The sweet spot for institutional debt investors seems to be shifting further and further into the banking mainstream, with some commercial bankers very worried about the growing encroachment. Perhaps they are right to be concerned. The infra debt funds are hungry for business. But the funds themselves have had to adapt to the evolution in the marketplace by taking on higher risk lending to boost their returns.
Institutional debt has long been a feature of financing energy and infrastructure projects for the long term. But the spotlight was put on this source of liquidity when the banking market collapsed during the global financial crisis in 2008. Apart from in the US, where banks did not lend long-term anyway, the idea was banks could continue to lend short term and the institutions would step up big time for the long-term debt. That did not happen but an equilibrium was established.
Two deals from this year show how the two liquidity pools have been working together over the last decade or so. The Ventient refinancing backing a portfolio of onshore wind farms across Europe saw a €2.6bn deal with shorter-term bank tranches from Abanca, AIB, ANZ, Bank of China, Bankinter, CBA, CIBC, HSBC, Intesa Sanpaolo, Lloyds, NAB and NatWest, and longer-term institutional tranches from NNIP, AXA, Manulife and Rivage. There was a combination of bullet and amortising repayment terms.
There was a similar complementary debt financing on the £661.1m Moray East offshore transmission owner (OFTO) deal for Transmission Capital Partners (TCP). Shorter-term bank debt was provided by Barclays, HSBC, Nippon Life, Norinchukin, RBC and SMTB, with a longer-term Legal & General tranche taking over the amortisation towards the end of the deal.
Both Ventient and Moray East OFTO were very competitively priced cashflow-backed secured financings. But interestingly, at the higher risk end of the debt spectrum we are seeing institutional investors starting to play. As demand for renewable energy grows we are starting to see more developers transition to a portfolio or independent power producer model as opposed to an individual power project model.
Institutional investors, perhaps familiar with private equity-style sponsorship, have funded developers in this space without taking control over specific assets and in return have received margins nearing 10% – unheard of even for equity returns before interest rates starting going up in 2022.
Pan-European renewables IPP Aukera Energy has raised a €450m structured credit facility from institutional investor EIG. The facility comprises an initial €200m tranche and has an accordion feature to increase the volume by another €250m. Tel Aviv-listed developer Econergy has raised a €150m loan from Rivage to finance the development of solar, wind and storage projects in the UK, Italy, Romania and Poland. This is not old fashioned long-term institutional debt, indeed it runs for five years. The first €100m tranche is priced at a 9%–9.5% fixed rate and the second €50m tranche is priced at mid-swaps plus 600bp to 650bp.
In the US, Stonepeak is getting a similar return of 9.5% on its US$400m loan to California-based renewable natural gas developer Clean Energy Fuels Corporation. RNG has been a growing sector in the US but has been largely shunned by commercial banks. Eiffel Investment Group was another institutional investor to get into the sector by funding a US$64m financing to back four RNG projects owned by Waga Energy Group.
Given the huge volume of bank loans going into the US renewable sector right now, there is plenty of room for everybody. Manulife provided a US$47.5m project loan to battery storage developer Spearmint Energy for a scheme in Texas. But then, at the same time, a host of commercial banks funded Calpine's US$985m eight-year loan to back its 680MW battery storage project in California, the world's largest battery storage deal thus far. But it is noteworthy that institutional investor The Carlyle Group provided a US$750m senior debt financing to airport parking company The Parking Spot. That is fairly chunky even if the scheme has real estate characteristics.
This ability to put down large tickets could start to worry commercial bankers. UK-based infrastructure developer John Laing signed a £180m refinancing with MetLife to take out most of its £200m banking facilities due to expire next month. The tranches will run between December 2030 and December 2038 with no changes to covenants. Some flexible banking debt remains with the KKR-owned company. Columbia Threadneedle European Sustainable Infrastructure Fund and Brittany Ferries are said to be looking at an institutional debt refinancing on their Condor Ferries asset to take out a bank loan from 2017. The £172m 2017 loan was extended by NatWest last autumn and a group of banks was working on the new deal.
Banks remain well ahead on greenfield project financings but that has never been all of the pie. Elsewhere, the institutions are coming.
