The bank had a swift launch, and traces its origins to a 2011 initiative of the Department for Business, Innovation and Skills. Green Investments would be the institution to help meet the financing requirements of the UK’s push to reach climate change targets, including slashing green-house gas emissions by at least 80% before 2050, boosting overall power generation from renewable sources to 15% by 2020 and cutting the amount of waste going into landfills.

Reaching such targets, however, requires investment in sectors and technologies that are emerging and sometimes unproven, and bank financing has become scarcer even for more proven technologies in recent years. Green Investments’ goal was to help mobilise financing for these investments.

“The long-term project finance market has been heavily affected by the global economic crisis, yet there remains an urgency to get green infrastructure deals financed,” says Ian Nolan, chief investment officer at GIB. “Tenors have shortened and, if it doesn’t match the project life, this can put a lot of refinancing risk onto sponsors.”

Green Investments was not in a position to provide direct financing in its early stages because it needed to win state aid approval from the European Commission before it could fully re-launch as a lending entity. While working towards clearance, Green Investments went about hiring a number of familiar project finance faces. They include Rob Cormie, former head of energy corporate finance at KPMG, Anthony Marsh, the EBRD’s former power and gas distribution head, Kenneth MacRitchie, a former Shearman & Sterling projects partner and Stephen Crane, who previously led Bank of Tokyo-Mitsubishi UFJ’s EMEA structured finance group.

The group’s remit was to develop strategy and target investment opportunities ahead of state aid clearance, which the European Commission granted on 17 October 2012. Even so, while the concept of a state-backed green investment vehicle has long been a topic of discussion in policy circles, the role, remit and delivery mechanisms of such an institution, have only begun to be realised.

“The concept of a green investment bank has been much spoken about, but is often misunderstood,” adds Nolan. “The challenge for us is now to get the message across of who we are and what we’re doing.”

Investment pot

The bank has £3 billion of taxpayer-funded capital to deploy over a three-year investment period. The main four areas of investment will be: offshore wind; waste recycling and energy from waste projects; an energy efficiency initiative; and support for the government-mandated Green Deal, a subsidised programme. Green Deal will fund domestic insulation, double glazing, renewable energy equipment and other energy efficient measures.

Nolan says that the main focus of the first stage is commercial lending. “The model the GIB is pursuing is to help catalyse and mobilise long-term financing that can run the life of a project, albeit we should not expect to get back to the under-pricing of debt which was a characteristic of the bubble period,” he explains.

As such, the market should not expect GIB to operate as a quasi-multilateral, akin to the European Investment Bank or the European Bank for Reconstruction and Development. GIB instead describes itself as having a double bottom line, or twin objectives. First is the green impact, or focusing on green projects rather than the reduction of carbon, and secondly being unashamedly and unambiguously a for-profit bank.

GIB plans to sit firmly amongst commercial lenders and not to support deals that would not close without heavily subsidised or multilateral lending. The bank says it will not offer subsidised or below-market financing, not only to meet its investment remit, but also to make sure it turns a profit.

“Our state aid clearance is only to invest on market terms, which means that GIB participation in financings has to be made on the same terms as the commercial banks or equity investors,” says Nolan. “The bank also needs to make returns on investments, so it makes no sense to pile into the market with cheap capital; if we are being asked to take risks, our pricing needs to reflect that and be commercial enough for the GIB itself to be a sustainable institution.”

In this sense, GIB’s participation in financings has to be additional to the commercial lenders. The bank will not serve as sole. Nolan reiterates that GIB is certainly not a lender of last resort and prefers deals that leverage its fledgling brand and capital. The bank refers to this as “crowding in, not crowding out private capital”, which means that it will always provide additionality to existing commercial lenders.

Up the Walney

The first financing to close for GIB – the Walney offshore wind farm acquisition refinancing – is a good example of how it will interpret its remit. Walney, a 367MW two-part offshore wind farm located in the Irish Sea, has been operational since November 2011, and is one of the world’s largest offshore wind projects.

GIB took 20% (around £45 million) of a seven-year £224 million refinancing package that included four commercial lenders; Lloyds, the Royal Bank of Scotland, Santander and Siemens Bank. The package, which is believed to have priced above 300bp over Libor, allowed Dutch pension fund PGGM and the Ampere Equity Fund to refinance around 70% of the price that they paid for a minority 24.8% stake in Walney from DONG Energy.

Walney involved the refinancing of an equity stake in an existing facility. Likewise, the buyers could hardly be classed as sponsors that would struggle to attain banking support. Finally, the additionality and commercial ethos of GIB was apparent in the novel way in which the financing was structured. “Most project financings are for a special purpose vehicle funding a specific project,” explains Jon Ellis, a partner at Norton Rose who acted for GIB and the banks on the financing. “Walney is interesting because the financing was for one of the three shareholders of the project company without direct security over the project company’s assets themselves.”

