Financing Instruments for Renewable Energies in Canada

Energie
Financing Instruments for Renewable
Energies in Canada
Klaus Houben,
Senior Regional Manager Europe, EDC
Bonn, June 19, 2012
www.german-renewable-energy.com
Support provided by
EDC - Export Development Canada
About EDC
 Canada’s Export Credit Agency
 Crown corporation wholly owned
by Government of Canada
 Financially self-sustaining
 Operates on commercial
principles
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EDC is Canada
100% AAA Sovereign Issuer
 EDC notes are a direct and unconditional obligation of the Issuer,
therefore are direct and unconditional obligations of Canada
 0% BIS risk weighting according to Basel II guidelines
Domestic Currency
Foreign Currency
Long-term
Short-term
Long-term
Short-term
Standard & Poor’s
AAA
A-1+
AAA
A-1+
Moody’s
Aaa
P1
Aaa
P1
JCR
AAA
DBRS
AAA
AAA
R-1 (high)
AAA
R-1 (high)
Canada Banking System Is World's Soundest, Economic Forum Says in Survey.
Canada’s banking system was ranked the world’s soundest for the third straight
year by the World Economic Forum. September 9, 2010
“What Toronto can teach New York and London”
– Financial Times, 29 January 2010
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EDC’s Role
 To support and develop
Canada’s export trade and
international business efforts
 Financing and insurance
solutions for Canadian
exporters and investors
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2011 Performance Highlights
 Facilitated $102.8 billion in business carried out by
Canadian companies
 Served 7,788 customers
 Supported business in 195 countries
 Facilitated $31.2 billion in emerging markets
 Contributed to 5.2% of GDP, supporting 707,287 jobs
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Supporting Business Worldwide
EDC’s foreign representation
North America / Caribbean $52.7B (51%)
Asia-Pacific $24.3B (24%)
Europe $13.1B (13%)
South / Central America $6.3B (6%)
Africa / Middle East $6.3B (6%)
% = percentage of EDC’s total business facilitated
Moscow, Russia
Düsseldorf, Germany
Beijing,
People’s Republic of China
Istanbul, Turkey
Shanghai,
People’s Republic of China
Monterrey, Mexico
New Delhi, India
Mexico City, Mexico
Panama
Mumbai, India
Abu Dhabi, UAE
Lima, Peru
Rio de Janeiro, Brazil
Santiago, Chile
São Paulo, Brazil
Location of EDC Representation
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Singapore
EDC Business Volumes in Europe (2007-2011, $ millions)
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EDC Products & Services
 Financing
 Insurance
 Bonding
 Criteria for EDC support:
 Canadian benefits
 Corporate Social Responsibility
 Credit worthiness of borrower or risk counterpart
 Exporter financial and technical capabilities
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Foreign Buyer Financing
 Direct financing to foreign
customer
 Loan or guarantee to another
financial institution
 Lines of credit
 Flexible financing options for
foreign buyers
 EDC assumes risk of nonpayment
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www.edc.ca/financing
Financing for Investment in Canada
 EDC can look at providing European investors to
Canada with financing for an investment where:
 The European investor will remain actively involved in the
operations of the Canadian subsidiary
 > 50% of the output of the Canadian operation will be exported
from Canada
 Benefits to Canada including employment, research &
development, environmental benefits and revenue are present
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Support provided by
other Canadian Financial Institutions
Incentive Programs for Renewable Energies
Federal
 “Clean Energy Fund”: $1 bln over 3 years for R&D
 Sustainable Development Tech Fund: $ 590 mln
 “Green Infrastructure Fund”: $1 bln over 5 years for investments in
“Green Building” projects
 Scientific Research & Experimental Development Program (SR&ED)
 CanmetENERGY Solar Photovoltaic Program
 National Research Council Canada Industrial Research Assistance Program
(NRC-IRAP)
 Particular accelerated depreciations for investments in renewable energies
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Incentive Programs for Renewable Energies (cont.)
