Solaris: Wisdom in crowds

The Eu217 million ($320 million) financing for the Solaris portfolio is the first, and to date only, bond financing for solar assets in Europe, and the first greenfield project bond for solar assets anywhere. It was the first to exploit the generous tariffs that came into force in Spain on 1 June last year. The deal demonstrates that the technical and contractual issues with solar projects can be accommodated within a bond structure, much as they have been with wind.

The sponsor, or technically developer, of the portfolio is Abastecimientos Energéticos, or Abaste, which develops solar projects on a turnkey basis for private owners. It typically sells these projects outright, and the new owners are usually high net worth individuals, from locations as far afield as Norway, who take out recourse loans to buy the projects.

The business model, while lucrative, is a little cumbersome, because the Spanish solar tariff regime only applies to projects of up to 100,000kW in capacity. While the European renewables market has frequently hinged upon the appetite of smaller retail investors, finding cheaper funding, and improving the returns of these investors, is important to developers. The developer, in turn, can achieve wider market recognition from a larger funding process.

Solaris is a series of 200 separate projects, each of 100,000kW, located near El Bonillo, in Albacete in southeastern Spain. While each project has its own transformer, and thus complies with the size limit, they share common infrastructure and a common operations and maintenance contractor, in Abaste.

They also share a single debt issuer, Delta Photovoltaic, which issues Eu185 million in 24.5-year notes, and then in turn lends the proceeds on to each of the 200 different companies than own the assets. Rounding out the financing is Eu33 million in equity and subdebt, which comes from private investors, and is structured to maximise the tax benefits to these owners.

Deutsche Bank's Spanish wealth management arm is responsible for rounding up these investors, while Structured Finance Management provides an equity agent, or a single point of contact, for a disparate and often disparate group of sponsors. The owners benefit from the debt's non-recourse nature, the higher leverage, and the ensuing better returns. Each project company has separate, but identical, operations and maintenance agreements with the developer.

Abaste is the engineering, procurement and construction contractor, but in case of its default, bondholders can fall back in direct agreements with key subcontractors and suppliers. If the need arose, Abaste could be replaced as O&M contractor at some point in the life of the contracts, and there would probably a number of sufficiently capable operators that could replace it.

The financing also features some headroom bonds, which can be called upon in the event that support from developer or contractor is not sufficient to deal with cost overruns or delays that require the payment of liquidated damages. The headroom bonds are similar to the variation bond concept, which is common and very practicable in the UK, but is more difficult to sell to Euro investors. But Deutsche's structure, which uses registered bonds, replicates the structure approximately.

The bonds are registered in Luxembourg because it enjoys a withholding tax treaty with Spain, and the financing documents are governed by English law, and in English, though the underlying project documentation is in Spanish. The bonds were not rated, because the process of getting a first-time rating in the sector would have been very time-consuming.

The project's technology, crystalline solar photovoltaic, is proven, reliable and easy to maintain, at least as compared to a thermal power plant. The asset is likely to suffer some degradation in its capabilities over the life of the bonds, whether from vandalism or wear and tear, and the model that underlies the financing accepts that the project will operate at steadily lower percentages of its original capacity over the years. Forecasting revenues is easier, since the quantities of sunshine that the project will receive are fairly stable, particularly as compared to wind.

The greatest factor in the timing and credit of the project was the Spanish tariff regime, which was changed in June, under Royal Decree 661, to offer a price of Eu0.44 per kWh for 25 years to small solar producers. But this tariff would only apply to the first 1,000MW of capacity to be installed, and as developers raced to install new equipment across Spain, investors worried that should their project be the one to come online after the cut-off they would earn an uneconomic spot market tariff.

The Spanish government, realising that it had created a renewables programme that made the US system look like a model of stability, is moving to put in place yet another tariff regime that is likely to offer a tariff of nearer Eu0.31 per kWh, but would not cap project size, or total capacity. Projects already operational will still receive the old tariff, but financing new assets, particularly given the rising costs of solar materials, will be challenging, and encourage funds and dedicated owner-operators to take over from private investors in providing equity.

So Solaris is unlikely to serve as a detailed template for future Spanish solar financings, still less those elsewhere in Europe. Germany's feed-in tariff, for instance, still fetches more admiring glances from bankers, carping about its quantities of sunshine notwithstanding. But in locations like Italy and Greece, with the right tax, legal, meteorological and tariff conditions, developers will be able to borrow copiously from Solaris if they decide to access European bond markets.

Delta Fotovoltaica SA
Status: Closed 26 June 2007
Size: Eu217 million
Location: El Banillo, Spain
Description: Bond financing for 20MW solar photovoltaic portfolio
Developer: Abastecimientos Energéticos
Equity providers: 200 investors, managed by Deutsche Bank, Private Wealth Management, Spain
Construction contractor: Dragados
Debt: Eu185 million
Underwriter: Deutsche Bank
Underwriter legal counsel: Linklaters
Sponsor legal counsel: Herbert Smith (English law) Garrigues (Spanish law)
Model auditor: Operis
Insurance adviser: Aon
Technical consultant: Fichtner.