Accessing financing for renewables
Government procurers can facilitate a competitive banking market, says Robert Harker, Partner, Project Finance, DLA Piper
In recent years, there has been a dramatic rise in the number of renewables projects which have been tendered, financed, commissioned and which are now operational in the Middle East and North Africa (MENA).
This is testament to the progressive approach a number of the governments in the MENA region have adopted, under which renewables projects have become an inescapable part of the energy mix. In the space of the last five years, renewables projects (particularly solar PV) have moved from small, 10 MW financings to utility scale-scale transactions in excess of 1 GW. Indeed, the region is poised for a series of very significant renewables projects, building on previous projects and ambitious renewables programmes.
In this context, and given the capital expenditure required, the issue becomes how best to approach the financiers and the credit markets in order to ensure the projects can be financed in a timely fashion, but also establishing a financing market which is both competitive and liquid. Leaving aside certain nascent technologies like battery storage (which we are now seeing being procured both on a standalone basis and as part of a wider solar procurement), regional and international commercial banks, together with export credit agencies and multilaterals are increasingly comfortable investing in the renewables sector.
The question which remains, particularly where financial institutions are constrained by the burden of enhanced regulation for long term tenor debt, is how government procurers can facilitate a competitive banking market, whilst recognising the on-going capacity constraints affecting the commercial bank market. In the past, government procurers would (largely) leave the funding solution to the bidding developer consortia, however, this is changing, with procurers becoming increasingly prescriptive in terms of what financing solution they expect the developers to provide as part of their bid submissions for their projects.
For some time now, through the global financial crisis and increasing regulation and capital adequacy of long term lending under the Basel regulations, procurers have actively encouraged the use of mini-perm financings to ameliorate the lack of liquidity in some quarters, where traditionally the expectation was of the provision of financing on tenors of 15 years or more.
Against this backdrop, the market has favoured the “soft” mini-perm financing. A soft mini-perm financing is essentially bank debt which has a similar legal maturity as traditional long-term debt but with a much shorter initial maturity (typically between 4 - 7 years in duration). What this means is that most banks can treat this internally as a much shorter tenor transaction even though legally the tenor is the same as has been seen historically.
The effect of this is principally twofold: (i) a mini-perm financing means a larger number of banks can potentially participate in the project and support the various bidders as they are not constrained by long tenors which should in theory allow more developers to bid for projects; and (ii) this creates a more competitive banking market which should allow for keener terms and therefore, ultimately, a lower tariff.
An important feature of a soft mini-perm financing is that the structure anticipates a “target” refinancing date at the same time as when the shorter, initial maturity expires.