Recent months have been kind to European offshore wind bankers. After signing in February, Dong, Siemens and Centrica’s 270MW Lincs offshore UK farm met conditions precedent and closed on 7 June, followed by Parkwind (Colruyt) and Aspiravi’s 217MW offshore Belgium project three weeks later. According to the European Wind Energy Association (EWEA), developers connected 132 turbines to the grid in the first half of this year, a 50% increase on the previous year.

Wavering political support in the UK and connection problems in Germany, the two leading markets for offshore wind in Europe, loom on the horizon, but the increasing scale of offshore means that is the most obvious way that EU members can reach their target of renewables accounting for 20% of energy consumption by 2020. But developers may struggle to access long-term debt for these projects, and multilateral and export credit lenders cannot be expected to entirely bridge the liquidity gap.

According to Martin Heppe, chief financial officer at wpd: “For projects that are in the market today that seek project financing, the type of approach we are living with does meet the financing need, and I’m not sure that will be sufficient if we want to do the volumes we are targeting over the next 10 to 15 years.” He adds: “We need different structures, and it is not possible to keep up this high proportionate level of export credit agency (ECA) and state institution engagement.”

Banks and Belgium

The financing for the 216MW Northwind offshore wind farm closed on 27 June as Eu596 million ($773 million) in 17-year debt, which included funding from a club of 6 banks: ASN Bank, Belfius, BNP Paribas Fortis, ING, KfW-IPEX and Rabobank, and was oversubscribed.

Management capacity and a streamlined contractual framework helped the sponsors reach that tenor, but so did approaching the EIB and the various ECAs – EKF, GIEK and ONDD – before issuing an RFQ to banks. Francois Van Leeuw, chief financial officer for Northwind, explains: “When we came on board in February 2011, the financial crisis was hitting us in all sorts of ways. Our first goal was to line up the financing for the contract, and we went to the ECAs and the EIB early on to make sure our project was secure.”

Given the degree to which many banks are focusing increasingly on their home markets, with the possible exception of UK deals, supplementing commercial bank debt with EIB and ECA support will be required to increase liquidity. Several new lenders are starting to look at offshore deals, though at different stages in the construction process, but the effects of Basel III, which will force lenders to better match their funding with their assets, means that others are expected to drop away. This turnover in lenders will complicate what is already a difficult sell to credit committees.

According to Carol Gould, head of power and renewables in BTMU’s structured finance EMEA group: “It depends on what sort of facilities are being raised, but for long-term project debt, we’ve not seen ticket sizes of more than around Eu50 million for offshore wind farms recently.” She adds: “That’s a lot of banks to fill up the funding requirement so bringing in entities such as KfW, EIB, and EKF is going to be essential for offshore wind farm projects.”

She adds: “This is a developing market; several lenders started off very cautiously in the sector but there’s now a wider group of banks looking at offshore wind. There are, however, changes occurring in the project finance market, much wider than offshore wind, which limit lender capacity.”

ECAs and EIB

There are several obstacles to the greater involvement of ECAs, not to mention the EIB, which is unable to participate in those deals, such as Lincs, that it deems too aggressive. Lincs eventually closed in June this year as roughly £425 million ($680 million) in debt from a diverse group of lenders – BTMU, BNP Paribas, DNB, HSBC, KfW-IPEX, Lloyds, Nordea, SEB, Santander and UniCredit – just a few weeks before Northwind reached financial close.

But the financing was heavily dependent on sponsor support, which included around £575 million in sponsor loans, and also the fact that lenders were able to extract from the sponsors fairly conservative financial metrics. The average debt service coverage ratio at P50 is 1.77x and the minimum is 1.54x, while at P90 the figures are 1.48x and 1.3x, respectively. Pricing on the project debt is also 275bp over Libor, rising to 310bp over the life of the loan.

Even for projects that are able to attract support from the EIB, there are complications. On Northwind project, the EIB provided Eu333 million, split between Eu133 million as a direct loan and two Eu100 million tranches, counter-guaranteed by EKF and ONDD. The intercreditor agreements were complex because the EIB, supported by some of the ECAs, imposed a minimum rating requirement on participating banks and the financing restricted the ability of banks to transfer their participations during the operational phase.

“I guess the issue here is that some of the policy differences between lender groups were heightened, in terms of coming up with resolutions, especially in relation to transfer restrictions and credit,” says Chris Utting, a partner at White & Case. “I think that a key aspect public finance institutions brought to this deal is credibility. You have a strong management team, EIB support and diversified multilateral presence, so the different parties felt that the project was solid and credible and were therefore willing to commit the necessary resources to finalise the deal.”

Northwind is unlikely to provide a template for any future deals, since there is no set rating at which lenders can participate in offshore deals. The EIB has also yet to fully explain what happens if the rating for one of the participating banks in a deal deteriorates, and whether this can be mitigated by positing collateral. The EIB will probably need to give further ground to lenders wanting to exit a deal after the construction phase.

u Alternative funding

The role played by multilaterals in Northwind was still vital. “I think that we need public support, although no party is individually indispensible” says Pierre-Etienne Claveranne, a director at Green Giraffe Energy Bankers. I think that a key aspect public finance institutions brought to this deal is credibility. You have a strong management team, EIB support and diversified multilateral presence, so the different parties felt that the project was solid and credible and were therefore willing to commit the necessary resources to finalise the deal.”

