Following the global financial crisis, a more diversified funding market is developing in Europe. Institutional investors are helping to fill the funding gap left by the contraction in bank lending in the wake of the crisis, particularly in long-term financing for infrastructure projects, and sitting alongside banks to offer a wider pool of capital to developers.
The economic climate which has prevailed since the financial crisis, of persistently low interest rates and increasing regulatory supervision, has led to institutional investors, such as insurance companies and pension funds, seeking alternative sources of stable long-term investment.
Over the past few years, direct lending in Europe by non-bank institutions has increased and S&P estimated that in 2014 the market grew to more than €10 billion, across more than 200 deals, up from €5 billion a few years ago.
In line with this trend, we have seen an increase in debt financing from institutional investors for infrastructure projects, particularly more established renewable energy assets, such as solar PV and onshore wind. Institutional investors seeking to match long-term and index-linked liabilities, and secure higher returns than currently available on government bonds, are attracted by the long-term, relatively stable, index-linked and government supported returns generated by these types of assets.
Much of such investment has been in operating assets, though we have seen increasing capacity for taking construction risk. However, similar to banks, there seems very little appetite for development risk. Institutional investors are also moving closer to bank-counterparts in being able to provide staged drawdown facilities and amortising repayment profiles, more suited to this sort of financing.
In the UK, investments from non-bank institutions have often been through the bond markets, or by purchase of participations in the secondary debt trading market. However, a market of debt facilities privately placed with a small group of sophisticated investors (so called “private placements” or “PP”) has been slowly developing.
For example, in March this year, UK-based firm, A Shade Greener (ASG) placed £155 million of debt with Macquarie Infrastructure Debt Investment Solutions (MIDIS), an investment platform set up by the Australian-based Macquarie Group, under a framework agreement to refinance a portfolio of ASG’s operational solar assets.
There is already a long-established private placement market in the US for corporate debt. Since the financial crisis, smaller national markets have also developed in EU member states, including the Schuldschein market in Germany and a smaller Euro private placement market in France. In the UK, where this market is less well established, many UK corporates have turned to the US private placement market for investment.
To help encourage development of a pan-European private placements market, the Loan Market Association published a suite of template Pan-European Private Placement documentation in January 2015, which was followed in February with the publication by the International Capital Market Association of a PP market guide. Aimed at standardising the documentation for private placements across Europe and providing a framework for best practice, it is hoped these will help to raise confidence in the market and will encourage investment by reducing the time and costs often associated with current private placements in Europe.
Moves to simplify and make more transparent regulatory regimes applying to private placements, like the UK government’s announcement of a tax exemption for private placements, should help further encourage both borrowers and institutional investors into this market. Following the announcement of the proposed tax exemption in December 2014, the Investment Management Association announced that six institutional investors expected to invest €9 billion in UK infrastructure, by way of private placements and other direct lending.
The European Commission’s Investment Plan for Europe also supports growth of Europe’s renewable energy sector and is hoped will help encourage further investment, including in energy infrastructure projects such as interconnectors, enabling renewable power to be transported to industrial centres otherwise dependent on fossil fuels.
It is hoped that the European Commission’s drive to create a European-wide “Capital Markets Union”, to attract cross-border investment and reduce dependency on traditional bank debt, will further encourage institutional investment for key sectors, including renewable energy, helping to stimulate growth and aid resilience in the EU economies.
It is unlikely, however, that the PP market will entirely substitute other forms of financing for renewable projects, such as the YieldCo structures which have appeared in the U.S., UK and Canadian markets over the last 18 months. The YieldCo market continues to attract new issuers, such as the joint venture between First Solar and SunPower announced earlier this year.
Banks are also returning to the market, and we are seeing an increase in new long-term debt facilities offered by banks for renewable energy projects. In addition, banks are likely to retain a significant role alongside institutional investors, providing deposit services and ancillary facilities, such as working capital and letters of credit facilities, which non-bank investors are not able to provide. Similarly, there is a role for banks in providing agency and trustee services where funds are ill-equipped to provide these services.
The expected continued increase in institutional investment, alongside returning bank debt and other innovative funding structures, is creating a deeper capital market for renewable energy projects. For developers and funders looking to invest in Europe, this presents greater opportunities and it will be a matter of finding the right project and the right jurisdiction rather than chasing limited assets.
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