With the world turning its attention to renewable energy sources, it's no wonder that capital market investors are keen to get in on the action. For some, the motivation has been the better yields that come with an untested product, while for others, the political statement behind the investment is too hard to resist.
"It's the topic of the times," said Fabian Poetter, a structurer on the new issues team at Munich-based UniCredit Markets & Investment Banking. "We receive calls everyday during the structuring phase of our deal." Poetter is referring to the several deals the team has completed under its Breeze transaction series. The group this month closed the third transaction within this series, which is continuing to attract a growing investor base. The latest Breeze deal covers 206 wind power plants in Germany and France, with a total capacity of roughly 350 megawatts. It is highly diversified in terms of the plant location, the number of wind park developers and the turbine types employed. Tranches A and B are rated by Moody's Investors Service, Standard & Poor's and Fitch Ratings. The tranche C first-loss piece is unrated. Tranche A has been provided with additional insurance by MBIA, resulting in a rating upgrade to AAA'/AAA'/AAA.'
Under its debut Breeze transaction, Poetter said UniCredit initially stuck to a smaller deal size, with a limit of 120 million ($161 million). However, after the positive reception from investors, the subsequent deals have grown larger. These deals can now be wholly funded in capital markets and are typically oversubscribed.
"Under Breeze II, we placed 470 million backed by five developers of wind farms, but the first-loss piece was preplaced with CRC," he said. "But investors, particularly hedge funds, said they were interested in this piece." As a result, under the Breeze III transaction, the first-loss piece was marketed along with the A and B tranches of the transaction.
Unlike the prior two transactions, Breeze III included an MBIA wrap. However, Poetter says that there was enough appetite to get the deal done without the wrap. The inclusion of the MBIA wrap opened the deal to a broader investor base from the institutional investors right through hedge funds. "We feel that the ratings could better reflect the structure but rating agencies are just not used to renewable energy deals," Poetter said. "So investors are able to get a deal that is rated good but that can also generate good pricing."
With EU heads committed to taking the share of renewable energy sources to 20% by 2010, similar deals looking for funding in the capital markets are likely to come. In three European countries - Germany, Denmark and Spain - national legislation has been adopted to introduce minimum prices for feeding into the grid electricity generated from renewable energy sources. Under the Germany renewable sources act, tariffs are set for a 20-year period, which Poetter said provides added security for investors.
So far, the Breeze deals have only referenced wind farms in Germany and France, but there are plans to expand the geographical basis of the program. Poetter says that while Spain has its version of a tariff scheme, getting a deal done from an outside perspective (meaning a German structurer as opposed to a native structurer) might present some cultural and tax issues. The more logical place to turn to would be countries where UniCredit Group has a larger presence, including emerging Eastern European countries that are familiar with the firm's brand and that have tariff schemes similar to Germany.
The group is currently looking to incorporate its Breeze technology to renewable energy projects in Eastern Europe. This would be done through a mixed transaction that would incorporate wind farms located in three to four different markets throughout Romania, Poland and the Czech Republic.
UniCredit Group intends to apply similar technology to other forms of renewable energy. At the moment, the group is looking to incorporate solar energy projects under its Breeze series. Poetter said his firm is also looking to launch the first offshore wind transaction that will consist of a 1 billion project in the North Sea. "It's a new technology and investors will be interested if returns are right for this risk," Poetter says.
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