EKF’s participation allowed the sponsors to take advantage of the co-operation agreement that the ECA and PensionDanmark developed for the 203MW Jadraas onshore project and which will cover DKr10 billion in export finance debt. For Northwind, EKF guaranteed a Eu35 million loan from PensionDanmark, its first to an offshore project.

This is also the first time that PensionDanmark is funding the construction phase of any project, and bringing in other institutional investors against that type of risk profile is likely to be trickier. Bankers hope in the medium term that other pension funds can follow Pension Danmark’s example and supplement commercial bank liquidity. But talk of replacing banks altogether is more fanciful.

According to Frank Coenen, chief executive officer at Northwind: “Funding of loans and the risk-taking are now two different types of expertise. Pension funds are now stepping in as funders, while the risk is taken by banks and ECAs. It is certain that pension funds will, on future projects, also make the step towards risk-taking.”

“For anyone seeking financing for offshore wind farms, do not expect that you are going to be able to tap directly any pension fund for debt,” says Green Giraffe’s Claveranne. “For Northwind, the reason that we were able to access debt from PensionDanmark is because of the pre-existing framework agreement with EKF. If you want to have the same kind of scheme available to you, then ask pension funds to coordinate with export credit agencies independently. This cannot be done for a specific transaction, but has to come from a broader funding framework agreement.”

Transmission ramp-up

The PensionDanmark piece was a relatively small component of the overall financing package. But their confidence that they would attract enough senior debt allowed the sponsors to pay for long-lead items such as an export cable upfront, using Eu80.6 million in equity from Parkwind and Aspiravi, and Eu174.4 million in subordinated debt from PMV/PMF, DG Infra/Inframan/GIMV, Korys/DHAM and Autofinancing. The absence of any transmission concerns in turn allowed the sponsors to rope in senior debt commitments from lenders.

The Northwind financing highlights the increased role that transmission plays in the financing of German offshore projects compared to their counterparts in the UK. One of the advantages of the UK system is the separation of the transmission and generation assets for offshore, which has helped increase competition in the UK transmission sector and has mitigated some of the risks that offshore generators face in building transmission. The UK offshore transmission (OFTO) regime dates back to June 2009, when the Office of Gas and Electricity Markets (Ofgem) launched the competitive tender process for the first round of offshore projects in the UK.

The strong regulatory regime underpinning the tender process and the stable availability-based revenue stream, fully linked to RPI and with protected downside, have resulted in strong interest from several financial sponsors. Caroline Miller Smith, partner at White & Case, explains: “What you’re looking at is a revenue stream, which is associated with offshore generation, but actually there’s no generation risk. From the point of view of lenders, if the wind farm never generates any power the OFTO still gets paid.”

For the projects tendered so far the generator is responsible for the construction of the transmission cables and substations, which the transmission operator then buys for a fee determined by Ofgem. The generation developer can finance this work, as was the case for Lincs, with a short-term facility from lenders, which bridges the generator to the sale of the transmission assets. For its forthcoming projects Ofgem says that generation developers will be able to decide whether they or the transmission owner constructs the transmission assets.

In Germany one of the major concerns in the offshore market relates to the ability of grid operator TenneT to fund investments in the infrastructure that would connect new generation to the mainland. In November last year, TenneT warned the government that it would be unable to connect any more wind farms in the North Sea to its high voltage grid after 2015, and the uncertainty surrounding grid connection could stifle investment in the country’s offshore sector.

Equity budge

The ability of TenneT to fund future connections will affect the ability of the German government to follow through on its renewable energy push. Germany has been a strong promoter of offshore, for instance through its optional compression model, which has boosted project finance debt coverages, but dealflow has begun to slow. Wpd has tried to close the financing for its 288MW Butendiek project, but has repeatedly pushed back signing because of its struggles closing an 11.5% equity sale to three stadtwerks. Wpd received commitments from a group of 7 lenders – Bremer Landesbank, DekaBank, Helaba, ING, KfW-IPEX, Rabobank and UniCredit – earlier this year but the delay in signing has pushed commitments from lenders past their expiration date and the debt is unlikely to close this year.

Sources familiar with the process suggest that the utilities’ wariness about committing equity came down to their concerns about the project’s connection. Several other developers are also delaying plans to construct further offshore capacity in the North Sea until the German government has reached an understanding with TenneT. Shortly before Project Finance went to press, Trianel, the municipal utility consortium that is sponsoring the Borkum West offshore project, sued TenneT over a delayed connection for the Eu860 million project, which TenneT has in turn blamed on the late arrival of a converter platform. This has already added to the cost of the project, as the developer scrambles to put back its turbine installation slot. It will be a sharp reminder to the 11 banks participating in the Borkum financing of the havoc that supply chain disruptions can wreak.

Throughout Europe the need to meet the 2020 renewables targets is driving investment in offshore. France has been late to embrace offshore wind but recently awarded four concessions off the coast of Normandy, with three going to an EDF-led consortium and one to Iberdola. In the Netherlands, Typhoon Capital and HVC are out to the market shortly for their 600MW Gemini project, which is expected to test lender appetite.