Project financed offshore wind deals, with few priors and a minimal track record, will always be tough to push through. But last month’s financial close of Germany’s 288MW €1.2 billion Meerwind project – with no EIB funding and no conditions precedent to boot – demonstrates the appetite of commercial banks for well structured offshore wind deals.

The deal marks two important precedents for the offshore sector: familiarising several European banks’ credit committees with offshore risk, and testing KfW’s €5 billion offshore programme for the first time. Each makes the path to be taken by future developers a lot less fraught with danger.

Comparing the Meerwind [Projects Database] with the EIB backed 400MW Global Tech offshore project [Projects Database] – which is signed but awaiting final confirmation from KfW – reveals how offshore sponsors can both secure debt on attractive terms and not make crippling concessions to the banks.

"Global Tech is the deal with the structure banks would like to see each time. Meerwind is the deal banks are able to do when pushed," an insider told IJ. "Global Tech was a lot more conservative and the sponsors pretty much gave the banks everything they wanted."

Jérôme Guillet, Managing Director, Green Giraffe Energy Bankers, financial advisors to the private equity sponsor Blackstone, describes the deal as “a first”. He says,"Meerwind shows you can do a billion-euro deal without the EIB and it shows that investors who want privateequity-type returns can find ways to invest in the sector with support from the banks."

A decision was made to prearrange the debt pricing before Blackstone went to the debt market and all the banks signed up, which helped iron out a tricky contractual situation with turbine supplier Siemens.

Utilities are a more usual sponsor of wind projects, onshore or offshore, as opposed to US private equity groups. This meant that the contractual relationships between Siemens, the major creditor of the build, and the sponsor were new territory; to wit the turbine supply contracts and warranties required significantly more detail.

"Contracts negotiated by utilities are not easily bankable, as they have a very different way of managing risk, with more internal resources and a reliance on broader relationships with the suppliers”, says Guillet. “We had to negotiate the contract extensively with Siemens because their turbines hadn’t been supplied before on a non-recourse construction risk basis – their reputation alone was not enough by itself."

"The advantage of having the banks around is that you can have a three-way negotiation. It’s not a zero sum game...Siemens may for instance be asked to take more of the downside risk, they get a better commercial deal on other terms from the project, to which the banks can lend more as they are protected from worst case scenarios. You can create value for each party in a three party negotiation," he adds.

The structure of the debt was as follows:

• total debt was €885 million, comprising a term facility of €822 million with a 15-year post-construction tenor, and €63 million of contingent facility
• seven MLA participated in the deal committing a €385 million commercial tranche. They were BTMU (€50m), Commerzbank (€75m), Dexia (€30m), KfW-IPEX (€35m), Santander (€50m), Siemens (€50m) and Lloyds (€50m)
• a €250 million guarantee from Denmark’s credit export agency, EKF, funded by BTMU and KfW-IPEX
• KfW signed off €260 million of its €5 billion offshore wind energy programme, the deal to benefit from the programme
• the debt margins start at around 300bp over Euribor in construction, dipping to around 280bp and rising to around 320bp though operation

The second significant obstacle arrived two weeks before the deal hit financial close. Blackstone realised that Siemens was not going to be able to build the substation in time, meaning that they had to negotiate a brandnew turnkey contract with a consortium of France’s Alstom Grid and Germany’s WeserWind.

"The complex challenges that are given with its short realisation periods in the offshore business can be bestsolved with strong, local partnerships," commented Gerhard Seyrling, Alstom Grid’s regional vicepresident in a press release which underlined the challenge of replacing a substation contractor in the window between 15 April when the information memorandum went out to the lenders, and the final close in early August.

The Meerwind deal also demonstrates a shift away from the monopoly utilities have had on offshore wind projects. The tradition of utilities backing large wind projects is being challenged by the advent of institutional investors and US private equity groups taking up the mantle.

DONG has been successful in selling a minority stake to institutional investors, for example spinningoff 24.8 per cent of its 367MW Walney farm to a consortium including PGGM last December, 50 per cent of its 400MW Anholt project to a consortium led by PensionDanmark in March and is talking to Marubeni about selling a stake in the 172MW Gunfleet Sands 1 and 2 farms.

Likewise, Blackstone’s role as sponsor for the project, though unusual, may be a sign of things to come. KKR, a significant player in the US private equity market, made its first foray in European renewables this summer, with a €236 million joint venture with Italian developer Sorgenia to enter France’s nascent – but potentially highly huge – offshore wind sector.

These new entrants to the market are attracted to European wind assets because Germany has signalled its exit from nuclear and its commitment to renewables (namely a target of 25GW in offshore capacity by 2022) and as the market gains a track record, competition will increase to buy stakes in operational offshore assets; buy low, stimulate the market, sell high.

Meerwind’s success is likely to make things easier for future offshore wind projects to get financed.

"From the moment you have the first project closing with the KfW offshore wind programme, there is a learning curve for the banks, for the market and even for KfW. I think future projects will benefit from what has been done with Meerwind," says a banker who lent to the deal.

The banker explained that KfW’s €5 billion offshore wind programme will benefit developers getting their projects off the ground but also said it would be possible to do a similar sized deal exclusively in the bank market.

"If the risks are properly mitigated you could expect to finance a €1 billion deal from the commercial bank market but if other sources of financing are available and competitive from ECAs or development institutions, developers should tap these sources," he says.

Whatever the future health of the German offshore wind sector, Meerwind has certainly been a positive influence on an industry which only a few years ago looked more like a dear than a reality.

"Offshore wind needs precedents, each time a new deal is validated by the market it’s positive news and it will be repeated – the hardest one is the first one," says Guillet.