01 April 2014
Revealed: the winners of Environmental Finance's 7th annual Deals of the Year Awards.
Environmental Finance's 7th Deals of the Year Awards provide an interesting insight into the state of the environmental markets.
The winners are evidence of clear signs that investors are becoming increasing comfortable with renewable energy, particularly wind and solar photovoltaics.
This is reflected in the number of renewables-related IPOs on both side of the Atlantic, but particularly in London, where the five floats in 2013 followed years of inactivity.
Arguably, this was in no small part down to the ingenuity of some of the financiers who engineered the deals, shaping products to meet demand from investors.
In the UK, Greencoat UK Wind was a case in point – it borrowed many of the features of infrastructure funds to help bring investors on side.
The spate of activity in the London market coincided with some strong IPO candidates in the US, where the invention of the 'yieldco' model has helped stoke investors' interest in renewables.
The green bond markets, too, were also on the charge in the second half of 2013, with a flurry of landmark issues – many of which were worthy of awards – causing headaches for selectors. 2013 saw benchmark issues from multilateral development banks as well as the first significant corporate issuance.
The bond market is arguably benefiting from another big theme across the markets – that, as mentioned in our Green Bond Principles feature, environmental, social and governance themes are increasingly resonating with mainstream investors.
Congratulations to all our winners. A strong crop of candidates is already emerging for 2014.
Reporting by Graham Cooper, Elza Holmstedt Pell and Peter Cripps
Torben Möger Pedersen, PensionDanmark
When it comes to institutional investors directly backing renewables, Torben Möger Pedersen, CEO of PensionDanmark, has led by example.
The pension fund, which manages some DKK155 billion ($28.9 billion) of assets, started investing in renewables in 2010, but has ramped up its activities over the past year, branching out into new technologies and new regions.
"2013 was the year with the largest number of investment decisions and transactions on renewables from us," Möger Pedersen told Environmental Finance.
PensionDanmark has currently invested some DKK11 billion in renewable energy globally, equal to about 7% of its overall portfolio. To put this into context, the OECD has estimated that European pension funds have invested just 1-3% of their portfolio in infrastructure including non-renewables.
The Danish fund has a target of putting 10% of its assets into infrastructure, of which the majority will be renewables, meaning its investments in renewables are set to continue.
As a mark of its leadership in the field, Möger Pedersen has been selected by the UN to participate in a working group advising UN Secretary-General Ban Ki-moon on scaling up climate finance, ahead of his world leaders' summit on climate change in September.
The decision to take direct stakes in renewables projects is partly to boost returns and offset the weak performance from government bonds in the wake of the financial crisis.
"With low yields on government bonds, we are looking for new types of assets to provide us with stable returns. There's demand for long-term investors like us," says Möger Pedersen.
The early phase of PensionDanmark's renewables drive saw it take stakes in two Danish offshore wind farms in an innovative public- private partnership with Dong energy – Denmark's state utility company – and the Danish energy Agency. It followed these with investments in onshore wind in the US and Sweden.
But in 2013, the pension fund entered new territory with its first investment in biomass, as it joined forces with contractor BWSC to build, operate and own a biomass power plant in Lincolnshire, UK. PensionDanmark invested £128 million ($213 million) via a fund managed by Copenhagen Infrastructure Partners (CIP), in which it is the sole investor.
In December 2013, PensionDanmark, via CIP, invested some £153 million ($254.5 million) in stakes in six UK wind farms with a total capacity of 273MW from Falck Renewables.
It also made a commitment to back Cape Wind, which would be the first offshore wind farm in the US. It pledged $200 million in funding towards the proposed 468MW park off Cape Cod.
Möger Pedersen hopes construction of Cape Wind will start this year despite the legal challenges hanging over it.
"We expect all formalities to be settled this year and construction to start in Q4. Most legal challenges have been settled – we are fairly optimistic about Cape Wind."
The renewables investments have continued in early 2014, when PensionDanmark committed DKK200 million to the Danish Climate Investment Fund, which was established by the Danish Investment Fund for Developing Countries, and will invest in climate-related projects in developing countries.
And, in February, CIP announced a DKK2.9 billion investment in the DolWin3 grid connection, which will transmit electricity from a number of wind farms in the German north Sea to the mainland. DolWin3 is planned to be completed in 2017 and the system will have a total capacity of 900MW.
