Generg: Daring but diligent

The Eu452 million ($540 million) Generg financing illustrates the diverse options now available to sponsors wishing to finance growing portfolios of renewables assets. It incorporates an innovative approach to due diligence and structuring that has applications both in Portugal's renewables sector and elsewhere.

But the financing is also the product of the evolution of Genergy from a state-owned mini-hydro generator to a privately-owned wind and hydro developer. As such, the deal features structural peculiarities that few other operators, particularly non-Portuguese ones, would likely emulate. But it demonstrates another means by which fast-growing developers can raise fast and flexible financing.

Generg's shareholders are Belgium's Electrabel (42.5%), with a number of Portuguese investors – Fundação Oriente, Novenergia 2010, Fundação Luso-Americana para o Desenvolvimento, Sociedade Lusa de Negócios, Partex Oil and Gas – grouped as Lusenerg and holding the remainder. But Generg is the sponsor, and the fact that it is also the borrower is the result more of happenstance and its history than the dictates of project finance.

The Portuguese government sold its 57.5% stake to the institutions in 2002, and according to sources at the arrangers, it meant that Generg could not set up a separate development subsidiary. "It was one of the first questions we asked them, but for tax reasons, as well as its history, we had to lend to the corporate."

The distinction between the two is a small one, since Generg's shareholders had decided that they wanted to contribute the existing small hydro projects to the portfolio and, more importantly, they wanted to count the cashflow from these projects as sponsor equity. But at the same time they wanted to allow Generg to pursue additional ventures.

Thus the structure is designed to protect lenders but allow Generg to pursue additional development prospects in the country. In particular, Generg is among the bidders for phase one of the Portuguese wind capacity tender, which is currently in progress. The borrower, therefore, could not be an ordinary special purpose vehicle.

Below it, though, were 18 special purpose vehicles – six for the existing 32MW of hydro capacity, 11 for the wind projects, and one service provider. Some of these SPVs in turn have some minority shareholders. Generg would on-lend the proceeds from the financing to these vehicles. The structure is only possible through the use of complex security and cashflow ringfencing mechanisms, making sure that lenders benefit from locks on distributions of excess cashflow at the SPV and holding company level.

This structural issue combined with the sponsors' desire to use operating cashflows as equity to require a high degree of monitoring on the part of lenders. Excess cashflow has to be pooled, and at the same time any shortfall in cash coming from the hydro projects or from government grants must be caught and rectified.

The Generg shareholders are able to persuade the lenders to live with this uncertainty by providing them with bank and corporate guarantees. These guarantees are then cancelled or called upon depending on whether cashflow is sufficient to provide equity contributions to the projects under construction. For the shareholders the solution, while featuring some contingent obligations, is better than a large equity contribution.

But the most innovative response to the sponsors' requirements is the staggered due diligence process. Generg's ability to become a big wind producer (it had 13MW of wind capacity operating before this deal) depends on fast and flexible funding for projects as they reach late-stage development. Several of these projects were, as Generg approached lenders, not well advanced enough to fund, but clearly identified.

Closing the deal in the time between late 2004, when Banco BPI, BBVA and Caja Madrid were mandated, and 9 June 2005, when the leads executed financing agreements, required a novel approach to due diligence. The leads would split the portfolio up into five groups, and then fund under these separately as they were able to complete their assessments.

The 442MW portfolio is split up into five groups:

Wind-farm Group     Capacity (MW)
Group 1 (5 wind-farms) 50.4
Group 2 (6 wind-farms) 130
Group 3 (5 wind-farms) 90.0
Group 4 (3 wind-farms) 106
Group 5 (6 wind-farms) 65.4
             Total Portfolio 441.8
Source: Banco BPI

All groups come under a single common terms agreement, which also sets out the criteria by which banks will disburse funds and release the sponsors from the guarantees associated with each group. The projects will be developed over a period that ends in 2007, and as and when they have the necessary contracts and agreements in place, then the banks will be able to fund on them.

The leads have completed the due diligence on three of the groups, equivalent to Eu271.5 million of the facility. The remaining two are likely to close in 2006. To this end, the leads have deferred syndication under the loans until later on in 2006, rather than involve a larger syndicate in the wider delayed due diligence process.

The financing breaks down into Eu164.5 million in term loans from the lead banks, Eu241.5 million in European Investment Bank debt, guaranteed by the commercial banks, and Eu46 million in short-term loans for working capital purposes. Equity and equity-like funding came from Eu26 million in shareholder equity, Eu66 million in cash flow from the hydro projects, and Eu26 million in grants from the government of Portugal.

Generg therefore financed its wind plants using only 5% in pure equity, and using an extremely accommodating bank group. The forthcoming round of bids for tenders, and the predictable nature of the Portugal feed-in tariff regime, will make this a structure that other operators will be keen to copy. Indeed, should they have a more straightforward corporate structure, they could achieve considerable efficiencies.

Generg
Status: Closed 9 June 2005
Size: Eu587 million
Location: Portugal
Description: Construction financing for 442MW wind portfolio
Sponsors: Lusenerg (57.5%), Electrabel (42.5%)
Debt: Eu452 million
Arrangers: Banco BPI, BBVA and Caja Madrid
Independent engineer: Garrad Hassan
Lenders' insurance adviser: Marsh
Lender legal adviser: Linklaters
Sponsor legal adviser: Viera de Almeida
Sponsor insurance adviser: SACRE