Toto Group closed Italy’s first project financing of a photovoltaic plant structured as a public-private partnership on 4 August. Toto raised a Eu66.6 million ($94.7 million) project facility for the Eu72.6 million 24MW Monteboli photovoltaic project in Eboli, Salerno province, Italy.

Toto won an open public tender to operate the plant on public land and the grantor, the municipality of Salerno, award­ed the concession in October 2010. The tender was largely based on the amount of royalty that the winning bidder was prepared to offer to the municipality.

The period from October 2010 to May 2011 has been a highly turbulent time for PV tariffs in Italy, given the retirement of Conto Energia 3 and the delay over the new regime, Conto Energia 4, which will see an accelerated drop in tariffs during 2011 and 2012. However, as a condition of the award of the concession the sponsor had to complete the project by May. Fortunately Toto, which is also the project’s engineering, procurement and construction contractor, duly achieved this, funding the construction on its own balance sheet.

The project consists of three separate 8MW plants whose permits fall under the central AU procedure. Two of the three plants were completed by April 2011 and receive the Conto Energia 3 tariff of Eu0.333 per kWh. The third plant, completed in May receives Eu0.311 per kWh.

Lead arranged by ING Bank (Eu31.4 million), MPS (Eu22.2 million) and UniCredit (Eu13 million), the debt comprises a Eu59.1 million 17-year loan and a Eu7.5 million VAT facility. MPS also provided guarantee facilities worth Eu8.3 million.

Chinese manufacturer LDK provided the PV panels, and is providing a standard 5-year availability guarantee. LDK was familiar to two of the banks and passed through their credit committees without a problem, while one of the banks required further due diligence on the strength of the parent guarantees.

The debt margins start at 270bp until year 5, 280bp until year 10 and 285bp thereafter. Upfront fees are 180bp. The average debt service coverage ratio is 1.3x and the loan life coverage ratio is 1.35x. There are no cash sweeps if the project performs in line with its base case.

Around half the debt was disbursed after financial close on 11 August, while draw down on the other half is dependent on the signing of a contract with state regulator GSE, which is expected by mid-October at the latest.

Bank appetite for Italian PV assets withered with the uncertainly surrounding the Italian tariff regime at the end of 2010 and the beginning of 2011, which is a large part of the reason that Toto funded construction on its own balance sheet. Despite the clarity over the PV tariffs at completion, such was the apathy towards the sector from lenders that Toto had to pare down its attempted leverage from 80% to 75%. However, Toto has grounds to believe that it has received a good deal, as the all-in cost of the debt (Libor + debt margin + fees + swaps) is currently lower than the funding costs for the government of Italy, which is struggling with bond yields of around 7%. When, or if, the market recovers and the project is a success, a refinancing will almost certainly increase the leverage.

Although there have been a number of 1MW to 2MW PV developments in Italy where a public body has used a private developer, Toto’s Monteboli deal is the first PPP of a significant size and the first to use project financing. The deal has an additional layer of complexity over a standard integrated PV project because the owner of the land, and the entity owed the tariffs is the municipality of Salerno. It is a three-way deal with the municipality wholly responsible for offering up security and revenues and the EPC contractor, which is responsible for operation and construction.

“The municipality acted extremely efficiently,” says Fabio Fritelli, chief financial officer at Toto. “They were able to negotiate and draft working contracts in a prompt manner. And ultimately the deal was set up, more or less, as a standard project financing.”

The municipality will receive the fixed feed-in tariffs paid by GSE and pass them through to the project company. GSE pays the tariff quarterly plus an additional 60-day deferral period, so the project’s first payment is due at the end of September.

Under Conto Energia 3, public bodies developing sites for PV are eligible for the higher roof-mounted tariffs, and so the Salerno municipality keeps the difference between the roof-mounted and ground-mounted tariffs. In return for surface land rights the project company will pay a fixed annual royalty to the municipality independent of the power generated. Toto expects to make a low double-digit internal rate of return.

The concession length will either be for 19 or 20 years, with a 20-year feed-in tariff. Fritelli adds: “There is a one-off re-equilibrium process whereby the municipality can choose to have a 19-year con­ces­sion with a slightly lower royalty and a full year of receiving the tariff after nineteen years, or a slightly higher royalty for 20 years. The municipality is likely to opt for the 20-year option within the next two weeks.”

At the end of concession the plant will revert to the municipality. Although under Conto Enrgia 4 there is no additional subsidy to public bodies and PV tariffs are decreasing all the time, the project should provide a template for future public authorities in Italy and the rest of Europe.

As for Toto, it is gaining a reputation for setting precedents in the Italian project finance market after closing the first financing of a road concession in February 2011, Strada dei Parchi. Toto is likely to next approach project banks for a Eu300 million wind farm portfolio financ­ing at the end of 2011.

Monteboli photovoltaic project
Status: Financial close 4 August 2011, second and final disbursement by mid-October
Size: Eu72.6 million
Location: Salerno, Italy
Description: 24MW solar photovoltaic plant procured as a PPP
Sponsors: Toto subsidiaries AP Capital (95%) and Toto Costruzioni Generali (5%)
Mandated lead arrangers:
ING Bank, MPS and UniCredit
Sponsor legal counsel: Hogan Lovells
Lender legal counsel:
Studio Legale Legance
PV panel supplier: LDK
EPC contractor: Toto Costruzioni Generali