Results suggest that the renewables drive is paying off. Its wind investments gave a return of 9.1% last year, contributing to an overall group return of DKK9.1 billion, or 7.1%, and offsetting the poor performance of its portfolio of investment grade government and mortgage bonds, which achieved a return of minus 1.3%.
In order to meet its 10% infrastructure target, Möger Pedersen expects further investments. "We will certainly be able to disclose two large investments this year," he adds.
Möger Pedersen insists that investing in renewables is a path other institutional investors can follow.
"It's a new asset class and most of our colleagues have a track record of investment through infrastructure funds," he adds. "I think a number of our colleagues will try in coming years to do the same as we have done in order to reduce management fees and costs and get more direct control over investments. In a few years, pension funds making direct investments in infrastructure will be just as usual as our investments in real estate."
For many pension funds, a lack of expertise in renewables is holding them back, but it is feasible for larger funds to recruit staff to help them expand in this area, he says, while smaller funds can continue to use infrastructure funds.
"Pension funds from Canada and Australia have a long tradition of making investments in infrastructure," he says. "The need for alternatives to government bonds will push european pension funds in this direction."
Greencoat UK Wind
When Greencoat UK Wind tapped public markets in March, it was a landmark deal in many ways.
It was the first listed investment fund aimed exclusively at UK renewable energy, and there is a strong argument that the four renewables IPOs in London that followed in 2013 were partly riding on Greencoat's coat-tails. It blazed a trail for others to follow.
Stephen Lilley, a partner at Greencoat Capital, which manages the fund, says: "The fund introduced the equity capital markets to long term wind ownership."
Matthew Coakes, managing director of equity capital markets at RBC Capital Markets, which was global coordinator, sponsor and joint bookrunner for the float, adds: "It was the first renewables fund in europe – it was breaking new ground."
The fund offered investors a healthy dividend yield of 6% (based on the initial share price of £1), that will rise in-line with inflation, while the fund will at the same time seek to increase its net asset value through reinvesting some of its income.
UK Wind was set up to buy assets from utilities looking to strengthen their balance sheets. It estimated that there would be £45 billion of assets coming to market over the next three years, of which three quarters would be utility-owned.
Lilley adds: "Independence is important. We want to buy assets from the whole utility sector – there is a great pipeline."
The oversubscribed offer raised £260 million to buy a seed portfolio of six onshore and offshore wind assets with a combined capacity of 126.5MW, bought from utilities SSE and RWE, which continue to operate them.
This model – of having a seed portfolio lined up to be bought with the proceeds of the IPO – was borrowed from infrastructure funds, and it is believed to be the first time it was applied to renewables, at least in the UK.
Iain Smedley, head of EMEA power, utilities and infrastructure investment banking at Barclays, which was joint bookrunner, says: "The fund was structured like the listed PFI-PPP infrastructure funds, with a clear dividend and return story that would appeal to investors and so that it was up and running, fully invested, on day one. It took more than a year of work for the Greencoat team speaking to potential investors and refining the proposition to get it to market."
Lilley adds: "In some ways, UK Wind was a copy of what had happened in the PFI infrastructure space a few years ago. It's a completely new asset class, however. We were keen to help investors by using a model that was understood – the same model of raising equity, then using debt to buy new assets before refinancing, with further equity issuance."
However, the 6p dividend compares with the 5p to 5.5p that infrastructure funds had traditionally offered, he adds.
The offer clearly struck a chord with investors. Some big names such as Henderson Global Investors and Legal & General have added their weight to its shareholder register, while retail investors snapped up some 45% of its shares.
Darren Willis, associate director at Winterflood Secturies, which was co-lead manager, says a lot of hard work was needed to educate potential investors about renewables, and says UK Wind may have played an important role in paving the way for future renewables IPOs.
The UK government's Department for Business, Innovation and Skills was a cornerstone investor, pumping £50 million into the company.
Strong demand saw utility SSe's commitment in the new fund scaled back to £10 million, from a possible £43 million.
In addition, the fund negotiated a £130 million three-year loan, provided in equal measure by RBS and RBC, allowing the fund to purchase a further four wind farms, with a combined generating capacity of 57.5MW.
"It was the first time this particular financing structure, put in place in parallel to the fundraising to buy more assets, had been utilised by a UK renewables fund. It's a structure quite common for infrastructure assets," says Ian Stocker, senior director, financial institutions UK coverage at RBS.
"It seems to have kicked off the market since. I think it's a sign of the sector maturing and investors getting their heads around what is a complex asset class, and improving their understanding of how they work."
