DEAL ANALYSIS: Solar Financing 2012-1
Independent Debt Capital Markets, founded by former ABN Amro bankers, and appointed representative in fixed income for Mirabaud Securities, was bookrunner on the deal, with Matrix Property Fund its arranger.
While the bonds are UK-listed, the UKs Pension Insurance Corporation, a private entity that sells insurance to UK defined benefit pension funds, bought the entire issue.
The issuer, Solar Financing 2012-1 plc, lends the proceeds on to operating company Michco 1204, whose ultimate parent is RRAM Energy. RRAMs shareholders are Angus Macdonald, Katherine Macdonald, Lombard International Assurance and Robert Randall.
The financing is essentially a securitisation of feed-in tariff payments due to two solar projects in Somerset. The two plants Higher Hill and Park Wood are both in operations, and use panels from LDK Solar, which has provided the projects with a warranty.
The issuer offers up the two projects, their feed-in and export tariffs and the debt service reserve account as security. The financing features a cashflow waterfall and a lock on distributions if the financings debt service coverage ratio falls below 1.2x. Should the DSCR fall below this level, cash is trapped and put towards funding the debt service reserve until the financing meets a 1.4x DSCR.
The proceeds of the bonds refinance a loan from Barclays, on which £18.5 million was outstanding at close. The Barclays loan was secured on the two plants but was not used to build them. The proceeds were also used to pay transaction fees, fund a debt service reserve with £1.5 million and pay a distribution to the shareholders. The sponsors financed construction with a £19 million subordinated loan, and this will remain outstanding, but ranks below the senior debt in the waterfall.
The projects benefit from a generation tariff under the UKs feed-in tariff regime, as well as an export tariff (essentially the spot market price), and will sell power to an Ofgem-licensed electricity supplier. The tariff lasts for 25 years, and provides the principal comfort to bondholders that the projects will meet their debt service obligations. The developer received its feed-in tariff in June 2011, and the projects were not affected by later cuts to the tariff levels.
The sponsors did not get a rating on the deal, given the fees attached to the process, and the agencies likely requirement for support from a well-capitalised sponsor. The sponsors and bookrunner felt that going through the process of gaining a listing, however, would benefit later and larger financings.
There is a small group of UK solar projects that were financed either purely with equity or bank debt and might benefit from a refinancing. However loans to solar projects in the UK are likely to attract a capital charge that will make the assets unattractive to banks. Banks will in any case struggle to provide tenors that match the term of the feed-in tariff.
The one big advantage that bond investors have over banks is their appetite for inflation-linked debt. The solar feed-in tariff is adjusted annually according to the retail price index. There have been few opportunities for bond investors to get exposure to inflation-linked project finance debt, ever since the heyday of the UK PFI bond market passed. The low coupon on the bonds 3.61% reflects investor appetite for the bonds inflation protection.
But the SPG bond is just the first step in educating investors about the use of bonds for solar projects. Unlike the US, where large and well-capitalised developers like MidAmerican Energy and NextEra have used their balance sheets to enhance the credit of large bond financings, UK developers are still comparatively small, and potential buyers of solar projects primarily funds are unlikely to provide investors and agencies with any greater comfort than projects original developers.
But the financing demonstrates that it is possible to structure a deal around solar panel performance risk, the UK feed-in tariff, and degradation and operations and maintenance. The risk factor that would most trouble an industry outsider the UKs inclement weather barely got a look in.
Solar Financing 2012-1 plc
STATUS
Closed 14 November 2012
SIZE
£40 million
DESCRIPTION
Bond refinancing of two 5MW ground- mounted solar photovoltaic projects
SPONSOR
Solar Power Generation
DEBT
£40 million in index-linked bonds
MATURITY
2037 (final maturity is 2039)
COUPON
3.61%
BOOKRUNNER
Independent Debt Capital Markets/Mirabaud Securities
ARRANGER
Matrix Property Fund
BUYER
Pension Insurance Corporation
PANEL SUPPLIER
LDK
EPC AND ORM CONTRACTOR
Solar Power Generation
METERING SERVICE
Npower
INTERCONNECTION
Western Power Distribution
NOTE AND SECURITY TRUSTEE
US Bank
CASH MANAGER
Elavon
LENDER LEGAL
Sidley Austin
BORROWER LEGAL
SG Berwin
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