The latest bout of weakness in European bank markets may be more fruitful than the last. This year’s winner in onshore wind marries two trends from the last several years – increased export credit agency involvement in developed market renewables deals, and the search for institutions that can replace constrained bank finance – into a single workable product. It is also the largest wind financing ever in the Nordic region, and was structured around the hard-to-hedge Nord Pool merchant market.

The highlight of the financing is its use of a loan from Danish pension fund PensionDanmark, which benefits from coverage from Danish export credit agency EKF. The product is just the kind of financing that sponsors hope will compensate for a lack of lender capacity for project finance assets. It emerged and was shaped in response to the needs of the Jadraas sponsors.

The sponsors of the 203MW Jadraas project are Arise Windpower, a listed Swedish developer, and the Platina Energy III Fund. But the developers of the project were Ownpower Projects Europe (OPP), a privately-held developer, and Bergviks Skog, which manages the forestry assets formerly owned by Stora Enson, and is one of the largest landowners in Sweden. Platina joined the transaction after another project it was developing with Bergviks Skog fell through.

The two sponsors started work with the two developers on the financing in early 2010, even though the sale of the project would not close until the construction financing also closed. While Arise, which listed around that time, and Platina, which was closing its third energy fund, had the necessary equity backing to close the deal, raising the necessary debt for a SKr3.1 billion ($450 million) project would be a struggle.

One important reason for this is that lenders would have to be comfortable with the project’s merchant risk profile. The Nord Pool market, which covers Sweden, Norway, Denmark and Finland, enjoys cheap power thanks to abundant hydroelectric capacity. Unlike many merchant markets sponsors cannot use gas price hedges to mitigate price risk, because rainfall, not gas prices, is the biggest influence on power prices.

Generators such as Jadraas can usually obtain hedges for power prices of five years, and renewables certificates, which obey similar market dynamics, of up to three years. Jadraas is working with Swiss power trader EGL on hedging its output under rolling five-year arrangements. Jadraas is also offering lenders distribution locks and cash sweeps based on both historical and forward looking debt service coverage ratio tests.

Scandinavian lenders came through the last crisis comparatively unscathed, and are familiar with Nord Pool through their exposure to generators, utilities and large corporates in the region. But they are few in number and generally conservative. German and Dutch lenders have chased project business in the region aggressively, but demonstrated little enthusiasm for Jadraas.

Arise and Platina managed to get a debt commitment from their financial adviser, DNB, as well SEB, for the financing before the Eurozone crisis deepened, at pricing that is thought to be around 275bp over Euribor. But asking the two banks to split Eu250 million of 15-year debt between them looked increasingly onerous as the market turned.

The sponsors’ decision to use newer Danish- made Vestas V112 3MW turbines, which had not yet been deployed on a large scale, became more of an asset than a cause for concern. The manufacturer provided a 15-year operations and maintenance agreement, which matched the debt tenor and went far beyond the scope of a typical manufacturer warranty.

Using Vestas equipment also made the project eligible for support from EKF. In the aftermath of the 2008 crisis EKF, which normally prefers to cover debt from commercial providers, has provided some direct lending to make up for missing bank liquidity.

In mid-2010, the sponsors and their adviser increasingly thought it might be necessary to access this lending, though it came with inflexible drawdown and prepayment provisions. However DNB noticed that PensionDanmark had become increasingly active as an equity investor, for instance in buying stakes in several offshore wind farms sponsored by DONG. It approached EKF and the pension fund about developing a suitable product.

Funds, as debt investors, tend to be similarly wary to EKF about flexible draw and prepayment provisions, not to mention floating interest rate exposures. The process of closing Jadraas involved discussions with the fund and EKF regarding flexibility and how to agree terms similar to the banks. PensionDanmark agreed to provide half the debt, with DNB and SEB each providing a quarter.

The product that EKF eventually unveiled with PensionDanmark was a DKr10 billion commitment to fund up to 50% of a project’s debt requirement, on terms that have to match commercial banks. But the lending programme did not emerge fully-formed, and was shaped through a process of negotiation with the Jadraas sponsors.

Jadraas, an onshore project dispatching into what for EKF is essentially a home market, was a good project to use to develop the programme. Both Vestas and Siemens, which has Danish manufacturing operations, will benefit if EKF funding means they do not have to drastically reduce project size. Offshore wind, which usually has larger debt requirements, is an obvious place to develop the EKF product further.

But Platina, which has a 250MW onshore project in Sweden nearing market, may bring in a more familiar follow-up before that. According to Mikael Schoultz, a partner at Platina: “We think there is room for lenders to accept different levels of power and certificate hedge coverage than they have accepted in the past, or accept different ways to build a hedge over time,” he says.

Jadraas Vindkraft
STATUS: Closed 6 October 2011
TOTAL PROJECT COST: SKr3.1 billion (Eu350 million, $450 million)
DEBT: Eu250 million
DESCRIPTION: 203MW onshore wind farm in Sweden
SPONSORS: Arise Windpower and Platina Energy III Fund
DEVELOPERS: Ownpower Projects Europe and Bergviks Skog
PROVIDERS: DNB, SEB, PensionDanmark
ECA: EKF
FINANCIAL ADVISER: DNB
MARKET CONSULTANT: Poyry
TECHNICAL CONSULTANT: DNV
MODEL AUDITOR: PKF
TAX ADVISERS: PwC and Ernst & Young
LENDER LEGAL ADVISER: Lindahl
SPONSOR LEGAL ADVISERS: Norton Rose; Setterwalls