On 7 June 2012, Lincs Wind Farm, a consortium comprising Centrica (50%), Dong (25%) and Siemens (25%), closed a £1 billion ($1.55 billion) financing for the 270MW Lincs offshore wind farm. The deal is the first offshore project in the UK to close where lenders have accepted construction risk, and is also the first project in Europe where construction risk has been written into the term sheet from the start.

The project entails the development of a 270MW wind farm, about 8km east of the town of Skegness, Lincolnshire, in the UK. Siemens is supplying 75 three-blade 3.6MW wind turbines to the project. The sponsors will be responsible for the construction of the wind farm, which, like all other offshore wind projects to date, lacks a single turnkey construction contract.

Centrica’s interest in Lincs dates back to 2004, when it acquired the project from Renewable Energy Systems. In 2008, the utility obtained planning permission and the following year brought in Dong and Siemens as shareholders. The sponsors started construction in 2010 and then in the middle of that year sent lenders an information memorandum, which proposed that they accept an element of construction risk.

What followed was a fairly lengthy negotiation, as both the sponsors and lenders tried to get comfortable with the risk allocation. In response to the information memorandum, lenders expressed concern at the sponsors’ initial proposal, and it was only by the following year that all parties were able to agree on a final structure.

Banks were officially mandated in August last year, and spent the next six months in documentation before signing in February this year. The reason for the lag between the signing and close is because the sponsors still had to finalise several conditions precedent, especially obtaining all the necessary permits, before the deal could fund.

The lag between signing and close illustrates the numerous risks of delay present in offshore wind projects: in this case the project suffered delays to the installation of its transmission cables across a seawater marsh and mud flats. Despite the problems the sponsors were able to raise £425 million in long-term debt without any ECA cover or construction guarantees, though all three developers are extremely capable, both financially and technically.

“The most important reason [why lenders were able to accept construction risk] is the counterparty risk” says Federico Florian, director for infrastructure and energy finance at KfW-IPEX. “You put in the balance the fact that on the other side of the table you have Centrica, Dong and Siemens. It is very unlikely that these types of sponsors will walk away from the project if an accident were to happen.”

The deal is a true project financing in the sense that the commercial bank debt is non-recourse and lenders have very little formal security from the sponsors other than a pledge over the shares of the project company. But it is also a limited recourse financing, since more than half of the debt, about £575 million, is in the form of sponsor loans.

The sponsors did hold initial negotiations with both EKF and the EIB about participating in the project, but eventually decided that commercial bank appetite would be enough, provided that the sponsor loans were in place. The deal closed through a club of 10 banks: BTMU, BNP Paribas, DNB, HSBC, KfW-IPEX, Lloyds, Nordea, SEB, Santander and UniCredit.

Pricing on the project debt is 275bp over Libor, rising to 310bp, while bank fees are around 200bp. The financial metrics on the deal are fairly conservative, reflecting the fact that banks are accepting some construction risk. The average debt service coverage ratio at P50 is 1.77x and 1.54x, while at P90 the figures are 1.48x and 1.3x.

The bank debt is split between various facilities, including a long-term project loan and also a letter of credit facility, a VAT facility and an OFTO tranche. The tenor on the project facility is 15 years plus construction, which is the same as the length of the offtake agreement. British Gas Trading, a subsidiary of Centrica, signed a power purchase agreement with the project for 75% of its output.

The OFTO tranche is designed to bridge the sale of the offshore transmission lines to Transmission Capital Partners, which Ofgem has named preferred bidder for the ownership and operation of the assets. The tenor on the tranche is 15 years plus construction, so if the sale did not go through it would just amortise to maturity naturally.

The sponsors have already drawn on the debt and are using the proceeds partly to fund construction, but also to reimburse themselves for the equity that they have already put into the project. Around half of the construction has already been completed, including the onshore and offshore substations and most of the work for the transmission lines. Commissioning is expected to start in the first half of 2013.

Lincs Wind Farm Limited
STATUS: Financial close 7 June 2012
SIZE: £1 billion
DESCRIPTION: Financing for the construction of a 270MW wind farm, located 8km off the coast of Lincolnshire in the United Kingdom
SPONSORS: Centrica (50%), Dong (25%), Siemens (25%)
MANDATED LEAD ARRANGERS: BTMU, BNP Paribas (hedging), DNB Nordbank, HSBC (documentation, modelling), KfW-IPEX, Lloyds, Nordea Bank, SEB, Santander (insurance), UniCredit (technical)
SPONSORS’ FINANCIAL ADVISER: BTMU
SPONSORS’ LEGAL ADVISER: Slaughter & May
LENDERS’ LEGAL ADVISER: Linklaters
LENDERS’ TECHNICAL ADVISER:Sgurr
LENDERS’ INSURANCE ADVISER: JLT