The participation of Mei-Hua Wang, the Taiwan Ministry of Economic Affairs' Deputy Minister, at a press conference tomorrow (2 July 2019) about the 640MW Yunlin offshore wind farm signals how strategic the government considers this project and its robust pipeline of offshore wind projects.
Nearly one year to the day after Formosa 1’s 120MW phase two financial close and refinancing of the 8MW phase one, Yunlin’s special purpose vehicle Yunneng Wind Power closed the largest offshore wind financing transaction in Asia Pacific.
Sponsors – Japan joins the party
Market insiders were not surprised to see Ørsted and wpd, as large European wind energy companies, cross the finish line first and second in Taiwan’s burgeoning offshore wind market. “European players are looking for growth beyond their mature home bases,” a market source told IJGlobal.
German developer wpd has been developing Yunlin in two phases: the first phase anticipated to be operational next year (2020) and the second phase a year later (2021). An adviser noted that subsidiary wpd Taiwan Energy has been in the local onshore wind market for years. “It has more than 50% of the market there, so it’s not simply thought of by the government and locals as an upstart foreign company,” added the source.
After wpd received in April 2018 the Taiwanese government’s tariff award, it started looking for buyer(s) of a minority equity interest. Sources told IJGlobal that a couple of Canadian pension funds with a presence in Asia were due to submit offers in Q1 2019. CDPQ and OMERS Infrastructure both have offices in Singapore.
The Japanese consortium Starwind Offshore ultimately acquired 27% in April (2019) after the bid process. The effective shareholding of each member of Starwind Offshore's byzantine cross-holdings breaks down as:
- Sojitz – 9.1125%
- JXTG Energy – 6.75%
- Shikoku Electric Power – 4.3875%
- Chudenko – 3.375%
- Chugoku Electric Power – 3.375%
At financial close, Macquarie Capital (50%), Ørsted (35%) and Swancor Renewable (15%) owned Formosa 1. “As an international pilot, Formosa 1 had blue-chip sponsors,” said an offshore wind adviser, “combining one of the world’s largest wind energy developers, the financing skills of Macquarie and a strong local partner in Swancor.”
Swancor has a 7.5% equity stake in Formosa 1, 25% in Formosa 2 and an undisclosed amount in the 2GW Formosa 3. Macquarie Capital and German utility EnBw also have equity stakes in Formosa 3.
JERA – a Japanese joint venture between TEPCO and Chubu Electric Power – later acquired in early 2019 a 32.5% equity interest from Macquarie and Swancor, which divested half their stakes. Formosa 1’s ownership to date is as follows:
- Ørsted – 35%
- JERA – 32.5%
- Macquarie Capital – 25%
- Swancor Renewable – 7.5%
Financing package – importance of ECAs and a delicious sweet-and-sour mix
Scale, structuring and debt tickets were different on Yunlin and Formosa 1’s financing packages. SMBC and BNP Paribas were sponsors’ financial advisers, respectively.
Headline figures from Yunlin’s NT$94 billion ($2.98 billion) project financing package include:
- 22 participating institutions, excluding advisers
- base debt tranches – NT$70.5 billion
- contingency tranches – NT$15 billion
- debt-to-equity ratio – 75:25
- commercial tranche – 240bp above three-month Taibor, stepping down to 200bp at COD
- tenor – 18-year, fully amortising
- nine tranches
Yunlin’s pricing and tenor
Yunlin’s package was sensibly larger than Formosa 1’s. Yunlin had 19 banks and three ECAs contributing to the NT$70.5 billion debt financing, jumping to NT$85.5 billion when the standby, working capital and VAT tranches are included. Without those contingencies, the debt-to-equity ratio was 75:25.
Beyond the scale and structuring, pricing and tenor had evolved naturally from Formosa 1 to Yunlin. Formosa 1 priced at 230bp above three-month Taibor, stepping down to 200bp at commercial operations date. Yunlin’s pricing increased to 240bp, having the same step-down.
