Financing offshore wind Copenhagen 4 November Marie de Graaf m.degraaf@greengiraffe.eu +31646318495 greengiraffe.eu
Financing offshore wind Copenhagen 4 November Marie de Graaf m.degraaf@green-‐giraffe.eu +31646318495 green-‐giraffe.eu
Financing offshore wind
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
Table of contents
We have an unparalleled track record in successfully closing deals for our clients
1. GGEB introduc7on – the offshore wind finance specialists
Advisor to C-‐Power to raise project finance debt
325 MW
Belgium 2010
• 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 Northwind to raise project finance debt
216 MW
Belgium 2012
(Sponsor)
Advisor to WindMW to raise project finance debt
288 MW
Germany 2011
The GroupBlackstone ®
Non-‐recourse financing of 25% stake in Walney offshore wind farm
367 MW
UK 2012
(Sponsor)
Advisor to Highland in the acquisi7on of the
Deutsche Bucht project
210 MW
Highland Group Holdings
Germany
2012
Financial advisory services French offshore
wind tender
1,428 MW
France 2012
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Financing offshore wind
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
Table of contents
2. How projects are financed
“Balance sheet” vs “non recourse finance”
Direct contractors have a direct incen7ve to understand who will be funding the project
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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”
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!
Project company
Lenders Sponsor(s)
Dividends Debt service
Equity Debt
No recourse
Recourse to investors is contractually limited • Lenders rely on project revenues only Capital intensive projects requiring long term financing • Lenders need LT opera\onal performance
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 This typically entails very detailed contractual frameworks and extensive due diligence
No upside
Lenders receive a fixed remunera7on • Lenders do not benefit from beeer performance Low single digits margins vs high leverage • Risks to be commensurate to remunera\on
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
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
2. How projects are financed – non recourse debt
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Revenue side constraint Capital expenditure constraint
Total capital expenditures
CONSTRUCTION
Turbines
Foundations
Electricals
Installation
Insurance
Construction engineering
Development costs
FINANCE
MLA and due diligence costs
Debt fees (arranging + commitment)
Interest during construction
DSRA
Senior Debt
Equity and quasi equity
2. How projects are financed – non recourse debt
Offshore DSCR constraint: 1.50 with p50 or 1.30 with p90
• No or very limited price risk on revenue side
• Net availability number in the 90-‐92% range
• Conserva\ve O&M cost assump\ons
Debt : Equity < 70:30
• Limited tolerance for junior debt mechanisms
• Limited tolerance for pre-‐comple\on revenues
• Strong requirement for equity to be paid upfront
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Debt structuring principles
Revenues
Opera\onal costs
Cash flow available
Senior debt: DSCR constraint
Junior debt: DSCR constraint 2
Total debt capacity
Total investment cost
• Opera\onal cash flows • Approximately:
• EBITDA – tax • Banks calculate debt
capacity assuming a safety margin
• Safety margin expressed as Debt Service Coverage Ra\o (DSCR)
• CFADS (Cash Flow Available for Debt Service) equals cash flow divided by DSCR
• Sculpted modeling to op\mize debt capacity
Capex (hardware)
Capitalised (financing) costs
IRR / dividend yield
Commercial contracts
Finance documenta\on
Pre comple\on revenues
Subsidies
Equity requirement
Senior/Junior op\misa\on
Vendor loans
Tax equity
• 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
• 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
CFADS
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2. How projects are financed – non recourse debt
Financing offshore wind
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
Table of contents
3. The debt market – lessons learned from the early years
The banking market is there if the transac\ons are well structured
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32% 5%
0% 41%
35%
37% 33%
0
500
1000
1500
2000
2500
2006 2007 2008 2009 2010 2011 2012
Offshore wind project financed volumes
Installed capacity (MW) - brought forward 2 years (est)
Project financed capacity (MW)
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
• 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
3. The debt market – some recent highlights
A number of large transac\ons have taken place
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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
3. The debt market – current market – volumes available
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The bank market is broader and broader • More than 30 banks have taken offshore wind risk today • More than 20 banks have construc\on exposure • Experienced banks – an ac\ve pool of banks able to structure and lead transac\ons:
• 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 • 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
Commercial banks
At least EUR 2.5 billion available per year
3. The debt market – current market – volumes available
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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 • 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 • 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 • 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