UK Wind returned to the market with a secondary listing at the end of the year, although the £83 million it raised was far less than the £135 million it had been eyeing. The proceeds were used to pay down the debt facility to £50 million.
Overall, the fund has made a solid start. "The company has performed well, the wind has blown, it has paid its dividend, and its nAV has grown," adds Coakes.
But the sector kicked off by the Greencoat fund is already showing signs of becoming overcrowded and investor interest in such vehicles is starting to cool amid talk of rising interest rates. Yet Lilley believes the fund's future is bright nonetheless.
"With infrastructure funds trading above NAV, our share price can grow too. Our sector is quite nascent, but there's no reason why we can't be the same – we are not as well trusted yet."
Solar Star bond
MidAmerican raised $1 billion on the bond market in June, in the largest renewable energy project finance bond ever issued.
The proceeds were to help finance the construction of the 579MW, $2.8 billion Solar Star photovoltaic (PV) project in the Mojave Desert in Kern and Los Angeles counties in California, 55 miles north of Los Angeles.
MidAmerican, a division of Warren Buffett's Berkshire Hathaway empire, bought the project from SunPower in December 2012.
SunPower will develop, construct and operate the project, using 1.7 million mono-crystalline silicon PV modules. When complete, Solar Star is expected to be the largest PV project in the world.
Solar Star will sell the power it generates to Southern California Edison under 20-year power purchase agreements.
The bond initially aimed to raise $700 million but it was upsized in response to strong demand from investors, says Nasser Malik, global head of project and infrastructure finance at Citi, who says there was more than $1.4 billion of investor interest.
It is the second time that the Des Moines, Iowa, based-utility has tapped the bond markets to finance a solar project. Its Topaz bond, a previous winner of Environmental Finance's solar deal of the year, raised $850 million in 2012 towards the construction of its 550MW project in San Luis Obispo County, California, to be built and operated by FirstSolar.
"Solar has a bit more of a foothold since Topaz," says Okwudiri Onyedum, managing director, debt capital markets at RBS. "Corporate investors are looking for quality and yield, and this is one of the few products that offer both. Investors who understand the market can get the extra yield."
"It was unusual in that there are not many of these bonds around," adds Grant Matthews, managing director of international banking at RBS. "It's a very significant transaction. Like with Topaz the year before, it was a watershed deal."
The Solar Star project was similar to the Topaz bond, says RBS. The banks involved were the same – the main difference was the project developer.
The Solar Star bond had a coupon of 5.375% and a spread of 296 basis points over the 10-year US Treasury, which Malik says was "very attractive in the context of other recent comparable power project financings". The Series A senior secured notes had an average life of 14.7 years.
The bond issue was given a credit rating of Baa3 or BBB- by the big three credit rating agencies, putting it at the lower end of 'investment grade'.
It was sold into the 144A market which is only open to qualified institutional buyers. A total of 25 investors bought the bond.
The joint bookrunners were Citi, Barclays and RBS.
"It was a large benchmark sized bond that will serve as a future pricing reference point for greenfield project bonds," adds Citi's Malik. "For some investors, Solar Star became the first non- Department Of energy guaranteed renewables deal, and their largest bid for a project bond to date, setting new records for investors."
He adds: "The financing overcame significant volatility created by the FOMC announcement regarding tapering of the bond buying programme and was the only non-agency transaction to price in any market on that particular day. This demonstrates the ability, if executed correctly, to leverage insurance companies, the core project bond investor base, to help weather tough market conditions."
In January, the first portion of the Solar Star development started delivering energy to the California grid. The rest of the project is expected to be completed in 2015.
A second issuance of $275 million is expected, completing a permanent capital structure including $1.275 billion of long-term debt financing
It is thought, that like Topaz before it, the Solar Star deal will help to familiarise investors with renewables assets, potentially paving the way for further issuances.
"This was appealing because it was a very well structured project," adds RBS's Matthews. "Where there are suitable assets, the market is very receptive and will continue to look at transactions as they come out."
However, there was no need for Solar Star to be labeled as a green bond, adds RBS's Onyedum. "It sold fine as a pure project bond, without the additional categorisation of being labelled a green bond."
EDF's €1.4 billion ($1.9 billion) green bond in October was not only the largest labelled green bond ever issued but it also set new standards for corporate issuers.
The A+ rated bond, which has a maturity of 7.5 years and an annual coupon of 2.25% and was the first benchmark issue from a corporate to be labelled as a 'green bond', was twice oversubscribed.
