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Could Utility-Scale Solar Financing with Bonds Be the New Normal?

In late April, concentrated photovoltaic (CPV) manufacturer and solar project developer Soitec announced that it had finalised a bond that will be used to finance a portion of its 44 MWp CPV plant in Touwsrivier, South Africa. The bond, worth some ZAR1 billion (approximately US$85 million) is the first publicly-listed project development bond ever issued to finance a CPV solar power plant, and only the third bond issued to finance any type of solar installation worldwide.

Issuing a bond that will list on the bond market allows institutional investors like pension fund managers or asset managers to invest in it and potentially receive a stable return over a fixed period of time.

The Players

Solar projects are typically financed through a mix of debt and equity. Debt investors get their money back plus interest, and equity investors get a share of the project and make money through any profit that the project generates. Equity investors in some countries can also take advantage of tax credits or other financial incentives offered by governments that support renewable energy development. For this deal, said Gaetan Borgers, executive vice president of Soitec's solar division, the company issued the bond to cover the debt portion of the project and partners have already been identified to finance the equity portion.

This was Soitec Solar's first foray into the project finance bond market. “We decided to try a bond because we thought it would enable us to spread the investment on a larger pool of investors,” said Borgers of the decision to use a bond to cover the debt.

Borgers explained that Soitec worked with a number of partners when developing and issuing the bond. Three banks - Trident Capital, Deloitte & Touche, and Standard Bank of South Africa - served as advisors for developing the bond, and in December 2012 the bond received a favourable rating from Moody's, indicating that it was investment grade and effectively giving it the green light to enter the bond market. Then, in the spring of 2013, Standard Bank of South Africa formally issued the bond, and Deloitte and Trident marketed it to investment houses and money managers in hope of convincing them to invest, said Borgers. “The bonds were placed with a diverse pool of South African institutional investors, pension funds and asset managers,” said Kimon Boyiatjis, chief investment officer at Trident in a statement. Soitec's role in the process was to answer questions about the project itself. Today the bond is listed on the Johannesburg Stock Exchange and is fully subscribed.

The Project

The 44 MWp Touwsrivier project will be located on South Africa's Western Cape. Borgers said site preparation has begun for the project - fencing and ground preparation for now - and some modules and systems have already been shipped to the site. Soitec will source the 1500 modules that the project will require from both its German and US manufacturing centres. Borgers said the first modules should be in the field by June of this year. Group Five is the EPC partner on the project.

The project is being developed under South Africa's Renewable Energy Independent Power Producer (REIPP) programme, which seeks to assist developers in bringing some 3725 MW of new renewable energy capacity to South Africa to meet the government's target of generating 10,000 GWh of electricity with renewable energy resources annually.

The Touwsrivier project has a signed 20-year power purchase agreement (PPA) with Eskom, South Africa's state-owned energy utility. Under the terms of the REIPP, the PPA will be supported by the South African Department of Energy in the event that Eskom does not meet the terms of the PPA.

Scheduled for completion by June 2014, Touwsrivier will be the largest CPV plant in the western world once finished.

The Significance

Soitec's bond, issued by CPV Power Plant No1 Bond SPV (RF) Ltd, an affiliate of Soitec Solar GmbH, marks many firsts for the solar industry and could prove to be a new model for project financing in the near future. It is the first use of a bond for a CPV project, the first use of a bond to finance a solar project in South Africa, the first use of a bond for project finance by Soitec Solar Gmbh. It is also only the third time a bond has ever been used to finance any solar project worldwide.

The new financing mechanism couldn't have come soon enough. “The solar power plant market is the fastest growing market segment in the PV industry,” said Borgers, and since traditional project financing relies on just one or two banks, Borgers believes that, until now, market growth has been limited. Solar bonds for this type of development, particularly in areas of high irradiance, make good financial sense. “If you look at a PV power plant or a CPV power plant, especially in countries that enjoy a large amount of sun, the cash flow projections are extremely predictable,” explained Borgers. “So we think that this is perfectly aligned to the requirements to have a successful bond,” he said.