While Yunlin’s 18-year tenor certainly contributed to the 10bp premium over Formosa 1’s 16-year, “the increase in tenor was not the sole factor,” said a source. “A large contributor is definitely the increase in scale, as Yunlin soaked up a lot of NTD liquidity. When you take that much NTD off the table, you need to pay.”
A market insider expects Formosa 2, the next offshore wind likely to reach financial close, to have an 18-year tenor. “If banks give a 20-year, which is the natural progression, they would then have to explain that to wpd, as the timing of Yunlin and Formosa 2 are relatively tight. The project after Formosa 2 may have the first 20-year.”
Yunlin banks, including their structuring roles, were:
- Cathay United (lead documentation)
- Chinatrust Commerical (CTBC)
- E Sun
- Taipei Fubon Commercial (insurance)
- BNP Paribas
- Crédit Agricole Corporate and Investment Bank (lead documentation)
- Deutsche (hedge coordinator)
- ING (modelling)
- KfW-IPEX (documentation)
- Mizuho (technical)
- MUFG (insurance)
- Siemens Bank (documentation)
- Société Générale
- Standard Chartered
The ECAs were:
- Eksport Kredit Fonden (EKF) – Denmark (documentation)
- Euler Hermes – Germany
- Atradius – Netherlands
A total of nine ECAs and lenders participated both on Yunlin and Formosa 1:
- BNP Paribas
- Cathay United
- Crédit Agricole CIB
- Société Générale
- Taipei Fubon Commercial
Yunlin’s 18-year, fully amortising debt package had nine tranches as follows:
- Atradius-covered – 95-100% cover
- EKF-covered – 100% cover
- Euler Hermes-covered – 95% cover
- KfW-IPEX guarantee
- Siemens Bank €100 million direct loan
- working capital
SMBC and Taipei Fubon provided the largest amount of debt.
A total of 11 international and local banks as well as EKF – Denmark's ECA – were on the syndicate for Formosa 1’s NT$18.7 billion debt package.
Model and sweet-and-sour mixes
Formosa 1 – the benchmark for Taiwan’s project finance market – and Yunlin’s financing structuring models, according to a project adviser, emanated from two markets: UK’s offshore wind and oil & gas. In Europe, financing packages tend to be more sponsor-friendly, while in Asia lenders are more likely favoured.
“I’m not necessarily talking about debt pricing but rather attractive documentation, covenants and controls,” said a market source.
Both Taiwan offshore wind projects have moved along the spectrum towards being lender friendly. However, they are not as lender biased as other projects in Asia, cautions a project participant.
Lenders on Yunlin required the combination of covered and uncovered facilities, or sweet-and-sour mix, to be at least 50:50, according to a project finance banker. “The final tally was slightly north of 50%,” said the source. In contrast, Formosa 1’s sweet mix was 60:40.
Yunlin’s sweet-and-sour requirement had two important implications for the structure of the financing package. First, it encouraged the participation of more ECAs on the project than on Formosa 1, as EKF, whose contribution was no surprise, hit its cap to support offshore wind projects, according to a project banker. The involvement of Atradius and Euler Hermes was innovative. “We’ve not seen them much on project finance deals in Asia, especially offshore wind,” said a project participant.
The participation of these ECAs meant that experienced sponsors, project finance bankers and advisers had to overcome the steep learning curve of the local banks while “benefiting from a high degree of commitment from all three ECAs and 19 banks”, said a wpd spokesperson.
Second, the lenders’ sweet-and-sour requirement constrained the total amount of Taiwan dollars. Sponsors needed novel solutions because some of the lenders had access to Taiwan dollars, while others who wanted to be involved did not. Siemens Bank joined, for example, to help plug that gap through a €100 million direct loan.
With its AA credit rating and as a quasi-ECA, KfW-IPEX contributed to the sweetness of the transaction by providing a tranche with a guarantee believed to be to the local banks. The local banks are paying KfW-IPEX to take on more of the development and construction risk. Adding to the complexity is that Yunlin is KfW-IPEX’s first long-term guarantee in Asia, according to an adviser.
