RES Astraeus: Up and away

Renewable Energy Systems' Eu225 million ($268 million) financing for its Astraeus wind farm portfolio is state of the art for the financing of wind assets. The deal is the first to include construction risk, and the first to allow for the addition of unnamed projects following financial close. It caps RES' rise from turnkey contractor to owner-operator, and provides a template for its US expansion plans.

RES wanted to use the financing as a cheap and flexible way to refinance asset-level debt and finance future construction projects. The two existing portfolio solutions – Breeze One and Zephyr – offered little in the way of a template for dealing with construction risk, and the former offered the cash carry difficulties associated with a bond financing. While attractive to deep-pocketed sponsors or those that own mature assets, they did not match RES' financial or operational profile.

RES had already funded all but two of the constituent parts of the operational portfolio, which consisted of projects in the UK, Ireland, and one in France, using single asset non-recourse debt. The projects benefited from contracts under a variety of regimes, including the UK's non-fossil fuel obligation and then ROC systems, the French EDF-centred regime, and the Irish Alternative Energy Requirement.

Much of the non-recourse debt on the constructed assets was closed at an earlier, more tentative, stage in the development of European wind markets. And so, while the Astraeus deal does offer the sponsor a measure of operational and financial flexibility, it also allows it to benefit from banks' enthusiasm for wind assets. Cheap pricing, then, was RES' other main priority.

For Jaz Bains, commercial manager at RES, Zephyr provided a template of sorts for the deal, but its restriction to operational projects limited its application. Its priority was to build on the template and adapt it to a growing business. "We have a few other advantages, in that we are able to fund a debt service reserve, and carry out our own EPC contracts," notes Bains.

Several responses from the bank market were for a number of separate financings, and more than one institution proposed a bond deal. However, along with the flexibility and the pricing, the sponsor was also keen to minimise transaction costs, even if an open-ended portfolio facility was not one that would attract all potential lenders.

The advantage, as far as lenders are concerned, comes from the portfolio effect – that the P50 and P90 wind probabilities for the portfolio were better because of the multiple locations at which the farms were situated. Says Bains, "the portfolio definitely helps lenders doing analysis on a P50 basis. You're not relying on a single wind regime, and the portfolio is also not as vulnerable to changes to the incentive system in a particular jurisdiction." Thus, what was challenging from a legal and structural point of view became a credit positive.

The sponsor retained a financial adviser – RBC – to put together a bankable term sheet, and allow the deal to close as soon after mandating as possible. The strategy has its risks, especially if the response from lenders were to be anaemic. Ultimately, however, BNP Paribas, RBC and Bank of Tokyo-Mitsubishi were named mandated lead arrangers.

But the process moved extremely quickly, since RES announced its intent to refinance in July 2004, it appointed the advisers in October 2004, and launched a term sheet on December 2004. It is possible that Astraeus would have been a candidate for Deal of the Year 2004, but banks took until January 17 to respond, and the deal signed on 22 March 2005. Still, given the complexity of the portfolio, the speed of the process is impressive.

The portfolio consisted at close of 96.9MW of operational capacity and 98.5MW of capacity in construction. Almost 40% of the developed capacity is in Northern Ireland, just over 10% in mainland Britain, 20% in France and under 30% in the Republic of Ireland. Of those projects to be constructed at close, 75% was in France and the remainder was in Ireland.

The operational projects thus provide the cashflow necessary to support the projects under construction. The refinancing did involve unwinding some project loans, and in one case novating a Fortis-provided swap to the new financing vehicle, but in general the cross-collateralisation was enough to tempt existing lenders back in.

The pricing of the deal, despite the additional construction risk, was slightly inside that of Zephyr, which ranged from 110bp to 155bp over libor. Since then, however, Zephyr has repriced at a still lower level. Other factors in the market, not least the razor-thin margins on Spanish wind debt, will have affected this, but it is easy to ascribe at least some of this movement to the advances of Astraeus.

The chief innovation of the deal is the ability to bring additional projects under development into the portfolio. Since each farm borrows its own tranche of debt, the overall facility increases incrementally as a new farm is approved. The new additions must be approved at the banks, but use the same documentation as the earlier projects. So far Blackhill Wind Farm, a £29 million, 28.6MW project in Scotland, has been added to the portfolio.

The project has some limitations, particularly if it were adapted to the US, where RES is keen to expand its presence. While the sponsor has considerable experience as a contractor across the Atlantic, the US incentive regime requires developers to find outside sources of tax equity, and would thus make it hard to group US and overseas projects together. Moreover, the portfolio might lose some of the benefits of speed and flexibility if a developer wished to use a third party contractor – RES builds its own projects. But the Astraeus assets look like good medium-term candidates for a capital markets refinancing.

Astraeus
Status: Closed 22 March 2005
Size: Eu225 million
Location: England, Wales, Scotland, Northern Ireland, Ireland and France
Description: Wind farm portfolio financing comprising nine operational and five prospective farms across five jurisdictions:
Sponsor: Renewable Energy Systems (RES)
Mandated lead arrangers: BNP Paribas; BTM; RBC
Financial adviser: RBC
Sponsor legal counsel: Norton Rose
Lenders' legal counsel: Linklaters
Hedging counterparty: Fortis
Tax adviser: Deloitte
Wind analyst: Garrad Hassan
Technical analyst: Mott MacDonald
Insurance: Willis
EPC contractor: RES