Noble NY 2008: Major headwinds

Noble Environmental Power marked a trying time in both financial markets and its growth as a developer by closing the largest wind financing that the US wind market had ever seen. Noble won the same award in 2007 for a $560 million construction deal that involved innovation in wind hedging, tax equity structuring and tax incentives use. It wins for 2008 by holding on to these advances despite a vastly different market.

The $741 million construction financing backes the construction of three wind projects in New York State, with a total capacity of 330MW, and all using GE 1.5MW turbines. It covers a 97.5MW farm in Altona, a 106.5MW farm in Franklin and Clinton Counties, and a 126MW farm in Wyoming County. The developer is extremely familiar with the region, and with the completion of the farms covered by the construction financing has 827.5MW of capacity in operation in the state.

The financing consists of a $631.77 million construction loan, which has a maturity of 31 March 2009. The portfolio, mostof which went online at the end of 2008, is set to be refinanced with a 15-year $440 million term loan and roughly $100 million in tax equity, as well as $109 million in letters of credit facilities.

The lead arranger of the financing was Citigroup, which brought in the mandate on the back of its provision of a 10-year fixed-for-floating financial busbar swap with Citigroup Energy. The mandate surprised many in the market, and signalled Citi's determination to build a wind power trading business. The financing package managed to move beyond the terms of Noble's 2007 deal by extending the tenor of the financing, at 15 years, for five years beyond the term of the hedge.

A merchant tail of this size marked a considerable step forward for the developer, and the wind market. Noble had managed in 2007 to assemble a portfolio construction deal featuring an energy hedge and a pay-as-you go tax equity structure, but the debt's tenor matched the length of the hedge. By 2008 these features had become more familiar, and several single-asset deals had come to market with merchant tails, so Noble took advantage of this familiarity to produce what was undoubtedly the market high water mark.

Citi brought in two familiar wind finance banks as lead arrangers and underwriters, in the shape of Royal Bank of Scotland and HSH-Nordbank as joint bookrunners. The debt, priced at an extremely competitive 175bp over Libor, launched to syndication in July, and brought in another five joint lead arrangers, Prudential, ING, BBVA, LloydsTSB and Scotia Capital, and EDC and Dekabank as participants.

That level of support was impressive, given that New York State's attorney-general, Andrew Cuomo, launched an investigation of Noble, and another developer, First Wind, over their dealings with local communities in New York State. The rush of money and interest into the region had created tensions between different residents and between residents and outsiders. Cuomo wanted to find out whether there had been any improper contacts between developers and local politicians.

The investigation ended without sanction after the two developers agreed to a new code of conduct, in October 2008, though by that time Lehman Brothers had collapsed, and banks' funding costs shot up. Banks that had previously avoided the deal because of the Cuomo cloud, now preferred to stay away because their own cost of capital had risen sharply. Lehman was, alongside Citi, Credit Suisse and JP Morgan, a bookrunner for a proposed $375 million equity initial public offering for Noble. Equity markets had turned equally difficult for wind producers, and the IPO was postponed.

Since then, the financial services companies that formed the backbone of the tax equity market have seen their taxable profits dry up, and with it much of their appetite for tax equity. GE Energy Financial Services had the levered pay-as-you-go tax equity market, a smaller subsection of this market, to itself, and provided the financing for the 2008 portfolio on similar terms to the 2007 deal. The financing thus had to work through a similar set of issues with respect to coordination between lenders, tax equity and the hedge provider.

The deal also had to contend with a looming deadline for the project to receive production tax credits, since the portfolio had to be in service by the end of 2008 to be eligible for the credits. To mitigate the risk that this might not happen, Noble provided some contingent equity to reassure lenders that missing the in service date would not hurt their coverage ratios. The projects have since entered commercial operations and the construction debt is in the process of converting into term debt.

The financing marks a high point for wind finance in the US, as a number of postponed syndications in the latter part of the year indicates. Both in terms of tenor, tax equity and hedging arrangements, Noble consolidated the advances it made on its 2007 portfolio, and keeps its position as one of the largest independent developers in the United States safe until markets recover. It has postponed some wind development, either because banks are still hesitant or because the wind resources did not look promising enough. But for one developer in 2008, ambition paid off.

Noble NY 2008 Wind Farm
Status: Closed 30 June 2008
Size: $777 million
Location: New York State
Description: Construction and term financing for 330MW wind portfolio
Sponsor: Noble Environmental Power
Debt: $741 million
Bookrunners and underwriters: Citigroup, RBS, HSH Nordbank
Joint lead arrangers: Prudential, ING, BBVA, LloydsTSB, Scotia Capital
Participants: EDC, Dekabank
Energy hedge: Citigroup
Tax equity: GE Energy Financial Services
Sponsor legal counsel: Latham & Watkins
Lender legal counsel: Milbank Tweed
Tax equity legal counsel: Bingham McCutchen