Deal of the Year 2012

Chirnogeni:

Merchant striver

Romania’s power market does not lend itself to easy project financings. Cash-rich utilities enjoy advantages over independent generators because they have the resources to mitigate lender concerns about regulatory risk. But independent developers will be key to exploiting Romania’s promising wind resources properly.

The financing for the Eu130 million ($177 million) Chirnogeni wind project is the first true non-recourse financing for a renewables project in the country, and managed to mitigate lender concerns about construction and revenue risk. It becomes, if by default, the template for standalone wind financings in the country, and may have lessons for renewables developers in other spot power markets.

Project developer EPGE, a part of Cypriot conglomerate the Paraskevaides Group, started taking wind measurements for the project in 2007, before Romania even had a renewables law. The country’s renewables law arrived in 2008, but did not provide a workable framework for development, and was amended in 2010, and again in 2011, with the second amendment allowing the European Commission to ratify the law.

Renewables generators receive a spot market price for power, and then two types of certificate, one for which the project is eligible once it reaches completion, and another when Transelectrica, the Romanian transmission system operator certifies that the project is dispatching to the grid properly.

Receiving the second certificate is an arduous process, and until recently banks were not comfortable with assuming that Transelectrica would certify a project as planned. The Eu500 million in debt that Romanian projects have attracted has featured various types of corporate support from utility parents, ranging from completion guarantees and promises to make up gaps in receipts from the certificates, to full guarantees. Enel, EDP and CEZ have developed the majority of Romania’s wind capacity.

EPGE’s original assumption was that it would flip the project to one of these large buyers at completion, but the 2008 financial crisis interrupted its plans for a quick sale. Market recovery coincided with improvements to the Romanian regulatory framework, and the developer instead decided to retain some of the project’s equity and sell the rest to a financial investor. Its first equity candidate, following a year-long period of negotiations that started in 2010, pulled out at the last minute.

The developer started negotiations at the end of 2011 with the Marguerite Fund, which eventually took a 50% stake, its first investment in Romania, and EnerCap, with 30%. In April 2011 it had started negotiating with the European Bank for Reconstruction and Development, which has supported the bulk of the earlier wind financings in the country.

The 14.5-year term debt financing consists of a Eu31 million direct A loan from the EBRD, and a Eu60 million B loan, split equally between Erste Group Bank, ING, and UniCredit. It complements a Eu6.1 million VAT facility, for which ING is sole provider, and Eu39 million in sponsor equity.

The EBRD was enthusiastic about working with the developer, even though the probable sponsor group would not have ample enough balance sheets to support the deal in the way that the utility sponsors did. The commercial lenders were more wary, requiring that the developer rework the deal in several ways.

Lenders asked for a new set of power price projections relatively late in the process, requiring a new amortisation schedule. In July 2012 they tried to persuade the sponsors to increase their equity contribution so that leverage dropped below 65%.

But the biggest sticking point was construction risk. Lenders were concerned about the financial health of turbine supplier Nordex, and required a balance of plant contract with liquidated damages provisions and parental guarantees that was not available in the Romanian market.

The developer eventually signed a full engineering, procurement and construction contract, covering both turbine installation and balance of plant risk, with Iberdrola. Banks still look to Nordex to carry out maintenance and servicing under a 13-year agreement. The project uses 32 2.5MW Nordex N90 turbines but lenders do not rely on Nordex for performance guarantees.

The EPC contract had to be structured to minimise the VAT burden, because imported content does not attract VAT, and if the contract was treated as an entirely domestic affair the VAT facility might have been four times as large as its eventual size.

The plant will sell power to Swiss power trader Axpo under a five-year power purchase agreement, but the PPA is at market prices, and the main purpose of the agreement is to outsource scheduling functions and lay off dispatch risk onto a third party. Lenders needed to be comfortable that Romanian market prices – dominated by hydro and coal – would support the debt.

The financing closed on 9 November at the same time as the sale to the two funds. It came close to collapse at several points in its development, but now stands as the most impressive and aggressive leap forward in onshore wind finance in the last 12 months. 

EP Wind Project (Rom) Six SA
Status
Closed 9 November 2012
Size
Eu130 million
Description
Financing of 80 MW wind farm in Chirnogeni, south-eastern Romania
Sponsors
Marguerite (50%), EnerCap (30%), EPGE (20%)
Equity
Eu39 million
Debt
Eu91 million, of which Eu60 million is an EBRD A loan, and the rest comes from commercial banks
Mandated lead arranger
European Bank for Reconstruction and Development
Co-arrangers and B loan providers
Erste Group Bank, ING, UniCredit
EPC contractor
Iberdrola
Turbine supplier
Nordex
Sponsor legal counsel
Trinity (EPGE), Salans (Marguerite Fund and Enercap)
Lender legal counsel
CMS Cameron McKenna
Environmental consultant
Environmental Resources Management
Technical consultant
Lahmeyer
Independent and owners’ engineer
Garrad Hassan
Market consultant
Pöyry
Sponsor insurance adviser
Renaissance Insurance Brokers/Lockton
Lender insurance adviser
JLT