Fred Olsen Renewables: Shore to be repeated

UK renewables project financings have to date been so infrequent that a template has yet to be established. Last year's model, Beaufort, while innovative, was a specific solution to the needs of a large utility ? npower Renewables ? in developing offshore capacity. But Norwegian developer Fred Olsen's project lease financing for two onshore UK projects provides an interesting model for smaller developers in search of cost-effective financing.

The deal, which consists of £90 million ($168 million) in long-dated and standby facilities from BTM and HSBC, with lease equity from HSBC, is not the first renewables lease ? there have been a number of French structures ? but it is the largest and most fully realised structure to date in the UK and has the advantage over the French counterpart of not needing specific permission on each use from the relevant government authorities. But it remains dependent upon the continuing generous tax treatment of wind turbines to provide the best benefit to sponsors.

The project consists of two separate wind farms ? Rothes and Paul's Hill. Rothes is a 50.6MW project located in Speyside, Scotland, and Paul's Hill is a 56MW wind farm located in the same region. Construction is already underway on Rothes, and Paul's Hill is currently awaiting Section 36 approval.

The sponsor has already completed one lease ? a smaller deal in the region of £46 million for its Crystal Rig project in East Lothian. Crystal Rig's arranger was BTM, which closed the financing despite problems at the project's turbine supplier, Nordex. For this financing, Fred Olsen, which is best known as a shipping operator, and its adviser Atlas Equipment Finance, contacted HSBC lease finance group, to provide a follow-up.

The follow-up consists of two cross-collateralised financings for two facilities with two lease agreements with HSBC-owned lessors. The farms use turbines from Bonus Energy, which does not suffer from the financial difficulties that plagues Nordex, and was in any case bought by Siemens late in 2004. The deal benefits from long-dated power purchase agreements with PowerGen.

The financing consists of a £70 million construction plus 15-year facility, described as a ?credit envelope? rather than debt by one participant, as well as a £20 million working capital facility that counts against the term facility commitment, Of this, £35 million has been drawn against Rothes, while drawdown on Paul's Hill waits on it receiving the necessary consents to commence construction.

The lease is made possible by UK tax rulings that allow finance leases on turbines and towers, which are counted as movable assets. This will enable smaller developers without adequate tax capacity to realise the NPV benefits of UK depreciation allowances. These can, according to one deal participant, be as much as 10%.

Fred Olsen Renewables
Status: Closed November 2004
Size: £90 million
Location: Scotland, UK
Description: project lease for two wind farms with a total capacity of 106.6MW
Sponsor: Fred Olsen Renewables
Credit providers: HSBC, BTM
Lease equity: HSBC
Financial adviser to sponsor: Atlas Equipment Finance
Wind adviser: Garard Hassan
Insurance: Miller
Lender legal: Allen & Overy
Sponsor legal: Watson Farley & Williams