Breeze One: Making the bank

Germany's wind industry, whilst the most developed in Europe, has had little to offer by way of inspiration to the project finance market. A network of smaller banks, backed by the balance sheet of the Kreditanstalt fur Wideraufbau, has a tight grip on lending to the KGs ? the partnerships of high net worth individual tax investors that make up the equity market.

But last year Germany fostered what is arguably Europe's first wind securitisation ? the Breeze One structured basket bond (SBB). A hard sell to the bond market, the deal eventually surmounted much scepticism from investors and ratings agencies and provides a useful tool for recycling wind debt for small project developers.

The bookrunning and structuring agent for the Eu100 million ($130 million) financing, HVB, is among the main lenders to German wind projects. It has around $3 billion in such debt on its books, although this takes the forms of guarantees of KfW loans. The deal is designed to refinance these commitments.

However, its main aim in structuring the transaction was to broaden the range of available financing tools to developers, and according to officials at the bank its own debt does not make up a significant portion of the debt that has been refinanced. The sponsor, insofar as the deal has one, is Energiekontor, a developer that plans, permits, and raises capital for wind farms, before selling off the equity to smaller investors.

HVB approached Energiekontor with the structure, which offered funding with double the maturity of the bank debt available to the KGs. Existing loan products usually come with a ten-year tenor, much less than the term of the guaranteed tariffs available to producers in Germany.

These tariffs typically have two elements ? the higher-level feed-in tariffs and a lower one thereafter. The duration and size of these tariffs are set with reference to the wind resource and the type of turbine being used. Breeze One looked for those farms that benefited from long-duration and high-level feed-in tariffs, even when these were likely to be in poorer wind resources.

The Breeze One structure works by applying the portfolio effect to these smaller wind farm projects, as well as by picking the projects with the strongest cashflows. All of the projects chosen are currently, or will be, managed by Energiekontor, and are located in Germany, (47.4MW) and Portugal (33.8MW).

Portugal benefits from a similar regulatory environment to that of Germany, with a guaranteed tariff and favourable interconnection treatment. Indeed the plants' equity will likely be sold to the same class of KG investors. Despite the extra due diligence and expense of including the planned Portuguese farms, their superior wind resource was by and large a useful addition to the transaction.

The issuer, Max Two, is an existing vehicle incorporated in Jersey that is designed to issue investment grade (it has a twin, Max One, for unrated debt). This will make a series of loans, with largely identical documentation, to the constituent projects, ten in all.

Refinancing three of the existing German projects requires a total of Eu12.1 million in senior loans, with the other two taking a combined Eu26.8 million of senior loans. The three senior loans on the Portuguese greenfield projects total Eu46 million.

There is also an escrow account that provides about Eu5.7 million of subordinated debt to various wind farms or funds to finance repowering measures. Eu600,000 will also be available to Energiekontor to use as construction bridge loans for new projects.

However, beyond that the portfolio is closed to new debt, since it would be difficult for the bond documentation to be flexible enough to accommodate new projects beyond the very limited circumstances available to escrow borrowers. The small size of the escrow facility is enough to be of limited concern to lenders.

The two biggest challenges were gaining an investment grade rating, and selling down the notes. The first challenge pitted HVB against Standard & Poor's, whose public rating experience before that date had been the FPL wind bond in 2003. While S&P grasped the regulatory environment quickly, those close to the deal, like their earlier FPL counterparts, believe that the agency may have overweighted wind risk.

No matter. The bonds gained a BBB- rating, and launched in June 2004. As a result of HVB's caution in marketing the deal, the financing took a while to close. Unfamiliarity with the structure, as well, some potential buyers say, the 5.7% coupon (equivalent to a spread of 176bp over the 2014 Bund), contributed.

The lead also decided to market in the debt in a sequential fashion to larger pension funds, those mostly familiar with project debt, and interested in writing large tickets. The process, while ensuring that the buyers had a good sized stake, may have dented confidence in the structure, as much as an oversold transaction might have. Nevertheless, the deal is now substantially sold.

The Breeze One transaction could benefit from some structural changes, and most importantly could include an even larger number of jurisdictions and developers. Spain and France are the most notable candidates (the UK and Italy's market-based system being a little less debt-friendly), and there are several developers that have approached HVB looking to put in place a similar structure.

The limiting factors are likely to be the generosity of a given country's renewables incentive regime and the available project debt in a given market. But Breeze One, which acts as a small bank for long-dated renewables finance, is sure to be imitated.

Breeze One
Status: Launched 18 September 2004
Size: Eu100 million
Location: Germany and Portugal
Description: First European wind portfolio securitisation
Developer: Energiekontor
Arranger: HypoVereinsbank (escrow account agent and collateral agent)
Trustee: JP Morgan
Legal counsel to banks: Linklaters
Legal counsel to issuer: Mourant du Feu & Jeune
Wind consultants (Germany):
Ingenieurbüro Chun, DEWI ? Deutsches Windenergie Institut, Windtest Grevenbroich, Deutsche Windguard, WIND-consult, Anemos, Windtest Kaiser-Wilhelm-Koog, SOLvent
Wind consultants (Portugal): Garrad Hassan, Inegi
Insurance: Marsh
Model auditor: Nexia