Provincial (selection)
 ON: EnerSmart Energy Program
Eastern Ontario Development Program
 QC: Energy Efficiency Programs
Regional Economic Intervention Fund (REIF)
 BC: Innovative Clean Energy Program
 NS: Environmental Technology Program
 NB: New Brunswick Growth Program
 SK: Go Green Fund + new Renewable Energy Incentive is being developed
 MB: Geothermal Energy Incentive for District Heating
Commercialization Support for Business Program
 AB: Alberta Innovation Vouchers Program
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Financing for Renewable Energies
 In the sector of renewable energies in Canada there appear to be a significant gap
in debt financing
 In Canada, banks have been rather conservative in their approach to the Cleantech
sector to the point where EDC and other financial institutions are exploring new more
innovative solutions
 Until recently, developers looking to finance their greenfield renewable projects
could go to:
 Banks (domestic banks offer mini-perm loans while foreign banks,
including Germans, offer long-term loans)
 Life insurance companies (who offer long-term loans)
 Venture capital firms / equity investors
 Now developers can also seek debt through:
 Rated bond offerings (long-term bonds sold to fixed income funds)
 Hybrid structures (using short-term bank debt combined with long-term bonds)
 ECA supported structures (e.g. Euler Hermes, US ExIm
have been active here)
Financing Considerations – Choice of Market
 Debt funding requirements for a project can be satisfied through either the bank market,
the bond (private placement market), or a combination of the two
 Banks debt can take the form of a mini perm or long term debt
 Private placements can take the form of a narrowly placed unrated issue or a broadly marketed rated issue
Bank Market
Typical Use:
Term1:
Amortization:
Covenants:
Pricing:
Prepayment:
Investor Base:
1
Subject to term of PPA
 Operating / working capital purposes
 Construction / project financing
 Most domestic banks will lend up to 10 years;
select foreign banks will lend up to 20 years
 Will allow debt to amortize over a longer period
than the term of the debt
 Amortizing principal payments required for project
finance
 Typically more restrictive covenant pattern
 Floating rate
 Based on BAs, LIBOR or Prime
 Synthetic fixed-rate must be achieved through
swaps
 Pre-payable at any time without penalty
 Swap breakage costs may apply
 Mainly banks
Bond (Private Placement) Market
 Permanent / long-term debt
 Typically 5 - 30 years
 Amortizing principal payments required for
project finance
 Bullet bonds possible for portfolio of assets
 More flexible covenant pattern for broadly
distributed bond deals than term bank credit
facilities and narrowly distributed bond deals
 Fixed rate
 Spread over Government bond yield
 Pre-payable with make whole premium
 Life insurance companies
 Asset managers
 Pension funds
Financing Considerations – Bank Financing
 Banks have traditionally been more accommodating in negotiating a customized
financing solution that takes into account the different credit risk and operating profile
of each asset
 Long-term (~18 year) bank debt based on 20 year PPAs and mini perms have been
used to finance a number of renewables projects in Canada
 Selected project finance banks, particularly Japanese institutions, remain interested
in providing long-term debt to the Canadian renewable power sector and are able to
offer competitive pricing compared to Canadian Banks
 Market capacity for long-term bank debt is currently around $250 - $300 million
 There is greater market capacity for mini perms in which a refinancing is typically
required - the term of the debt is 5-10 years but it can amortize over a longer period
(~18 years) with a swap over this same longer period
 Larger debt requirements can result in higher margins and less attractive terms
depending on the size of the lending syndicate and its composition
Financing Considerations – Bank Financing (cont.)
 Most European banks are currently only able to lend on a mini perm basis.
