The A$284.8 million ($205 million) financing for the Hornsdale wind farm is notable for being the first project financing under the Australian Capital Territory’s wind auction, representing a rare bright spark of activity in Australia’s otherwise dormant renewables sector.

It is also notable for the terms that the borrower was able to attract. The financing was competitively priced and the maturity of the debt matched the duration of the power purchase agreement (PPA) with a slight tail, a rarity in Australia's traditionally miniperm friendly bank market.

“The big thing about this financing is that we don’t normally see these sorts of tenors” says Sean Rush, partner in Baker & McKenzie’s Sydney office. “In Europe and in some parts of Asia when you have a long-term PPA secured you can normally get a project financing to match the duration of the offtake contract, but in Australia this isn’t usually the case.”

He added: “There have been a few deals that have included a long-term tranche as part of the funding, but this has normally been provided by development banks or the Clean Energy Finance Corporation, and is provided along with a commercial bank facility with a much shorter maturity.”

Background

The wind auction forms the centrepiece of the ACT government’s target of meeting 90% of its energy demand through renewable sources by 2020. In March 2014, the Minister for the Environment, Simon Corbell, announced that 200MW of wind capacity would be auctioned on a competitive basis and pulled in 16 bids.

In February, the government announced that three projects had been awarded 20-year feed-in-tariffs under the auction. These were the 80.5MW Ararat wind project in Victoria being developed by RES, the 19.4MW Coonooer Bridge wind project in Victoria being developed by Windlab, and the 100MW Hornsdale project being developed by Neoen and Megawatt Capital.

The ACT wind auction represents about the only source of deal activity in Australia’s renewable energy market at the moment. Renewables projects in the country have been largely on hold as the federal government and opposition Labor party, which holds the balance of power in Australia’s Senate, have been in disagreement over the country’s Renewable Energy Target (RET).

The RET sets out how much of the country’s energy will come from renewable sources up to 2020 and is the main source of support for Australia’s wind market because of its effect on the market for renewable energy certificates. The government and opposition finally agreed upon a compromise, which will see the target set at 33,000GWh although this breakthrough has yet to filter through into deal flow.

The project

The remaining sponsors of the Hornsdale project are Neoen (70%) and John Laing (30%) after Megawatt Capital, the company formed by ex-Investec banker Mark Schneider, sold its equity stake in the project at the time of financial close to John Laing. The sponsors acquired the project from Investec last year after the bank announced plans to wind down its Australia operations.

The project company, which has the rights to develop up to 270MW at the farm’s location in Jamestown, Australia, was awarded 100MW, the maximum allowed under the ACT’s wind auction and signed a 20-year FiT with the ACT government, which was priced at A$0.92 per kWh.

Siemens is the engineering, procurement and construction (EPC) contractor for the project and is also providing 32 Siemens direct drive turbines for the projects. Siemens has also signed a long-term operations & maintenance (O&M) contract for the project.

The financing

The sponsors signed the A$248.8 million financing for the project on 19 September, which was split between a A$195 million 19.5-year term loan, a A$23.8 million letter of credit facility and A$66 million in equity. Pricing on the deal starts at 160bp over BBSW before stepping up to 220bp.

KfW-IPEX and Societe Generale were the sole lenders under the deal, a surprisingly exiguous group given the total debt size. The borrower was reportedly keen on bringing more banks into the deal but most other lenders including overseas banks active in Australia were unwilling to lend long-term.

The absence of more than two banks participating on the deal is obviously a concern, but the sponsors can still be content with having agreed a long-term project financing and having eliminated any refinancing risk involved with the project, a rarity in Australia.

Advisers

The Hornsdale project will likely spark few imitators simply because the ACT wind auction makes up only a small fraction of Australia’s renewable energy market. Also, PPAs in excess of seven years are usually rare for most RET projects.

But what the project does offer is a borrower friendly template for projects under the wind auction, an important feat as the ACT government has just launched its second wind auction last month, and the expectation will be that other similar deals may follow suit.

Herbert Smith Freehills advised the lenders and Baker & McKenzie advised the borrower. Clayton Utz also advised John Laing on its acquisition of a stake in the project, and King & Wood Mallesons advised on a small mezzanine facility provided by Investec at the holdco level.