Despite the lack of a single convergent technology the solar energy project market is delivering growing and significant deal flow – particularly in the hospitable renewables regimes of Spain, Germany, India and the US.

The most recent example of how far solar has moved into the mainstream is Isolux Corsan's 120MW Tuin Zonne photovoltaic (PV) portfolio – the largest European PV project financing to date. The project comprises 30 solar units across seven regions in Spain.

The Eu832 million deal reached financial close on 29 January and comprises a Eu700 million 20-year term loan, an 18-month Eu112 million VAT facility and a Eu50 million guarantee. BBVA was the originating bank and brought aboard 11 other bookrunners – Banesto, Banco Popular, BES, La Caixa, CaixaBI, Caja Madrid, Depfa, ECO, Natixis, KBC and SG – in a club deal.

Depfa is a notable new solar lender among the bookrunning group. Following its takeover by Hypo Real Estate in October, the Depfa infrastructure team has been mandated to expand its credit footprint into new sectors – Tuin Zonne is the bank's first foray into the renewables and power sector, and it is bidding on a number of other power projects, both renewable and conventional.

The deal pulled a lot interest and a number of disappointed banks missed out on bookrunner roles – such as Dexia and WestLB – and may yet come in on retail syndication, which is scheduled to launch imminently.

The debt has a margin of 75bp during construction where Isolux is guaranteeing the work of various contractors, and ratchets up to 120bp initially during operation, but can step down or up 10bp (110bp-130bp) depending on debt service coverage. The term loan has a gradual annuity-style amortization profile.

The project has an ADSCR of 1.25x, and distribution locks are triggered at 1.10x. The individual PV units are project financed separately because there are different minority shareholders at each unit comprising local landholders and investors. The deal is therefore not fully cross-collateralized, but collateralized to the point of Isolux's revenues from each individual project to a holding company. Isolux's equity contribution across the portfolio is over Eu100 million.

Banks are taking two primary risks. The construction, installation and operation of the units is being undertaken by Isolux, with the sponsor wrapping the obligations of the contractors during construction – the banks are therefore taking Isolux credit risk, and relying on its operational expertise. Given that the solar units are fixed devices, rather than tracking units, and that they connect directly to the low-voltage distribution system, there is limited technological and operational risk.

Banks are accepting solar reserve risk, with the standard base case average across 30 units of 1375hrs per unit a year. Compared with wind farms, solar has a very low amount of variance: with data going back 10 years the maximum variance from the average for the solar regions is 4%, this compares with up to 50% variance in some wind regions.

The advantage of inherently low variance is that solar projects can be more highly levered and be banked with lower debt service than more volatile revenue streams allow. The relatively predictable performance means that the efficiencies will be less profound for portfolio project financings, although there are still economies of scale to be made from the spreading of fixed costs such as transaction fees.

Currently, photovoltaic power technology is not cheap enough to provide generation without either healthy subsidies or supporting tariffs. Spain currently offers one of the most hospitable regimes in which to develop solar plants, offering a tariff of Eu44 per megawatt hour, which has created a glut of development.

The Spanish government offered the tariff for a capped capacity of 371MW, and to ensure that there was not a cliff edge in the system, the government stated that it would announce to the market when 85% of the capacity had been met and provide a 12-month run for developers to get their projects online. The 85% announcement was made in September 2007.

Once the tariff expires, no one yet knows what the Spanish government's intentions are, so the cliff edge has not been avoided. September 30 2008 is widely expected to signal a significant step down in tariff to the low Eu30s per MW/hr.

For Tuin Zonne, the risk of each sub-project not being complete in time for the high tariff is borne by Isolux. In the event of falling under the lower tariff, Isolux will partially prepay the debt apportioned to the sub-project to a level where the debt service cover ratios match the model for the higher tariff.

The solar projects in the pipeline in Spain are likely to be split between photovoltaic and thermo projects. Currently in the syndication market is Abengoa's Solnova 1 and Solnova 3 thermoelectric financings. Thermoelectric avoids the current shortage of silica required to make photovoltaic modules and works by concentrating the sun's light with mirrors to heat a liquid with a high specific heat capacity.

Supporting Solnova 1 is a Eu267 million project facility and Solnova 3 is backed by a facility of Eu261 million: both arranged by Santander, CajaMadrid, Calyon, Natixis and SG, with an operating margin of 105-110bp, 22-year tenor, and a slightly higher ADSCR than Tuin Zonne of 1.3x.

There are still efficiency and cost savings to be made in solar generation, but developers will continue to make hay while the sun shines and tariffs remain high. In the long run, the tariffs should help lower the cost of production. The next frontier is likely to be the wholesale use of thin film PV units that require less silica in construction opposed to mono- and polycrystalline PV panels. 

Tuin Zonne
Status: Closed 29 January
Description: Eu832 million financing of Isolux Corsan's majority shareholding in 120MW Tuin Zonne photovoltaic portfolio
Sponsor: Isolux Corsan
Mandated lead arrangers: BBVA, Banesto, Banco Popular, BES, La Caixa, CaixaBI, Caja Madrid, Depfa, ECO, Natixis, KBC and SG.
Sponsor counsel: Uria Menendez
Lender counsel: DLA Piper