of the bankrupt (and highly scrutinized) Econcern was not simple – given their role, it is very hard to convince such administrators to provide the necessary additional funding to bring the transaction forward (paying for advisors, among others), but in this case, it was quite obvious that the project was worth a lot more if it could be financed right away than if it was sold without the financing and later redeveloped by a new owner, and the administrator agreed to keep the process alive in order to get a reasonable sale price at financial close. It did manage to get an across–the–board reduction in fees by all advisors, including lawyers and bankers, of 20% as a contribution to the overall effort… The financing finally happened, with painful final haggling over who had the pay the last 50,000 euros required to close the budget when the swap rate moved in the wrong direction by a few basis points on the day of signing…
The project was duly built on time and on budget, despite a spectacular incident when one of the foundations sank in the middle of the main Zeebrugge shipping lane when being towed to site:
Figure – a foundation sank in the Zeebrugge channel, 2010
Colruyt, via the entity called Parkwind, has since become one of the savviest independent developers and investors in European offshore wind, building on the experience of that early project.
We will look at a few more case studies in forthcoming Part 4.