As such, the deal is like an acquisition financing, yet structured with project finance covenants. For instance, lenders monitor debt service coverage ratios rather than Ebitda. In this case, as the special purpose vehicle owned a minority stake, it was one step removed from the assets and did not control them, so the banks had to get comfortable with that structure and the fact that SPV’s revenues came from electricity sales or dividends.

The GIB was in contact with the sponsors of Walney before the banking club was in place. The message to the borrowers was that the bank would be happy to help when a club got together, and sponsors had obtained their required clearances. “It is likely that Walney would have closed without the GIB involvement but it certainly helped the deal,” Ellis says. “There is not a great amount of liquidity in the market for offshore wind schemes, leading to club deals. GIB was able to facilitate the financing and was the last piece of the jigsaw.” GIB’s participation was on the same terms as the commercial lenders.

The GIB has also offered an eight-year loan of up to £100 million to support Drax’s conversion of some of its coal–fired capacity to run on biomass. The bank’s offer complements a £100 million amortising term loan from that Prudential and M&G UK Companies Financing Fund offered to Drax in June 2012. The offer of the GIB facility took place alongside an expansion to Drax’ corporate revolving credit facility to £400 million from £310 million. The revolver matures in April 2016, and is priced at 225bp over Libor.

In January, GIB participated in the Wakefield waste PFI; a recycling and waste to energy project in West Yorkshire. Its £30.4 million loan complemented £121.7 million in debt from a club of commercial lenders, notably BayernLB, Sumitomo Mitsui Banking Corporation and Barclays, Waste projects can be challenging, given the issues with supply, planning and technology risk that they often encounter, but they illustrate GIB’s desire to support financings in sectors that lenders can view as risky.

“Offshore wind farms are huge projects and are not the sort of financings that GIB would do on its own, as it wants to act as a catalyst for other investors and lenders,” Ellis says. “This is an example of a trend I expect to continue; refinancings as a way of recycling capital by sponsors after projects reach completion.”

The bank’s willingness to make loans that help sponsors recycle capital is one of the best ways it can highlight its commercial remit and point to its work freeing up capital for investment in target sectors. GIB is able to provide financing, whether as equity, new debt or refinancing debt, to help sponsors make subsequent investments.

“Walney was effectively the refinancing of a minority stake bought by PGGM and Ampere that was underwritten by DONG,” Nolan says. “It is a similar rationale behind the Greencoat IPO; we want to promote liquidity in the secondary markets. Once a project is up and running sponsors can sell stakes to free up capital to invest in more projects.”

Equity interests

The Greencoat initial public offering highlights how the bank’s equity investments might work. The bank is willing to take stakes in companies or projects, although this policy is still in its formative stages. GIB featured in the £205 million initial public offering of Greencoat UK Wind, snapping up a 24.95% holding in the 90MW Rhyl Flats wind project off the coast of Wales alongside Greencoat.

Nolan stresses that GIB will have a preference for debt over equity, as that is where the greater need is, but the bank is willing to make equity commitments. In some ways, GIB has a loose precursor, in the shape of the Industrial and Commercial Finance Corporation (ICFC). ICFC was created in 1945 by the Bank of England with the goal of offering long-term financing to small and medium-sized companies. It evolved over the decades into what has become private equity giant 3i.

GIB has invested in funds and has taken direct stakes in projects, though highly leveraged or early-stage development equity is not of interest. “We would like, in due course, to encourage investors into the construction stage, but there is very little institutional appetite there currently, so the secondary market is the right place for us to start,” Nolan remarks.

Project bonds are also potential vehicles for GIB. “There is plenty of investment grade capital in the market at record low spreads, and while the GIB is modest compared to the larger funds, it could be a way to encourage the long-term debt markets,” Nolan says.

The bank’s staffing, infrastructure and international presence, especially when compared to commercial peers, is still a little short of its £3 billion in available capital. This means GIB has had to prioritise debt and equity investments and has had to farm out some of the smaller deals to outside managers.

“We have not got the resources or timeframe to analyse smaller deals,” Nolan says. “As such, we are going through distributors such as fund management companies, to make investments on our behalf in the waste and energy efficiency sectors. We will provide up to £50 million to a fund manager who will do the deal on our behalf, while also raising external capital to go alongside that.”

Before GIB received state aid clearance, for example, it had already entered into relationships with external fund managers, including Greensphere Capital and Foresight Group, for small-scale waste projects, and Sustainable Development Capital and Equitix, for non-domestic energy efficiency projects. In February, meanwhile, GIB and financial adviser Macquarie Capital asked for expressions of interest from parties with “relevant proven project delivery capabilities and the financial capacity to make a substantial contribution to co-funding the project pipeline capital costs”.

The initial indications from the GIB’s first few months have been encouraging, though there have been some hiccups. The February resignation of Sir Adrian Montague, who was the bank’s deputy chairman, but also juggles responsibilities to 3i and Aviva, attracted widespread publicity because of his role in creating GIB. Still, for countries like the US, which is considering establishing a clean energy bank, not to mention proponents of a British Investment Bank that would have a wider remit than GIB, the progress of GIB will be worth watching.