When it comes to ambitious new entrants trying to emerge from the shadow of a more fêted neighbour, Babcock & Brown and the Portuguese renewables market have more than a little in common - write Simon Ellis and Vander Caceres.

Babcock & Brown's €490 million swoop for Portugal's largest renewables developer Enersis differentiates its strategy from the model established by fellow Australian investment bank Macquarie, which is now targeting established utilities.

Portugal too has set out an aggressive strategy to draw developers away from renewables leader Spain with which it shares the Iberian power grid.

Last year Lisbon instituted a generous feed-in tariff and increased its wind power target for 2010 from 3,750 to 4,400MW. This year it is set to award its largest renewables concession of 1,500MW to one of three international consortia - and Babcock & Brown is in the running.

However the investment bank first had to settle the small matter of refinancing Enersis' wind and mini-hydro portfolios at a combined cost of €986 million - the Portugal's largest renewables deal to date.

The Portuguese renewables programme

The Portuguese government continues to incentivise renewables - both to meet Kyoto targets and to diversify supply away from the rainfall-reliant, and thus unreliable, large hydro projects which account for more than a third of domestic generation.

To meet this goal, the government passed law in February 2005, introducing a 15-year guaranteed feed-in tariff for all Renewable Energy Sources (RES) - including wind, micro-hydro, wave and solar.

In response, 2005 saw a rampant growth in the Portuguese wind sector which doubled in capacity from 522MW by the end of 2004 to 1,022MW in 2005 and the launch of the world's first commercial wave project and largest commercial solar project in Moura.

Another effect of the new security has been consolidation in the domestic renewables market as international developers and investors seek to capitalise.

In the last two years Endesa has purchased small developer Finerge and Iberdrola has acquired Gamesa's Portuguese portfolio. Meanwhile EdF is set to finance a second new portfolio through renewables subsidiary SIIF while Suez controls a 42.5 per cent stake in the nation's number two wind developer Generg.

In 2005, Lisbon unveiled the jewel in the crown of its renewables strategy - a tender for the construction of up to 1,500MW of wind farms - broken into two 1,000MW and 500MW phases - and the development of an industrial hub for turbine assembly.

Four consortia assembled to compete the tender including Ventiveste - a consortium of Portuguese oil and gas firm GALP, German turbine manufacturer REpower and Portugal's largest wind developer Enersis.

Enersis' 28.7 per cent share of the Portuguese renewables market along with its role in the second wave wind power concession made it an attractive takeover target - as did an EBITDA growing at 15 per cent per year between 2003 and 2005.

In December 2005 Babcock & Brown completed a €490 million leveraged buyout of Enersis, securing a foothold in the market.

Long-term non-recourse debt replaces acquisition facility

Following what has become standard practice in the infrastructure acquisition market, B&B obtained an €806 million (US$1.01 billion) refinancing loan that replaced an acquisition facility taken out for the purchase of the Martel wind portfolio.

B&B, a master of structured finance, acquired 100 per cent of the issued share capital and shareholder loans of Enersis II SGPS SA (Enersis) – the owner of Martel - in December 2005 for about €490 million (US$590 million).

The purchase was funded through a combination of existing loans and a one-year acquisition finance facility of US$478.2 million secured against the assets of the target company. BES was the sole lender and the transaction was completed on 16 December 2005.

At the time of the acquisition, sales from the operating assets had increased from €33.4 million in 2003 to €44 million, while the earnings multiple was about 27 times of the €37.5 million EBITDA for 2005.

Enersis’ assets had about 620MW of generation capacity from operating or under construction wind farms and hydro facilities in Portugal, Spain and France in addition to a further 360MW in projects in the pipeline in these countries.

The divestors were Portuguese cement group Semapa, which held an 89.92 per cent stake, Astural (9.41 per cent) and Sonagi (0.67 per cent).

Once B&B had the assets on its balance sheet, the Australian group divested the wind farms to special purpose vehicle Pebble and the hydro facilities to Pebble Hydro.

The non-recourse refinancing deal was one of the largest transactions in the Portuguse energy sector to date and was arranged by a group of Iberian banks structured as follows:

•  A €743 million (US$931.6 million) term loan
• A €25 million (US$31.3 million) working capital facility
• A €20 million (US$25.1million) debt service reserve facility
• A €15 million (US$18.8 million) bank guarantees facility
• A €3m (US$3.8m) VAT facility

The loan agreement between Pebble and the MLAs led by BBVA and including BESI, Caixa BI and Millennium BCP was signed on 12 October. The term loan carries a maturity of 18 years and pricing starts at 70bp and gradually steps up to 100bp over Euribor.

The step-up pricing structure reflects the risk profile of the wind farm portfolio, which includes a mixture of operating facilities, under construction plants and projects in the pipeline.

Parallel to the refinancing of Martel, Babcock also refinanced the Spring mini-hydro portfolio owned by Pebble Hydro with a €180 million (US$225.6 million) facility.

The deal was financed by an all-Portuguese team including BESI, BPI, Caixa BI and Millennium BCP and structured as follows:

• A €138 million (US$172.9m) term loan
• A €10 million (US$12.5m) working capital facility
• A €24 million (US$30.1m) debt service reserve facility
• A €7.5 million (US$9.4m) bank guarantee facility

The term loan carries a maturity of 22 years and pricing starts at 70bp and gradually steps up to 95bp over Euribor. PEBBLE HYDRO’s portfolio amounts to 89.1MW and is made up of a mixture of operating and under construction facilities.

Conclusion

With the Enersis refinancing, B&B has proved that there are no limits in wind farm financing under current market conditions.

The portfolio profile of the underlying assets has not changed much since the acquisition. By including facilities under construction and projects in the pipeline, the deal marks a milestone for portfolio wind farm financing in Portugal.

The future could offer further potential for growth.

In August, Enersis's Ventiveste consortium was awarded a close second place in the first round of bidding for Portugal's second wave wind concession winning 68.5 points behind EDP's Eólicas de Portugal consortium which led with 70 points. Iberdrola's Nuevas Energias Ibericas consortium was excluded altogether (IJ News, 1 September 2006). 

That puts Enersis in line for the 500MW Phase B of the concession - it will be interesting to see what measures B&B uses to finance growth.

Martel wind portfolio

The project at a glance

Spring mini-hydro portfolio

The project at a glance