ING tailwind makes First State’s Portuguese wind acquisition a breeze
First State Investments’ acquisition of Enel’s wind power assets in Portugal faced a challenging deadline. But ING’s renewables expertise and local presence enabled First State to rapidly complete a $605 million financing that met all of its requirements.
First State Investments is part of the Commonwealth Bank of Australia. It manages approximately €120 billion of investments on behalf of institutional investors, pension funds, wholesale distributors, platforms, financial advisers and their clients worldwide. Of this, €5.1 billion is invested in unlisted infrastructure assets, €3.5 billion of which is focused on Europe and held primarily through the European Diversified Infrastructure Fund (EDIF). EDIF’s investment strategy is focused on mature, operating European infrastructure assets with highly visible, predictable cashflows. So when it emerged that Italian power company Enel was preparing to sell Finerge, the third largest wind portfolio in Portugal with 23 operational onshore wind farms, it looked like an excellent fit.
“As a renewable power company, Finerge ticked all the right boxes for EDIF,” says Stephen O’Shea, director of direct infrastructure, at First State Investments. “It has high quality technology, is a significant size, has a reliable track record with an average operation of three-and-a-half years per individual wind park, and occupies locations that are well located on the blustery Atlantic coast. Importantly, Portugal remains an attractive location for renewable assets. Unlike some European countries, Portugal took a relatively balanced approach to making changes to its renewable tariff regime and gave existing operators a choice of options. Enel chose to take lower rates over a longer timeframe. As buy-and-hold investor, that made Finerge more attractive to EDIF because a lower differential between tariff and market rates effectively means lower public subsidies supporting the payment mechanism. This, therefore, means it is far more sustainable and less likely to be revisited.”
Winning the deal
ING’s team closely monitors the Portuguese market and became aware of ENEL´s intention to sell Finerge in the first quarter of 2015. “Our market intelligence told us that once Enel had completed a particular transaction then Finerge would follow shortly,” says Wafaa Ermilate, Head of Infrastructure and Power Finance, Iberia at ING Wholesale Banking. “Due to its presence in recent renewable transactions in Portugal and sector expertise, ING was approached by several bidders to support them in the acquisition process: one of them was First State. We were aware of the opportunity early on and could allocate resources to the accordingly.”
ING has been active in Iberia for many years, entering Portugal in the late 1990s. ING also has long-standing strength and experience in renewables, with a presence in most transactions in the sector in recent years. “What differentiates us from other banks in renewables is the combination of deep sector knowledge and a broad network presence – in Portugal, for example – that means we can support clients where they operate,” says Ermilate. “In Portugal, this combination of local presence and sector knowledge ensured that ING was the first foreign bank to finance a renewables transaction in the aftermath of Portugal’s sovereign debt crisis.”
First State was aware of ING’s strength in both Portugal and renewables and the bank is already a lender to a number of EDIF’s existing investments. “We appointed ING quickly and got straight onto the hard work of preparing a binding bid in time for the deadline, which at that time was due at the end of August,” recalls O’Shea. “We knew that we had a challenge ahead, not least because of the upcoming Iberian holiday season which meant it was going to be very difficult to maintain momentum in executing the deal.”
Working to a tight deadline
Preparing the bid was a multi-faceted task: due diligence had to be conducted on the business, title, land, rights of way and contracts for feed in tariffs. An engineering consultant was employed to check that the turbines, blades and gearbox were in good condition and that they would last 15 years with the necessary warranties in place. Similarly, a tax consultant checked that Finerge’s tax and accounts were up to date and its reporting met the required standards. A legal team assessed the agreement to ensure full transfer of ownership would be achieved.
Given the tight deadline, “the key criteria was the deliverability of First State’s bid,” says Ermilate. First State recognised that it would be impossible to put in place the long-term project finance-style solution it wanted in time for the binding offer. “These facilities are highly structured, which takes time and work. There was therefore a high degree of execution risk and we decided to use a short-term bridge,” says O’Shea. However, while putting together a bridge, ING also continued to work on the longer-term financing, which turned out to be advantageous when, for reasons related to the European Investment Bank’s investment in Finerge, Enel decided to extend the transaction close by six weeks.
The delay meant there was no need to draw on the bridge financing: First State was able to go straight to the long-term financing and eliminate re-financing risks. The €605 million financing consisted of a €575 million project financing facility, fully amortising during 15 years – which aligned with the tariff agreement for Finerge’s assets – and a €30 million debt service reserve facility, provided by eight international and Portuguese banks, including ING.
The benefit of sector and local knowledge
Even with the extended deadline, the 15-year €605 million financing, which had ING as senior mandated lead arranger and senior swap arranger, was completed rapidly by the standards of the structured finance market. “ING is good at analysing credit risk rapidly,” explains Ermilate. “We’re diligent in reviewing information and, unlike some banks, we’re known for making firm commitments. Once we’ve done the analysis work and we’re comfortable with the risk we will commit and support clients whatever happens.”
O’Shea says ING’s commitment and professionalism were valuable during the transaction. “ING has a solid reputation in the sector,” he notes. “They are able to deliver and have a level of sophistication that comes from understanding how these types of assets work in practice: it’s not simply a cookie-cutter type process applied to each opportunity but one which requires thought and dialogue. As importantly, ING has people on the ground who understand Portuguese law and structures (and had the resources to be able to work through what is a holiday period in Portugal). For example, the transaction was structured as a bond – a feature specific to Portugal – to enable bank investors without a license in Portugal to participate without suffering tax penalties.”
A commitment to sustainability
ING’s strength in renewables is just one example of its commitment to sustainability, which is reflected in its portfolio of sustainable transactions valued at around €24 billion. ING has been at the forefront of industry efforts to promote projects associated with the environment and social development for decades – being an early signatory to the Equator Principles signed by banks worldwide to manage environmental risks – and began publishing a sustainability report in the early 1990s, before many other banks. “We were committed to sustainability before it became trendy!” notes Wafaa Ermilate, Head of Infrastructure and Power Finance, Iberia at ING Wholesale Banking. “We’ve always looked for ways to drive changes in business that will benefit society in a broader way.”
Most recently, in November 2015 ING successfully issued a five-year €500 million and a three-year $800 million green bond. The money raised will go to projects in six categories eligible under ING’s newly established green bond framework, including renewable energy, green buildings, public transport, waste, water, and energy efficiency. By singling out the use of proceeds from the bond, ING is highlighting that its approach is broader than other green bond issuers, which reflects its ambition to support sustainability across all industries and sectors. The benefits of ING’s green bond issues are already being enjoyed by clients. “It was funds from our green bond that financed First State’s transaction,” explains Ermilate.