EMEA: Case study: Walney Extension marks new template for non-bank wind debt

09 March 2018 - 12:00 am UTC

The product of intense cooperation among banks, funds and an ECA, Ørsted’s GBP 1.3bn financing for the Walney Extension is set to become a reference point. It demonstrates that in renewables, top tier developers can achieve ever more ambitious projects, as Andrew Cavenagh reports.

Last year’s GBP 1.3bn financing for the Walney Extension wind farm project established two significant precedents for non-bank debt in the sector.

Located off the coast of Cumbria, the farm will be the world’s largest operational facility when it comes on stream later this year.

First, the transaction saw the first use of non-recourse, investment-grade bonds to finance an offshore wind farm during its construction phase. Second, it marked a step change in the still-nascent market for inflation-linked sterling bonds based on the consumer price index (CPI). These instruments accounted for more than half the total raised.

The task of bringing the private placement to financial close was complicated by the fact that it was not the bond issuers who arranged the debt structure. Walney’s owner, the now renewable-focused Danish energy utility Ørsted, had drawn up the plan some months earlier as a staple financing to facilitate its sell-down of a 50% stake in the 659MW project.

Ørsted’s financial advisers Citigroup and Goldman Sachs had carried out some market testing on the proposed structure – split between CPI-linked and fixed-rate tranches of 16-year debt. But there was still a great deal of work to do after Danish pension funds PFA and PKA agreed to acquire the stake.

“We had to pick up someone else’s debt package and make sure it worked for our clients,” explained Greg Falzon, managing director in the capital structuring group at the funds’ financial adviser RBC. “There was quite a lot of fine-tuning to do, and it turned out to be quite a painstaking exercise – given the complexity of the transaction and the number of parties involved.”

The key consideration was determining the size of the CPI-linked tranche, designed to match the inflation linkage of the Walney revenues. The project benefits from two UK government contracts for difference (CfD), which will guarantee an initial tariff of GBP 150 per MWh (when the wind farm comes on stream later this year) and increase annually in line with the CPI.

There was consequently every incentive to maximise the CPI-linked tranche as this would effect the desired match without the need for swaps (which would be necessary to achieve the same end for fixed-rate debt). Given the size of the market and prevailing investor appetite for CPI-linked bonds, however, this presented a considerable challenge.

For bonds linked to the retail price index (RPI) have historically accounted for the vast majority of sterling index-linked debt, and the depth of even that market is limited. RBC’s market specialists advised Falzon and his team that GBP 250m would probably be the typical maximum that such a single issue would seek to raise from RPI-linked instruments.

In the event, however, PKA, PFA and its advisers were able to exploit a growing appetite among certain institutional investors for CPI-based sterling debt – many big insurers now have liabilities linked to the index – and a general “direction of travel” in the market towards the CPI to an extraordinary extent. (The British Government has been progressively adopting the index as a truer measure of inflation than the RPI since 2011, although it has yet to extend this policy to Gilts issuance). “We worked hard with investors to maximise it,” said Falzon.

Their efforts enabled them to raise more than GBP 700m of their total requirement from the CPI-linked tranche in the transaction.

Participating institutions were not, however, required to subscribe for both tranches of the offering. “It was a process where people came in for the type of debt they fancied,” explained one investor. “But in general terms, the Danish funds and their advisers did a good job in whipping up a great deal of interest.”

The Macquarie Infrastructure Debt Solutions (MIDIS) fund – which had been working with Ørsted on the package from a very early stage – was easily the largest individual buyer. MIDIS bought GBP 500m of the bonds on behalf of its various investors, while Legal & General Investment Management’s real assets division accounted for almost another GBP 300m. The Pensions Insurance Corporation signed up for a further GBP 115m, while Aviva, BlackRock, Metlife, SunLife, and Westbourne Capital were among the other investors.

The Danish export credit agency EKF had meanwhile provided a triple-A guarantee for GBP 300m of the bonds – both index-linked and fixed-rate instruments – which clearly helped broaden the potential investor base.

“The ECA involvement certainly created additional liquidity, which was probably helpful,” confirmed Tom van Rijsewijk, the managing director who led the MIDIS team on the transaction. “This was one of the largest CPI-linked issues yet seen in the UK.”

Another helpful factor would undoubtedly have been low technical risk of the Walney Extension project, even though it is not yet complete. As the largest and most experienced global developer of offshore wind farms, Ørsted is responsible for the construction and operation of the facility under EPC and operations contracts. What’s more, Vestas and Siemens – the companies supplying the project’s 87 wind turbines – have provided strong long-term performance guarantees. This was perhaps more important in the case of the 47 Siemens 7MW Gamesa turbines, given the project is the first commercial use of these huge units anywhere in the world.

The installation of the 40 Vestas 8MW turbines under the project’s first phase was also virtually complete by the time the private placement achieved financial close at the beginning of November.

From Ørsted’s perspective, the Walney Extension financing established an important precedent as the Danish utility continues to develop ever larger offshore wind farms. This includes the 1.2MW Hornsea 1 project currently under construction in the UK sector of the North Sea, in the firm’s quest to achieve a target of 12GW of installed capacity by 2025.

Ørsted confirmed last month that it was in talks to sell down half the equity in Hornsea 1. Whereas the Walney project could probably have raised the finance it required from banks, this significantly larger undertaking almost certainly could not. “That one is of such a scale that I don’t think they could get it done in the banking market,” said Falzon at RBC.

With even larger projects on the horizon – including the 1,386MW Hornsea 2) – the utility has now successfully developed a debt template to meet all its future requirements.

Walney Extension