The feed-in tariffs for the next three years are in place and the uncertainty surrounding local permitting law is almost settled. Today, the Italian PV sector is by far the most buoyant project finance sector in Italy and the Italian market is by far the most buoyant PV market in Europe.

A flurry of large projects, interspersed with numerous 5MW to 15MW schemes, are reaching financial close across Italy. Most recently First Reserve reached financial close on the 70MW plant in Rovigo in Northern Italy.

Mark Florian, managing director at First Reserve, says: “Italy has a pretty good solar resource and has a good incentive regime. The feed-in tariffs of Eu35 cents per kilowatt hour plus the local merchant power pool price produce a healthy enough support mechanism for developers and investors to make a reasonable return on investment.”

The Rovigo financing follows on from the announced joint venture between First Reserve and SunEdison to develop up to $1.5 billion of solar PV plants. SunEdison is developing the projects, obtaining permits, and constructing and operating the plants and First Reserve is underwriting the equity and leading the structuring of the project financings.

Two obstacles overcome

The two major obstacles facing the sector at the beginning of 2010 – unknown future feed-in tariffs and permitting uncertainty – have almost entirely evaporated.

Under the new tariff regime there will be an orderly step-down in the tariffs every four months through 2011. And in 2012 and 2013, the last tariff of 2011, Eu0.251 per kWh, will be reduced by 6% per year. The new law will also establish a 3GW cap in solar capacity by the end of 2013, up from the 1,200MW cap.

The rationale behind reducing the tariffs is for the government to provide enough incentive for developers while the technology is nascent and reduce the tariffs as input costs fall. In this respect, the Italian government appears to have done a decent job. “Although projecting out panel costs is difficult and uncertain, it feels as if the set tariffs are following the projected fall in panel costs,” says Florian.

Permitting pace

Aside from the feed-in tariff uncertainty that has been resolved, the PV sector has encountered uncertainties with the permitting regime, namely the local fast track (DIA) laws of the regions of Puglia and Calabria. These appeared to have been completely resolved with the introduction of a federal DIA law that effectively cured Constitutional Court hearings, which had stated that the local law directly contradicted federal law and was therefore illegitimate.

However, GSE had intimated to the solar market that if PV plants subject to local fast track DIA permits are not connected to the grid by 15 January 2011, it will not recognise those permits. However, most of the market believes that consolidated DIA permits – that is, those projects where construction has begun and the challenge period has elapsed – will survive past 15 January.

These issues are avoided if projects are authorised with the more protracted but safer federal authorisation procedure, autorizzazione unica (AU).

“All our projects are fully permitted using the central authorisation procedure (AU) before we invest. We have taken a lot of time looking at the Italian permitting regime and despite the time it takes to develop a project, I think it helps modulate the system,” adds Florian. “If it was too easy everyone would rush out projects, so the system helps the sector develop at a reasonable pace. Each region has its own nuances and laws and it’s time consuming, but I see that as a good thing.”

Structuring benchmarks

Bank liquidity is less of a problem. Anecdotally, the most active international banks in Italy – Societe Generale, BNP Paribas, Credit Agricole, WestLB, Dexia and Natixis – are looking at projects of 15MW and over and the PV sector makes up around 80% of their project finance work in Italy.

The benchmark for reputable sponsors that have approached a number of banks is forming: leverage of between 80 to 85%, average debt service coverage ratio of between 1.25x to 1.3x, 18-year fully amortising term loans, pricing starting at around 260bp rising to 310bp over Euribor and bank fees of around 200bp. Leverage, pricing and other terms are becoming keener as banks chase the predictable deal flow and now-vanilla structuring. For instance AES/Riverstone’s 43MW Il Primo deal was done on an ADSCR of 1.35x, and debt margins now start at around 260bp rather than 300bp of 10-12 months ago. The mandatory cash sweeps at around years 9 to 12 have also been largely bid out to fully-amortising structures.

Perhaps the most innovative aspect of the standardised documentation is the method of regulating debt sizing depending on the tariffs at connection, and separating DIA plants in case of challenges. Banks do not accept late connection/tariff-drop risk, so most deals feature a conservatively large amount of equity based on a worst-case connection scenario with a true-up facility on successful connection, or, an escrow account to achieve the same, or, with the tariff now known, pass through these risks to the EPC contractor.