'Responsible investors' bought 60% of the issue, helping the energy giant broaden its investor base. It is understood that some SRI investors would have balked at investing in EDF because of its nuclear portfolio, but were happy to buy its green bond because the proceeds will finance renewable energy projects developed by EDF Energies Nouvelles, a wholly-owned renewables subsidiary.
The standards set by the bond were widely hailed as an example to other companies, coming at a time when corporate issuers are expected to scale up dramatically.
The selected projects will have to comply with the environmental, social and governance (ESG) eligibility criteria set by sustainability ratings firm Vigeo. Deloitte will issue a report on an annual basis giving comfort that the proceeds have been allocated to appropriate projects.
EDF had a gross installed renewables capacity of 6.4GW at the end of September and spent almost 2 billion on renewables last year.
"EDF's green bond is a game-changer," says Tanguy Claquin, head of sustainable banking at Credit Agricole, which was bookrunner for the bond alongside Societe Generale and Morgan Stanley. "It really uses the best standards – they did very strong investor work.
"There's a set of eligibility criteria validated by a special entity … and they asked Deloitte to verify that the use of proceeds are in line with the documentation. This is the first green bond where there is such verification.
He adds: "It's a blueprint for any corporate that will tap the market - any that's less advanced than EDF may have some difficult questions from investors."
Felix Orsini, head of debt capital markets at Societe Generale agreed that the EDF bond is "significant" in the context of the market's development.
"They have given a bit more thought and have taken into account what SRI investors were looking for," he says. "It's a major step because it is a large issue and, for the first time, an attempt to structure it in the way it should be. It's something all potential issuers will look at, although not everyone has a pipeline of projects like EDF.
"Such transparency and accountability is necessary for the green bond market to grow and become a reliable and efficient source of financing for green investments," Carine de Boissezon, senior vice president, investors and markets at EDF, told Environmental Finance.
"We hope that EDF's first green bond will support the development of a deep and liquid green bond market from corporate issuers."
The bond was also significant because of its A+ rating, which appealed to green bond investors hunting yield. The space has traditionally been dominated by AAA rated issues from multilateral development banks.
"We believe that this kind of instrument can be used to finance other sustainable projects such as energy efficiency, energy services and hydro," adds de Boissezon. "All else being equal in terms of financial conditions, we would expect to come back at some point to the green bond market."
The Renewables Infrastructure Group
After some two years of muted stock market activity for companies in the environmental sector, the string of renewables infrastructure funds floating on the London market in 2013 was a welcome change.
Of the five renewables related IPOs that year, The Renewables Infrastructure Group (TRIG) stood out when it raised £300 million ($500 million) in an oversubscribed offering.
Its portfolio contained a mix of renewables technologies, and – perhaps most importantly – its managers and underwriters claim it attracted a broad mix of "high-quality institutional investors".
TRIG is a partnership between InfraRed Capital Partners, TRIG's investment manager, and developer Renewable Energy Systems (RES), which has completed 120 energy generation projects, including onshore and offshore wind, solar and biomass.
Since floating in July, it has used the funds to buy an initial portfolio of 14 onshore wind farms and four solar photovoltaic (PV) parks in the UK, France and Ireland with a combined capacity of 276MW.
Some 92% of the assets in TRIG's initial portfolio were owned by RES, the fund's operations manager. The other 8% were owned by InfraRed, a London-based investment firm with $6 billion of equity under management best known for launching hICL, the first infrastructure investment company to float on the London Stock exchange.
Having InfraRed as investment manager and working alongside RES "helped enormously with this IPO" because their track record made investors comfortable that the portfolio would contain high- quality assets, says Mark James, managing director, investment companies at Jefferies, the joint-bookrunner of the IPO.
Richard Crawford, director, infrastructure at InfraRed Capital Partners, says: "We put a lot of thought into the optimal portfolio composition. We were fortunate in having a wide spread of assets from the two managers that run the fund, that ensured a diversified portfolio from the start."
All assets in the initial portfolio were operational at purchase, which "resonated well with investors", adds James. TRIG has since acquired a further two solar parks and plans to buy further completed assets in the UK and other northern european countries, including France, Ireland, Germany and in Scandinavia.
"Investors in closed-end funds like to invest in a scalable proposition," James says, adding that the listing attracted more than 70 investors, resulting in a "very diversified book of demand from day one, which is absolutely crucial for IPOs and the secondary market".
