A Balfour Beatty, AMP Capital and Equitix consortium reached financial close on the £317 million (US$517m) acquisition of the Greater Gabbard offshore transmission project at the end of November 2013.

The project vehicle, Greater Gabbard OFTO Plc, issued £305.14 million in senior secured bonds to help finance the acquisition. The deal was a first in many respects; the first offshore transmission project to be funded through the capital markets and the first UK project to use the European Investment Bank’s PBCE product.   

The project

The UK’s Greater Gabbard offshore wind farm is on the world’s largest offshore wind projects. Originally an Airtricity/Fluor joint venture, the £1.3 billion (US$2.1bn) operational wind project is now owned by utilities SSE and RWE. The 504MW project requires three 45km long cables - known as export cables - to bring power onshore, where it connects with the national transmission network at Sizewell in Suffolk.

Under European unbundling requirements, the transmission assets of offshore wind farms must be transferred from the wind farm developer to an independent operator. The UK’s OFTO structure has been well received by the industry, with healthy competition for the assets. In the case of Greater Gabbard, a consortium of Balfour Beatty, AMP Capital and Equitix won the mandate to own and operate the transmission cables.

The OFTO will operate under a licence with a 20-year revenue entitlement period awarded by UK transmission regulator Ofgem. Under the licence, the project will receive a UK Retail Price Index-linked revenue stream based on a minimum availability assumption of 98 per cent with a bonus/penalty system if availability deviates from this level.

The deal 

Greater Gabbard OFTO Plc, issued £305.14 million in senior secured bonds to help finance the acquisition of the wind farm assets from the wind farm developer.

The amortizing bonds priced at 125bps over the five per cent 2025 Gilt giving an all-in coupon of 4.137 per cent semi-annually with a book of ~ 3x. Maturity is November 2032, and weighted average life is ~ 12 years. A source told IJ News that bank financing at this price would have been unlikely.

The bonds will be backed up by an unconditional letter of credit from the EIB through its Project Bond scheme. The EIB will guarantee 15 per cent of the transaction under the PBCE scheme. This is the first offshore transmission project to be funded through the capital markets, and the first UK project to use the EIB’s PBCE product.

Moody's assigned an A3 rating to the bonds. A source close to the deal told IJ News that the PBCE enhancement had helped to achieve a one notch rating upgrade on the bond from BBB+, and Moody's confirmed that "the A3 rating of the bonds includes rating uplift of around one notch due to the presence of the EIB's project bond credit enhancement (PBCE). This on-demand letter of credit will provide additional liquidity to the project if required, but will also enhance recovery for senior lenders as it acts as a first-loss piece in the financing structure."

According to a source the response from investors has been very positive. The majority of investors - 78 per cent - in the bonds are from the UK. A source said that there had also been interest in the bonds from European, Japanese and North American investors. In terms of investor type insurance companies and pension funds (international but broadly UK) purchased 22 per cent of the bonds. 

The sponsor consortium will also provide equity capital in the form of subordinated shareholder loan notes. Each member of the ownership consortium will invest one third of the required equity of £46 million. The deal is leveraged at 90:10, and Moody's noted that the credit quality  of the financing structure is slightly constrained as a result.

"It is constrained by very high initial leverage of around 90 per cent of total capitalisation [...] albeit this is not uncommon for projects of this nature and somewhat mitigated by the amortising nature of the bonds," they noted.

The financing structure also includes interest rate swaps as the payment stream is inflation linked and the bonds are fixed rate. The swap is a revenue style swap and allows the equity holders to achieve inflation linked returns.

HSBC was sole arranger on the deal. Banco Santander and HSBC were joint bookrunners. Linklaters was legal adviser to the seller, whilst Allen & Overy acted as legal adviser to the buying consortium.

The future

The Greater Gabbard OFTO is only the second scheme to benefit from the EIB’s Project Bond initiative (the first was Spain’s Castor gas storage project), and as such it remains to be seen whether the EIB’s participation in the deal will be viewed as a success. The stable, inflation-linked returns offered by this investment has led some in the industry to question whether the EIB letter of credit was necessary at all. 

It could set a template for future OFTO financings in the UK; the high level of interest from institutional investors and funds suggest that these sources of capital are growing increasingly comfortable with the renewables asset class, and with UK offshore in particular. This bodes well for the next stage of the UK’s offshore wind development, Round Three. Indeed, this deal is part of a growing trend, Anne-Christine Champion told IJ News this month, and that a raft of transactions in 2013 involving non-bank players supplying long-dated debt to projects was evidence of a shift.

 “We are seeing institutional investors becoming involved in a concrete way, for example in French and Dutch PPP deals and in the Castor transaction [a €1.4 billion (US$1.9bn) refinancing] in Spain in July or the UK OFTO deal more recently.

“Bank liquidity is back on a short-term basis but on the long-term side of the curve there are regulatory constraints holding them back and there isn’t as much volume as before. I’m convinced this is a structural change.”