Advising Taiwan’s offshore wind – old and new faces
Many of the same advisers on Yunlin appeared on Formosa 1, while a few dropped off and others added.
Yunlin advisers to the sponsors included:
- SMBC – international financial
- E-Sun – local financial
- Blanke Meier Evers – legal on supply agreements, financing, equity
- Linklaters – international legal
- Lee & Li – local legal
- Nordwest Assekuranzmakler (NWA) – insurance
Advisers to the Yunlin lenders comprised:
- Benatar & Co – insurance
- White & Case – international legal
- Tsar & Tsai – local legal
- Wood Group – environmental, technical
Benatar & Co was lenders’ insurance adviser on both. Two local law firms Lee & Li and Tsar & Tsai have represented the sponsors and lenders, respectively, on both. Wood Group also provided environmental and technical advice to lenders for the two projects. Linklaters crossed the table from lenders’ legal to sponsors’ counsel.
The Yunlin sponsors added E-Sun as the local financial adviser and Blanke Meier Evers as the legal team on supply agreements and financing including equity. NWA was sponsors’ insurance adviser, while on Yunlin White & Case took Linklaters’ place as lenders’ international legal counsel.
Moving forward – NTD liquidity and ECA diversification
The financing market has pivoted to Formosa 2 and Greater Changhua 1 & 2a wind farms, which have decidedly different financing plans.
Société Générale – as financial adviser to project owners Macquarie Capital (75%) and Swancor (25%) on the 376MW Formosa 2 offshore wind farm – has been receiving responses on banks’ indicative pricing and credit committee approvals for the financing package. All responses will likely arrive by the end of June (2019). Formosa 2’s project financing package is rumoured to be in the range of NT$52-57 billion.
Ørsted – supported by HSBC as financial adviser – signed last week with 15 banks an NT$25 billion syndicated revolving loan for its Greater Changhua projects, following its final investment decision in late April.
The Danish company’s financing plan for the Changhua wind farms is on a 50:50 debt-to-equity basis. Ørsted Group will fund 50% of the capital expenditures and will raise 50% debt from financial institutions with an Ørsted parent company guarantee. Ørsted's treasury team has now turned its attention to an anticipated green NT$-denominated bond issuance in Q4 2019. IJGlobal estimates the total financing package to be NT$125-140 billion, with the final amount potentially surpassing $4 billion.
Industry insiders caution that Taiwan’s project pipeline faces two challenges in the long-term: local currency liquidity and diversification of ECAs.
Project finance advisers and bankers have been trying to recruit the eight state-owned banks in Taiwan to be involved in financing the offshore wind market. While wpd had announced last October (2018) Bank of Taiwan’s participation as Yunlin co-adviser, the bank withdrew from a formal role by the financial close.
“The involvement of the state-owned banks is critical for the development of the offshore wind industry,” a project finance banker told IJGlobal. “NTD liquidity drying up is a concern over the long-term, given so many projects in the pipeline. We need the balance sheets of the state-owned banks.”
The participation of all eight state banks on Ørsted’s revolver – the first time that Taiwanese state-owned banks have contributed to financing offshore wind projects – bodes well for the market’s development.
The eight state-owned banks on the revolver were:
- Bank of Taiwan
- Chang Hwa Commercial Bank
- First Commercial Bank
- Hua Nan Commercial Bank
- Land Bank of Taiwan
- Mega International Commercial Bank
- Taiwan Business Bank
- Taiwan Cooperative Bank
We expect Bank of Taiwan to be involved in Formosa 2, with one or two more state banks likely joining.
The pool of ECAs covering Taiwan’s offshore wind market is likely to expand beyond Europeans to North Asians, in particular, Nexi and K-Sure, market sources said.
The obstacle is ensuring the wind farm projects’ procurement plan has technology from Japan and Korea. Japanese and Korean suppliers have had small, limited roles to date. Anyang, South Korea-based LS Cable & System is supplying 170km 66kV submarine cables to Yunlin – the first time a Korean cable maker is exporting submarine cables to Taiwan.
Watch the North Asia ECAs and suppliers break out during the next three to five years.