Europe's first wind securitisation 'Breeze One' launched mid-September. Arranged for wind developer Energiekontor by HypoVereinsbank (HVB), the deal is also Europe's first structured basket bond (SBB) - a combination of existing wind farm debt and equity refinancing and project bonds for greenfield developments.

The securitisation first appeared in June when it was the first European wind deal to be publicly rated, generating a BBB- from Standard & Poor's (S&P). The structure is innovative, not only in bringing wind assets to the capital markets, but because it has the potential to bring a whole new range of asset classes to the securitisation market - in short Breeze One is the first time that any small and mid-sized project financings have been securitised.

Issued through Max Two Limited - a Jersey incorporated special purpose vehicle - Breeze One has put out a total of Eu100 million ($125 million) of 20-year notes due in 2024 to refinance Eu40 million of existing project debt and equity from five wind farms in Germany and finance Eu46 million of greenfield development of three farms in Portugal. Construction of the new farms - the 13MW Penedo Ruivo, 10.4MW Montemuro, and 10.4MW Marao - is expected to begin this year.

Although the ultimate sponsor is Energiekontor, the company is an operations and maintenance specialist and retains very little equity in any of the farms it manages. The company usually develops sites and sells the equity to private individuals. In effect, the majority of the equity on this deal was from KG investors, Germany's tax efficient small investor system that has dictated the way German wind development has gone - lots of small farms developed independently.

The deal therefore creates a portfolio effect for the KG system with the consequent economies of scale.

On the debt side, Energiekontor, which is unrated and too small to raise unsecured funding, relies heavily on bank project finance loans. Its lender banks include HVB, which will continue to lend to the company. However, the 20-year bond allows the company to raise much longer-dated funding than is usually possible in the bank market.

According to S&P, "the key support for the senior debt is the benign regulatory regimes in Germany and Portugal for renewable energies, which provide for long-term offtake agreements and the expectation of price stability." The 20-year term matches the fixed tariffs laid down by both German and Portuguese feed-in laws and intended to promote renewable energy. They allow wind farms priority dispatch into the regional utilities and grid operators in Germany, and the national grid in Portugal. The grid operators are required to pay the windfarms a set tariff over 20 years for all the electricity they are able to produce.

Refinancing on three of the existing German projects raises a total of Eu12.1 million in senior loans, with the remaining 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: the deal comes with the option of additional windfarm projects being added to the portfolio

Although situated in long established wind markets, the deal's cashflows are dependent on the ability of the farms to generate, and hence wind levels throughout Germany and Portugal. Wind availability was therefore a key investor and rating agency concern, and with no significant cross collateralisation between the projects, the lowest rating on the separate underlying wind farms determined the BBB- the rating on the notes.

According to S&P, the deal could stand four consecutive years of wind levels 20% below their long-term average, and that throughout the 35 years of wind analysis available, no wind year dropped that far below average. The rating agency notes, however, that Portuguese wind data is limited.

The deal also benefits from a debt service coverage ratio of 1.4%. If that drops to 1.2% all dividend payments for that year will be locked up.

Nevertheless, the issue has not gone as well as expected. After a long marketing process which began before the summer, HVB priced the bond at a coupon of 5.7%, paying a spread of 176bp over the 2014 Bund.

However less than 10 accounts participated, of which around half were banks and the rest insurance companies and pension funds which used the bond for asset and liability management purposes. Most accounts were UK-based, although there were buyers from Benelux, Germany, France and Austria. The bank was unable to find demand at that price for the entire deal, and a portion of bonds were retained at launch.

Despite the initial hurdles - in this case symptomatic of unfamiliarity with a new technology and asset class - HVB has at least two more transactions in the pipeline, with the next deal expected at the start of 2005. And other banks - notably Commerzbank, which has a large German wind loan portfolio - are likely to give the structure a try. Germany is the biggest wind market in Europe and, unlike the second biggest market, Spain, comprises a vast number of small projects that the portfolio effect should benefit in terms of cost of financing.

Breeze One
Status: Launched 18 September 2004
Description: First European wind portfolio securitisation
Sponsor: 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