Jadraas Wind: Danish debut
Arise was founded in 2006, has 138MW of capacity in operation, and its shareholders include AP3, Nordeas fund management arm, Statkraft, Danish pension fund ATP, and Swedish pension fund Alecta. It listed in March 2010, and has financed its slate of smaller wind projects with loans from single arrangers. Nordea funded the 16MW Idhult project in Mönsterås, Sweden, while DnB NOR funded the 22.5MW Fröslida plant in Hylte.
The developers of Jadraas were renewables developer Ownpower Projects Europe (OPP) and Bergviks Skog, a forestry owner spun out of Stora Enso in 2004, which had formed a 50/50 joint venture to own the project. Given the size of the proposed wind farm, Arise needed to find outside sources of debt and equity to enable it to acquire the project from the developers. Platina Partners, through its Platina Energy III Fund, which closed in March 2010, agreed to take a roughly 50% stake in the acquisition.
The purchase price for the project is SKr250 million, split roughly equally between cash paid by Platina to Bergviks Skog and the issuance of 2.5 million Arise shares to OPP at a 5% discount to market price. But the two buyers worked together on the construction financing with their adviser DnB NOR in advance of the acquisition, because the close of a construction deal was a condition precedent for the closing of the sale.
The Eu220 million in 15-year debt breaks down into a Eu110 million commercial bank loan from DnB NOR and fellow mandated lead arranger SEB, and a loan of the same size from PensionDanmark with full commercial cover from EKF. The terms of the two lines are essentially identical, and here the EKF/PensionDanmark differs from other ECA-guaranteed institutional debt products, because it is squarely designed to replicate bank debt terms and supplement bank financing.
ECAs such as US Ex-Im and Sace have been actively marketing bond products for renewables exporters, but solar has been the best candidate for bond deals and wind lends itself to bank financing. Denmarks biggest renewable exporters are turbine makers Vestas and Siemens Danish operations. The product will be a useful marketing tool for larger customers, though it has limitations.
EKF covers credit risk, but it does not cover funding risk or currency risk. Sweden is not a member of the Euro, but it is a member of the Nord Pool power market, which covers Norway, Denmark, Sweden and Finland, and transacts in Euros. The projects 66 Vestas V112 3MW turbines are priced in Euros, and the obligations of PensionDanmark are in Danish Kroner, whose value is pegged to the Euro. PensionDanmark will have a limited appetite for sterling or dollar assets. The lender will also expect a prepayment penalty, unlike banks, which tend only to insist on swap breakage penalties.
The debt is priced at roughly 275bp over Euribor, a level that was set before the recent bout of instability in the Eurozone, and for this reason, and despite the insistence of one source close to the arrangers that they have received some reverse enquiries from potential participants, the leads are likely to retain their commitments.
One additional reason for the limited appeal of the deal is its exposure to merchant revenues on Nord Pool. Lenders need to be comfortable with the pricing that will be available to the project when it rolls over contracts with a maximum five-year term, and which will be set with reference to spot prices. Spot prices, for both power and renewables certificates (a regime confined to Sweden, and soon Norway), are a function of hydrology, given the way hydroelectric plants dominate the Nordic power market. Lenders with experience of the markets dynamics have an in-built advantage, and EKF can almost treat the credit as a domestic one.
There are additional protections, including leverage of nearer 65% than the 80% that can be typical for UK onshore, and a preference for a P95 base case over P50 levels. The debt has cash sweeps, and if necessary distribution locks, based on the projects debt service coverage ratios, both historic and forward-looking. Nevertheless, the financing might have closed earlier, and have been more widely distributed if falls in power prices over the middle of the year had not required the lenders to revisit their assumptions.
The Nordic wind market has inspired considerable competition amongst banks, and the Jadraas financing will only make this more intense. The PensionDanmark product appears during a window in the European bank market that might be brief. Banks will lend to 15 years, but not in large amounts, so a product that covers a maximum of 50% of a projects debt requirement and mirrors bank debt terms makes perfect sense.
A collapse in bank sentiment and a return to miniperms in European project finance would be a test of its usefulness. Indeed lenders have suggested that it might be necessary to lean on EKF and the institutional provider to go beyond banks, if needed. But the EKF/PensionDanmark combination is ideally suited to support upcoming offshore wind financings. Both have experience in the sector, EKF as a lender, and PensionDanmark as a shareholder in DONGs Anholt project, and the debt requirements of the segment are immense. ■
Jadraas Vindkraft
Status: Closed 6 October 2011
Size: SKr3.1 billion ($450 million)
Location: Jadraas, Sweden
Description: 203MW onshore wind farm
Sponsors: Arise Windpower and Platina Energy III Fund
Developers: Ownpower Projects Europe and Bergviks Skog
Debt: Eu220 million
Providers: DnB NOR, SEB, PensionDanmark
ECA: EKF
Financial adviser: DnB NOR
Market consultant: Poyry
Technical consultant: DNV
Lender legal adviser: Lindahl
Sponsor legal advisers: Norton Rose and Setterwalls
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