"You want to have a balanced book in terms of types of investors, from institutional equity funds to multi-asset investors and private banks - and that's what TRIG ended up with. The very high quality of institutional investors is probably more relevant for this company than the size or the fact that it was oversubscribed," he adds.
Crawford says InfraRed is "very pleased with both the number and quality" of investors in the fund. He says that, for some of TRIG's investors, it marked the first time they had ventured into the renewables space.
"There were certainly some that had got used to social infrastructure via the HICL fund ... but had not done environmental or renewables [investments] as such," he notes. "A few of them had invested in other [renewables] funds, and a few had invested in private equity and wanted to go into the listed space."
Shareholders were set to be paid their first interim dividend of 2.5 pence per ordinary share on 31 March. This means it is on track to meet its target for an annual dividend of 6 pence.
"These returns are seen as attractive by investors", Crawford says. TRIG recently announced it is considering an additional equity raise, planned for March. Its managers would not be drawn on details and say there is no firm figure in mind for the final size of the fund, as it will be determined by market conditions.
But Jaz Bains, director of risk and investment at RES, adds that "over time, we can see TRIG growing to the size of the social infrastructure fund HICL", a fund managed by InfraRed which has grown from an initial £250 million portfolio in 2006 to £1.46 billion today.
"We have no concern about the volume of projects available in onshore wind and solar," he adds.
Brigg power plant acquisition
The £160 million ($265 million) sale of the 40MW Brigg biomass power plant in Lincolnshire in the UK last August was a landmark deal for both the bioenergy sector and the purchaser, PensionDanmark.
It was the first major investment in bioenergy by the fund, which manages some DKK 155 billion ($28.9 billion) on behalf of 642,000 workers in 27,000 businesses in both the private and public sectors in Denmark. But it followed several major investments in offshore wind projects.
The Danish fund is not the only institutional investor to see a good fit between the stable, government-backed cashflows that are available from many renewable energy projects and the long-term liabilities of insurance companies and pension funds. But few have invested on a similar scale.
The remaining £32 million of the Brigg purchase price came from its joint venture partner Burmeister & Wain Scandinavian Contractor (BWSC), a Danish engineering and contracting firm specialising in bioenergy plants.
PensionDanmark made its investment via the Copenhagen Infrastructure I fund, which is administered by specialist fund manager Copenhagen Infrastructure Partners (CIP) set up in 2012 by former employees of Dong energy.
The pension fund committed DKK 6 billion to the fund, in which it is the sole investor. This investment route was chosen because PensionDanmark did not have sufficient capacity in-house to deliver its strategy for infrastructure investments. Copenhagen Infrastructure I was set up to supplement PensionDanmark's internal team, says Christian Skakkebaek, a senior partner at CIP.
Although the pension fund committed the lion's share of the financing, this was mostly in the form of debt and preferred equity, rather than common stock. BWSC will be responsible for operation and maintenance of the plant for 15 years.
The partners wanted to act fast, so did not want to depend on traditional project financing, and "the joint venture structure was chosen to facilitate other similar projects," adds Skakkebaek. The companies intend the Brigg project to be the first of a series of biomass power plants that they will build, own and operate internationally.
"We have found a model that provides PensionDanmark an attractive return with limited risk," said Torben Möger Pedersen, CEO, PensionDanmark, at the time of the acquisition. "The risk is limited by the fact that the majority of PensionDanmark's investment is in the form of loans and the bulk of earnings are regulated, with the costs fixed via long-term contracts," he added.
The plant was acquired from Eco2, a UK-based company that develops renewable energy projects across europe. The timing of the deal was significant, as the Brigg project is likely to be one of the last power-only biomass stations to be built in the country because of a recent policy change, says Eco2's CEO David Williams.
The UK government confirmed in July that subsidies for new power-only biomass projects will cease when 400MW of new capacity is reached. Confirmation that Renewable Obligation Certificates (ROCs) would be issued for the power produced by the Brigg plant was crucial in negotiating the sale, he says.
The policy change was driven by government concerns about importing large amounts of wood for burning as biomass and a desire to promote combined heat and power rather than power- only biomass plants. But the Brigg plant uses straw as a feedstock, which is a waste product from local farms, and Eco2 says there is a substantial annual surplus of straw in the UK.
Electricity generated by the plant will be sufficient for 70,000 households and will save an estimated 300,000 tonnes/year of carbon dioxide emissions, the operators estimate. Ash produced by the combustion process will be sold as fertiliser.