In the Ampere/Winch 9.7MW Puglia deal, the sole arranger Investec passed through the connection risk onto the EPC contractor. The Eu33 million deal is not a benchmark however, as leverage was only 75%, with a tenor of just 10 years.

The AES and Riverstone joint venture, AES Solar, is expected to close a Eu100 million ($136 million) debt financing for a portfolio of 24MW photovoltaic solar plants across Italy in November. Dexia and SG are lined up to provide the debt and are unlikely to require additional banks. The deal is likely to have two novel features – three DIA assets are segregated and can be pulled from the financing easily if the permits are challenged, and additional debt for a further 18MW that will use the 2011 feed-in tariff can be annexed to the facility.

The term loan is expected to be an 18-year fully amortising facility with debt margins starting at around 260bp, rising to 320bp. The ADSCR is around 1.3x.

AES Solar has a huge 123MW PV portfolio financing with assets across Italy that will approach the bank market before the end of the year. And SunPower is likely to close its much-anticipated 52MW Andromeda project bond by offering Eu100 million 18-year SACE-covered paper to investors. SG and BNP Paribas are bookrunners.

The bond is unlikely to undercut a bank debt deal, but should open up the capital markets for future deals. Refinancings of PV portfolios without construction risk would be most suited for an uncovered bond. “A capital markets refinancing is definitely something we will consider in the future but we need to get to scale,” says Florian. “The capital markets could be competition for banks in the future, and it will be interesting to see what structures emerge.”

Weighing regimes

How long can such a rush of developers and a glut of deals last? It depends largely on the projected cost of PV panels and whether the tariffs plus pool price provide sufficient headroom to meet return thresholds. At present, Italy is one of the most attractive regimes anywhere and it has a relatively stable regulatory and political regime.

“I couldn’t say if Italy is the best regime globally but it compares favourably with Germany, for example, where there is less irradiation and has a less supportive regime,” says Florian. “Spain had a very attractive regime but that was slashed and investment in the sector faced a cliff edge drop. In Canada, Ontario has become a very attractive place and is governmentally stable.”

In Spain the federal government was using its own budget to finance renewables, so there were inherent and eventually justified concerns over the availability of funds. In Italy the cost is passed through to the consumers. “We’ve done some detailed analysis which shows that you could build all the PV plants you want and it will not materially affect the end-user cost stack.” n

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 Rovigo PV: Europe’s largest

US private equity firm First Reserve reached financial close on a Eu276 million project financing for its 70MW Rovigo solar plant in Northeast Italy on 2 November.

The total project cost is Eu345 million, financed on a debt to equity split of 80/20. The Eu276 million debt financing splits into a Eu240 million fully amortising 18-year term loan priced at 265bp stepping up in equal six-year intervals to 315bp. The other debt facilities comprise a 5-year Eu15 million VAT facility, and ancillary facilities of Eu21 million shared among a working capital facility and VAT, municipality and commissioning bonds. The average debt service reserve coverage ratio is a healthy 1.3x and bank fees were in excess of 200bp.

Unlike a number of recent Italian PV deals the deal does not feature a mandatory loan life coverage ratio-triggered cash sweep.

The deal was led by coordinating banks Santander and Unicredit, which were joined by Credit Agricole, Dexia Crediop, Natixis and Société Générale. Credit Agricole was the technical bank and Dexia was the insurance bank. Santander and Unicredt provided the bonds and took the largest tickets.

Despite its size – the plant will be the largest operating PV plant in Europe – the deal was simple to transact because the project is almost fully commissioned with the interconnection tested at the end of October. Drawdown will occur at final interconnection so the banks are not exposed to late connection and tariff risks.

SunEdison is operating the plant and supplying the panels. It has provided an extensive availability based two-year warranty for the panels.

First Reserve acquired the plant from SunEdison, a division of MEMC Electronic Materials, for Eu276 million in September 2010. The plant was acquired through a joint venture established between First Reserve Energy and SunEdison, which is a minority investor in the joint venture. The JV could provide for the acquisition of up to $1.5 billion in current and future SunEdison PV projects with First Reserve and SunEdison committing $167 million equity initially over a phased period.

First Reserve may later raise an additional $150 million of equity. Investment vehicles managed or advised by Partners Group AG and Perennius Capital Partners SGR are expected to also invest in the venture. The combined equity when geared with project debt could lead to the JV owning $1.5 billion of PV assets.