3.2. Renewable energy as a strategic business segment for banks

• Developers: in particular for the construction time or until the developed project is sold toan end investor. Generally, the financing will be sustained since the SPV is the borrower.

• Financial investors: institutional investors like infrastructure funds or life insurancecompanies interested in a stable cash flow.

• Strategic investors: Investors whose business model is based on the production anddistribution of electricity (electricity provider, municipal utility, ...).

• Presentation of an information memorandum, that illustrates the cornerstones of theproject (location, wind and solar-radiation conditions, planning and construction progress,applied technology, ...).

• Initial assessment by the bank and, if interested, a non-binding term sheet. If bothparties agree, the customer mandates the bank.

• The bank initiates the internal credit process. Its objective is the approval of all bankinternal decision makers.

• The sequence ends with the signing of the documents and the payment.

• Loans are granted not only during the operational phase, but also during the constructiontime (no cash flows earned).

• One condition is that the SPV is certainly going to operate the plant at a fixed date and todefined costs and therefore is going to realize the cash flow.

• To ensure a stronger liability of investors or other parties, usually limited-recourse-financing is chosen for the construction time.

• In general, small projects (≤ 50 million €) are funded by just one bank.

• Bigger projects lead to club deals or syndicated transactions.

• Club deal: Two or more banks join together to finance one transaction. Generally everybank is a Mandated Lead Arranger (MLA).

• Syndicated transactions: At first just a single bank takes the responsibility for financingthe transaction. Later it passes some of the financial risk on to other institutions. Normallyonly the first bank is the contact person for the debtor and only this bank assumes the roleof the MLA

• provides a measure of financial risk by highlighting the year with the lowest coverage ratio

• Extending the debt term

• Deferring principal payments

• Borrowing with a grace period

• Providing a government guarantee on a portion of thedebt

• By extending the term of the debt, the DSCR is increased because shorter-term debt service payments aredecreased.

• The obligation to pay debt service is also extended in the longer term (when revenues will be sufficient), allowing the revenue available for debt service to exceed the debtservice throughout the project life.

• In this scenario, the lenders’ risk is increased and,therefore, the cost (interest rate) is also higher

  
  

• By deferring principal payments, the cash flow fromrevenues becomes sufficient to meet debt servicerequirements.

• The lenders’ risk is increased, necessitating a higher interest rate.

• One form of deferring principals is to make a balloonpayment at the end of the term.

• The cash flow requirements of the project can also be metby borrowing with a grace period.

• Again, the lender risk is higher and, therefore, so is thecost

A guarantee by a more creditworthy entity (e.g.government) will lower the interest for the original life ofthe loan, thereby reducing the debt service level to belowthe revenues available for debt service

• measures a project’s ability to service all of its debt whileoutstanding, but does not indicate whether there are shortfalls in any given year

measures a project’s ability to service all of its debt but does not indicate whether there are shortfalls in any given year