3. The debt market – current market – financial condi7ons
Market trends
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Typical project finance condi\ons offshore 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
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
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
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
Financing offshore wind
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
Table of contents
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
Risks are different in each project phase
4. Risk analysis by the lenders
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Stuff happens, offshore
4. Risk analysis by the lenders
A crane collapsed in the marshaling harbour
A monopile sank and was damaged
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4. Risk analysis by the lenders
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
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Offshore wind adds new risks to tradi\onal PF risks
Offshore wind is one of the most complex industries to be project-‐financed
4. Risk analysis by the lenders
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) • 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) • 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
Construc\on risk and mul\-‐contrac\ng
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4. Risk analysis by the lenders
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 • 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 • 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
Security package
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Financing offshore wind
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
Table of contents
5. How to approach project finance
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
You cannot improvise a project finance deal
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5. How to approach project finance
It helps improve risk discipline for the project • More external eyes on contracts, interfaces and detailed project structure • 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 • 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 • 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%
Project finance for offshore wind is not just about leverage
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5. How to approach project finance – Conclusion: PF is available for well-‐structured projects
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 • external advisors • contract nego\a\ons • internal approvals
How to make a deal bankable
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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 • the contractual package has to include banks requirements as early as possible • experienced advisors consulted upstream • \ming adapted to the banking process
Financing offshore wind
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
Table of contents
• 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
We have a proven track record in closing transac7ons and maximising value for our clients and their projects
6. What GGEB can do for you – our value added
What GGEB brings to the table The services we can offer
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Strategic financial advisory • 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,...)
GGEB’s comprehensive approach
6. What GGEB can do for you – roadmap to financial close
Logis7cs
Technology
Equity Financing
Insurance
PPA
Contrac7ng
• Check robustness of business plan
• Verify input (on a no names basis) with shortlisted suppliers
• Assess (financial) impact of opera7ng decisions
• Request indica7ve term sheets
• Selec7on of EPC and other partners
• Nego7ate main commercial terms
• Process management
• Nego7ate commiged term sheets
• Develop effec7ve financing strategy
• Select most preferred bank consor7um and effec7ve process management
• Nego7ate commiged terms from banks
• Finalisa7on of financing documenta7on
Prepara7on Business plan Project contracts Financial Close
Project Financing
Inpu
t Business p
lan
Project Financing
Draw
dow
n of fu
nds
and Start con
struc7on
Added Value GGEB:
• Exper7se to perform detailed review incl. financial modeling
• Informal market sounding for quotes, etc.
• Sanity check on process and 7metables
Added Value GGEB:
• Experience with all key project contracts
• Many lessons learnt (some the hard way..)
• Ensure process discipline and contain (legal) costs
Added Value GGEB:
• Proven track record
• Extensive network with financing banks
• Independent posi7on
• Provide comprehensive process management
Permits
• Develop effec7ve equity raising strategy
• Valua7on
• Effec7ve process management
• Comparison of offers and final nego7a7ons
• Finalisa7on of transac7on documents
Equity raising
Added Value GGEB:
• Proven track record
• Extensive network with poten7al investors
• Independent posi7on
• Provide comprehensive process management
Financing Project organiza7on
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8 rue d’Uzès, 75002 Paris
tel: + 331 4221 3663
email: fr@green-‐giraffe.eu
Maliebaan 83a, 3581 CG Utrecht
tel: + 31 30 820 0334
email: nl@green-‐giraffe.eu
30 Crown place, London EC2A 4EB
tel: + 4475 5400 0828
email: uk@green-‐giraffe.eu
tel: + 4917 6551 28283
email: de@green-‐giraffe.eu
Green Giraffe Energy Bankers
Paris
London
Utrecht
Hamburg
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