Most have also experienced an increase in funding costs which has made them less
competitive in the Canadian market
 CIBC is one of the most active lenders in the renewable space in NA having recently
closed a number of transactions and being a top 3 dealer in the Canadian market with
significant power and project finance experience
 Scenario: Canadian banks will lend on a hard mini perm basis for up to 10 years while
some European banks will lend on a soft mini perm basis
 Failure to refinance a hard mini perm prior to its maturity results in default while a
failure to refinance a soft mini perm triggers a cash sweep that results in accelerated
repayment of the loan and an extension of the initial term along with a step up in the
margin similar to a default rate
 Banks will typically lend up to 80% to 85% leverage with minimum DSCR coverage
levels of 1.35x for solar and 1.40x for wind both on a P50 basis for single asset
financings with more flexibility for a portfolio depending on its composition and risk
profile
Financing Considerations – Bond Financing
 Narrowly Distributed Private Placement (“Private Placements”)
 Life insurance companies (“Lifecos”) and certain pension funds have been particularly
active in the narrowly distributed private placement market
–
Total market capacity is currently ~$200 - $300 million
–
To date, have financed most of the wind/solar projects in Canada
–
Typically the transaction is unrated and negotiated directly with a small group of investors
–
Even through the transaction is not rated externally by credit rating agencies the investors
will structure the transaction to at least receive an internal investment grade rating
–
Terms can be more onerous than a broadly marketed rated issue and the pricing tends to be higher
–
Debt is usually placed on an amortizing basis where prepayments are subject to a make whole
provisions given the fixed rate nature of the financing
 “Lifecos” typically lend up to 75%-85% leverage with minimum DSCRs similar to banks
of ~1.35x for solar and ~1.40x for wind projects (stepping up over time) on a single
asset basis with more flexibility for a portfolio depending on its composition and risk profile
–
“Lifecos” will lend without a financing tail (i.e. full PPA term)
–
Like banks - are able to commit to a credit spread for a period of time
–
Covenants will be similar to those required by banks
Financing Considerations – Bond Financing (cont.)
 Broadly Distributed Bond (“Bond Offering”)
 The broadly distributed bond market is familiar with project finance renewable bonds for
hydroelectric projects but to date, wind and solar projects have only been financed in the
private placement market or bank market in Canada
 CIBC has explored a renewable bond offering in Canada with other issuers and believes
it is achievable
–
Growing investor interest from infrastructure debt investors and pension funds for wind and solar projects
–
Investors are comfortable with greenfield project financings as demonstrated by the robustness of the P3
bond market ($4.5 billion in issues in 2011)
–
Investors (“Lifecos”) who have participated in private placements would also participate in a bond offering
 A credit rating and larger investment base would create greater market tension for thereby
potentially improving pricing and terms versus a private placement offering
–
A wind/solar bond issue would need to be structured to achieve a minimum BBB rating from
2 credit agencies to generate sufficient interest in the Canadian market and to optimize pricing.
This would require DSCRs of 1.40x – 1.50x on a P90 basis
–
Significant interest in the market for BBB financings: A $1.4 billion project financing
at the BBB/BBB+ recently closed in the C$ markets and largest BBB issue to date
in the C$ market was a $1.45 billion issue in 2009
Financing Considerations – Bond Financing (cont.)
 Broadly Distributed Bond (cont.)
 Market capacity for a Bond Offering is typically well in excess of the bank and private
placement market
– Given there have been no issues that have come to market, a pricing concession would need to
be made for issues in excess of ~$300million although there may be greater interest at the
appropriate spread
– Expect that there will be greater capacity and improved terms achievable with subsequent issues
(similar to P3)
– No tail is possible to achieve based on the project’s ability to generate revenues after the expiry
of the PPA
– Pricing will be subject to prevailing spreads at the time of issue
Energie
EDC Representation for Western & Central Europe:
Klaus Houben
Senior Regional Manager Europe
Tel.:
+ 49 (0) 211 17217 45
Mobile:
+ 49 (0) 151 5381 6672
Email:
[email protected]
Consulate of Canada
Benrather Str. 8
40213 Düsseldorf
Germany
www.german-renewable-energy.com
Anna Wozniak
Coordinator Europe
Tel.:
+ 49 (0) 211 17217 46
Mobile: + 49 (0) 151 5381 2048
Email:
[email protected]