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Investment in infrastructure: Solar-park securitization breaks new ground

Boutique structures innovative listed RPI-linked deal; Investors replacing banks in infrastructure finance

As 2013 begins, debt market bankers will be stepping up their efforts to find new providers of finance to project and infrastructure borrowers.

Policymakers want more capital investment to spark economic growth, and big-ticket construction projects are the top candidates.

Institutional flows are just beginning as insurance-company and pension-fund investors hire in specialists to oversee portfolios or appoint external managers. At the end of last year, Swiss Re committed an initial $500 million to investments in senior secured debt of infrastructure businesses and assets located primarily in northern Europe. It has awarded a mandate for this to infrastructure specialist Macquarie Group.

Klaus Weber, managing director and head of external investment mandates at Swiss Re, says: "We expect the market to evolve substantially over the next few years and are excited to participate in this development. With its particular characteristics, infrastructure debt fits well with our asset and liability management approach and provides attractive long-term investments, well aligned with our balanced investment strategy."

Meanwhile, a smaller deal, announced on the same day as the Swiss Re investment, shows how much innovation can play a part in catalysing investment flows into the asset class. Specialist debt finance boutique Independent Debt Capital Markets (IDCM) announced the listing and placement of £40 million ($64.8 million) of senior-secured Retail Prices Index (RPI)-linked notes, secured against the cashflows from two accredited UK solar parks with an aggregate output of 9.97 megawatts.

The long-life of the assets – which amortize towards the 24-year final maturity with a 13-year average weighted life, and the inflation-linked coupon, initially set at 3.61% – might have been expected to attract keen interest from institutional buyers.

In an effort to encourage development of renewable energy sources, the UK government established a tariff regime in 2010 that requires the UK’s licensed electricity suppliers to pay a tariff for electricity generated by accredited renewables suppliers. For such generators, 85% of their revenues are effectively guaranteed, as long as they keep generating electricity.

And while there is an additional 15% export tariff to be earned for energy supplied to the grid, these generators are not exposed to volatility in the spot price or to off-take contracts from particular consumers.

Construction of the two solar parks behind Solar Financing 2012-1 had been completed when the deal was announced. It refinances the sponsors’ equity commitments with long-term debt and allows them to retain ownership rather than selling out to an infrastructure fund.

Justin May, former global head of debt capital markets, asset-backed securitization and structured consumer capital at ABN Amro
Justin May, former global head of debt capital markets, asset-backed securitization and structured consumer capital at ABN Amro

Partner Justin May, former global head of debt capital markets, asset-backed securitization and structured consumer capital at ABN Amro, who left the bank after its ill-fated sale to RBS and founded IDCM in 2009, says: "Further to receiving the technical due diligence reports, we were able to calculate the anticipated performance of the two solar parks, given certain performance ratio assumptions. "We clearly stress-tested these assumptions to ensure our structure was robust and that the cashflows were able to support the securitization, given that the two parks had been accredited with a 25-year RPI-linked tariff."

One or two securitizations have been completed for US solar parks, but this was a ground-breaking deal in Europe and also a first-ever listed transaction. In the end, it was placed entirely with Pension Insurance Corporation (PIC), the early leader among a small group of interested investors, which eventually offered to buy the whole transaction.

"We spent a considerable amount of time educating prospective investors about the solar sector and the regulatory framework," says May. "While it makes sense for a number of different types of investors to buy corporate inflation-linked assets, on the fund-management side many of the inflation-linked portfolios are run from the government bond trading desks which have limited appetite for corporate credit product.

"In future, there will be a much broader universe of inflation-linked issuers beyond governments and large names, such as Network Rail, that will include credits from the renewables and social housing sectors. Clients should make sure that their appointed asset managers are aware of this broader universe of potential investment opportunities."

While the notes are listed and could trade, it is unlikely they will. PIC, having secured a long-term inflation-linked asset with a margin some 300 basis points above inflation-linked gilts, is likely to hold on to it.

May asks: "Can this asset class continue to develop from its embryonic status? I hope so. There are a number of investors looking at the infrastructure space, and its cashflow stability is attractive from a debt investor point of view. But it will take time. Investors need to commit resources to get comfortable with it."

IDCM has informally been discussing with the UK Treasury new ways to catalyze capital markets investment.

One thing is for sure, though, says the former banker, who set up his boutique to structure bespoke, often illiquid finance alternatives to bank debt for SMEs, property and energy and natural resources borrowers.

"This is not a bank product," he states. "The role of banks should be to provide short-term construction finance, working capital and acquisition finance, but not to provide long-term debt."

For more on institutional investment in infrastructure, see next month’s issue.

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