With predicable cash flows and booming global solar development, Borgers said he really isn't sure why more solar projects are not already being funded this way. He surmises that investors probably just need to get more familiar with solar projects. “Once they understand that [solar farms] are perfectly reliable power plants, there is no reason that a bond could not be used,” he said. “We think that it actually opens a large amount of capital and so it is a very attractive thing as we move forward.”

Ompi Aphane, deputy director for general energy policy and planning for South Africa's Department of Energy, is thrilled that Soitec was successful in using the bond market for project development. “It opens an entirely new field of project funding to the solar industry in South Africa,” he said in a statement. “We hope that this will contribute to the creation of a new pool of financial resources that can support the South African government's ambitious plans for renewable energy.”

The Opportunity

Beyond South Africa, anywhere there is an active bond market and a strong solar resource, solar project financing with bonds is a viable path, said Borgers. He mentioned the US and Europe as good candidates for this type of transaction and stated that other institutions are keen to work with Soitec on a similar model. “Since we released our announcement we have been approached by other banks that have said, ‘Well, why don't you try to do that [issue a bond] for another project with us,’” he said. “And so I think that it's going to catch the attention of the financial market.”

Financial instruments that bring more capital to the solar market are exactly what the industry needs. With module prices at record lows, developers are actively seeking capital to execute new solar projects in regions all over the world. Issuing bonds like Soitec's to cover a portion of the project could be a good way to get more money into the sector, and institutions across the world are starting to take note.

For example, in the UK, Foresight Group recently announced that it had issued a £60 million ($93 million) solar bond, which has been used to refinance its existing portfolio of solar assets located in Kent, Somerset and Wiltshire. This is the largest solar bond to date in the UK and is a further endorsement of the low-risk profile of operating solar power plants, according to Foresight Group. The company said it plans to deploy another £250 million ($387 million) into new large-scale ground-mounted solar projects in the UK over the next year. “We are finding a growing appetite from both institutional and retail investors who see solar power as a maturing asset class with an attractive risk profile,” said Ricardo Pineiro, investment manager at Foresight.

Warren Buffet's MidAmerican Energy Holdings issued its first utility-scale solar project bond in March 2012 to help finance the 550 MW Topaz Solar Farm in San Luis Obispo County, California. MidAmerican Energy Holdings initially issued bonds worth $700 million, then upped them to $850 million once they proved popular. One month later the holding company announced plans to issue another bond because the first one was oversubscribed by $400 million. The bonds, which will reach maturity in September 2039, will yield a 5.75 percent return rate.

The Risks

Soitec's solar bond has an 11 percent fixed return and reaches maturity in 2029. Moody's gave the Soitec bond a rating of Baa2.za. According to Tom McKelvey, a retired money manager who worked for UBS managing large corporate US pension funds and sovereign Middle Eastern funds, Baa2 is just above a C rating, with C being junk. “It's a low rating but it's still considered investable,” he said. It's also important to note that ratings differ from market to market, so comparing a rating designed for the Johannesburg stock market with one designed for the US market isn't apples to apples.

According to McKelvey, high-yield bonds are inviting to money managers because of the potential returns they offer. But he cautioned that Soitec's 11 percent return and Baa2.za rating indicates that, while attractive, it definitely comes with some risk. “In this day and age, when interest rates are so low, money managers would be very interested in a bond offering an 11 percent return,” he said. But the risks are real. Soitec's CPV technology has never been used in a project as big as this. And the company could always go out of business, McKelvey said - or the equipment could fail, O&M costs could be greater than anticipated, or any number of other unforeseen issues could arise, which means an investment in the Soitec bond is one that McKelvey would call “speculative”.

Depending on the type of fund that a money manager is running, said McKelvey, she or he might buy enough Soitec bonds to make up to 3 percent of the total holding. “If it was well-known to be a speculative fund, I might go as high as 5 percent,” he added. “I would probably take a chance that it might make it,” he concluded.

As the solar industry continues to mature and investors become more comfortable with solar power projects, expect to see greater use of solar bonds for project development in 2013 and beyond.

Lead image: Soitec's pilot facility in the Aquila Private Game Reserve on the Western Cape, next to the future Touwsrivier power plant. Courtesy Soitec

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