Presentation on theme: "18/05/10 Securitisation in Renewable Energy: Hercules or Hydra Jason Langley BEng ACA AMIMechE A Presentation for The London Accord Spring Conference –"— Presentation transcript:
18/05/10 Securitisation in Renewable Energy: Hercules or Hydra Jason Langley BEng ACA AMIMechE A Presentation for The London Accord Spring Conference – Structuring Cleantech Investment
2 Renewable Energy European Subsidies – Predictable Income Debt, the most senior & lowest risk ownership of a renewable energy plant should be suitable for institutional investors (Pension funds and Insurance companies) One reason for this is the subsidy systems in place: Feed in Tariff ROC system or similar These systems give renewable energy assets a predictable yearly income stream for over a decade (especially the Feed in Tariff). Mature technologies (wind & solar) are quite simple and together with predictable income produce a low risk real asset.
3 Renewable Energy Assets have a Suitable Cost Profile for Debt Finance Renewable Energy Nuclear Power Natural Gas (Thermal Power) Lifetime cost profile illustrations for 3 types of power plants Time Cost High upfront cost Very low variable cost (maintenance only) High upfront cost Low variable cost (fuel & maintenance) Unknown final cost Low upfront cost High variable Cost (fuel & maintenance) Fuel price inflation assumed in chart Time Cost Wind is free Fuel is not free Risk of cost inflation ? This combination of predictable income and low variable costs means significant levels of debt can be used to finance the high upfront costs of the renewable energy plant
4 Renewable Energy Project Debt Profile and Plant Value Over Time Developers equity Time 15 years Loan to Value (£ or €) of Renewable Energy Asset Time in years Proof of asset 1 year Banks project development finance Institutional investors Long term debt profile matches long term liabilities of Institutional Investors Build Out Planning Warehouse Long term stable period of ownership Securitisation Banks capital free for new project lending However one project is too small to create a liquid bond suitable for fixed income institutional investors
5 The Housing Finance Corporation (THFC) – An Old and Stable Model Equity Total Value of assets Aggregated loans to Housing Associations secured by property Increasing Seniority Bonds to market This Simple Aggregation Structure can be Replicated for Renewable Energy Debt Debt assets in Alignment of interests All bonds are the same seniority Vertical structure of notes Bonds tranches equal Term bonds of different maturities sold into the bond market Aggregation will allow large bond issuances that are listed on global benchmarks and are therefore liquid enough for Fixed Income Investors
6 Credit Ratings Inflation – The Perception of AAA Premier League Championship League One League Two Aggregated debt assets Total Value AAA A Super Senior Securitised debt trances League names changed to make the lower leagues more attractive Tranches Created Debt Assets In AA If the underlying assets are partially devalued the AAA is put underwater quite quickly by the presence of the Super Senior. Key principle should be AAA always means most senior
7 Untangling the Hydra – If things go wrong resolving issues is hampered by conflicting interests of note holders D C E A A Increasing Seniority B Impaired Value of Assets Investors A to E invest in notes of different seniority Underlying debt assets impaired Investor A is conflicted as it has taken a position in Junior and Senior notes The most senior note holders may want to close the structure and sell the assets The most junior notes want to hold the assets until maturity in case values recover In any restructuring negotiation there are many lawyers with conflicting briefs. Very significant time and legal expense to restructure the debt
8 Simple aggregation structure would work for a Green Investment Bank. The Housing Finance Corporation (THFC) creates a secondary market for debt. This increases supply of money available for new lending. Freddie Mac is the same simple structure as THFC and demonstrates the importance of robust rules for the input debt assets. Equity Total Value of assets 1.Pass through bonds 2.Bullet and Call bonds of various maturities Large bond issuances listed on Fixed Income Benchmarks Aggregated debt assets Structure of notes Bonds to Market Debt Assets In Alignment of interests All bonds are the same seniority Robust rules for the underlying debt assets produce robust bonds
9 Green Investment Bank (GIB) Template Rules – Transparency Leads to Measurable Risk Template Rules 1.Min debt service coverage ratios 2.Max starting LTV’s 3.Proven technology list 4.Robust agency agreement Only debt within parameters Transparent bonds measurable risk These template rules would be clearly understood by Fixed Income Investors allowing them to more accurately measure the risk profile of the bonds A standardised template would give transparency through a clear and strictly enforced set of rules for a bank to be able to place its debt into the aggregation vehicle or (GIB)
10 Applications of this simple aggregation structure – Mature Technologies Horns-Rev Denmark 80 2MW wind turbines Debt funding to large scale wind farms Beneixama Spain 20MW of Solar PhotoVoltaic Debt funding to large scale solar plants
11 Applications of this simple aggregation structure – Regulated Assets and Loans Secured Against Property www.calfinder.com National Grid Proposal for HVDC Cable Rebuilding Security, Conservative Energy Policy Paper Offshore high voltage direct current (HVDC) electricity cables North sea supper grid Home energy efficiency loans secured against residential property via your electricity supplier
12 Solvency 2 – Regulated Capital Charge for Institutional Investors - Defining the Amount of an Asset Type that can be Held CEIOPS – Debt portfolio risk weightings for structured credit (extract from industry consultation paper) Capital Allocation Required High Risk Low Risk OECD Government Bonds Venture Capital The % of different types of debt in an aggregation vehicle gives the overall capital weighting of the bond. This gives the capital charge if debt is in a simple single tranche structure. Tranching increases the capital charge to 100% for the riskier tranches
13 Conclusion – Key Principles if Securitisation is to Become a Hercules for Renewable Energy Simplicity – Fewer tranches – Ideally 1 –No tranche should be more senior than AAA Transparency – Clear & robust template for debt to be input and bonds to be output Large Size – Aggregation to allow large bond issuances that are listed on global benchmarks and are therefore liquid enough for mainstream Fixed Income investors BACK TO BASICS
14 Important Information This presentation is for information purposes only and does not in anyway constitute an offer, solicitation or specific recommendation with respect to the purchase or sale of securities issued by any fund which is promoted or managed by AXA Investment Managers. Any information contained in this presentation, including but not limited to examples related to turnover, leverage, allocation or diversification is based upon certain assumptions on our part and does not in any way intended to relate to any fund which is promoted or managed by AXA Investment Managers. This presentation is not an advertisement and may not be copied or circulated, in whole or in part, to any person without the prior written consent of AXA Investment Managers. It shall not be deemed to constitute investment advice and should not be relied upon as the basis for a decision to enter into a transaction or as the basis for an investment decision. Investments should only be made on the basis of suitable investment, legal and taxation advice. Subscriptions to any fund managed or promoted by AXA Investment Managers are accepted only from eligible investors on the basis of the then current prospectus and related offering documentation. AXA Investment Managers does not offer legal, investment, tax or other advice on the suitability of these funds or services for investors, who should take appropriate professional advice and make their own assessment of the merits, risks and tax consequences prior to investing. The value of the investments may fall as well as rise. Past performance is not necessarily indicative of future returns. Target returns and volatility are not guaranteed. Investment returns may be subject to foreign currency exchange risks. This document is not for private client use.