The plant is expected to be operational in early 2016.
"This project is a perfect example of sustainable biomass. Residue-based biomass plants at the right scale are good for the economy, good for the farming community, good for energy security and good for decarbonisation," Williams says.
The sale of the Brigg facility will enable Cardiff-based Eco2 to invest in new renewables projects. But it will increasingly be focusing its efforts overseas. "We have to look overseas so long as the government makes it difficult for biomass in this country," Williams adds.
The Moringa Fund, which raised just over €50 million ($69 million) at its first close in August last year, claims to be the first investment fund dedicated to sustainable agro-forestry. The African and Latin American projects in which it will invest have many attractions over pure forestry plantations in terms of sustainability benefits, while still promising attractive financial returns, the fund managers say.
A second close is expected in the next few weeks with a third before the end of June and the final close, with a goal of €100 million, in the third quarter of this year. Commitments are expected from a range of investors with an interest in emerging markets and sustainability, including foundations, private investors and banks.
The fund was founded by Geneva-based La Compagnie Benjamin de Rothschild (CBR), which has several other environmentally-oriented funds, and ONF International, a commercial subsidiary of the French government's Office National des Forets.
So, it is backed by a "strong financial partner and a strong technical partner," says Martin Poulsen, a partner in Moringa Partnership, the investment advisor, owned by CBR.
Initial investors were mostly from the public sector and include: the South American development bank CAF; the Finnish Fund for Industrial Cooperation (Finnfund); FISEA, a French fund for supporting business in Africa; Spanish development fund Fonprode; and the Dutch development bank FMO.
But Korys, the investment holding company of Belgium's Colruyt retail family, has also backed the fund and CBR says it has made a "significant financial commitment" itself.
Moringa's investment strategy is to support projects yielding forestry products such as timber, biomass and fuel wood, alongside agricultural products (crops or cattle), often on degraded land. Both forestry products and agricultural commodities will be sold on local and international markets, the fund manager says.
Examples of potential agriculture and forestry combinations include:
• crops, such as coffee, cocoa and tea, grown in the shade of trees;
• crops growing within fruit and nut orchards; and
• projects combining livestock and trees.
A portfolio of relatively large, profitable, projects, with high environmental and social impacts has already been identified, by CBR and ONFI's staff in sub-Saharan Africa and Latin America.
Typical investments will be between €4 million and €10 million per project, usually in the form of equity or quasi equity.
The fund manager expects to make one or two investments by the end of this year, Poulsen says, and the fund is expected to yield "an attractive financial return", although he declines to be more specific.
Deforestation is a major problem in many developing countries, causing a range of environmental and social problems. Traditional afforestation or reforestation projects provide numerous benefits by providing rural employment; preventing soil erosion; and sequestering carbon, thereby helping to combat climate change.
Unlike mono-cultural plantations, however, agroforestry projects have the added benefits of conserving biodiversity; alleviating poverty; and giving poor households access to markets for high- value fruits, oils and cash crops.
Moringa says it will seek third-party certification of the sustainability of its projects from organisations such as the Forest Stewardship Council, the Climate Community and Biodiversity Standard and the Sustainable Agriculture network, where possible and relevant. Projects may also seek Fair Trade, organic or other certification from consumer associations.
Complementing its investments and underpinning its commitment to the concept, Moringa is also setting up a grant- based technical assistance programme to help with project preparation, build capacity in host countries and disseminate the findings from completed projects.
The World Bank struck an innovative deal when it partnered with several weather risk players to execute the largest-ever weather and oil price risk transaction.
This innovative solution will for the next 18 months protect UTE, a Uruguayan state-owned hydropower company, against a combination of drought and high oil prices, both of which have had negative financial impacts on the company in the past.
When lack of rain lowers the volume of water in reservoirs which feed UTE's power plants, the company must turn to thermal generation, which has a higher cost and requires oil purchases.
In 2012, water shortages meant that UTE spent $447 million more than it had predicted to supply electricity to the country.
This risk of high oil prices and little rain is being offset by Allianz, through a partnership with reinsurance risk investment manager Nephila Capital, and Swiss Re, with the World Bank acting as UTE's counterparty, meaning it is liable to UTE if any of the risk providers go bankrupt.
In order to measure the extent of a drought, the transaction uses rainfall measurements at weather stations spread throughout two river basins. If rainfall is lower than the pre-determined level set as the trigger for the contract, UTE will be paid up to $450 million. The size of the payout will depend on the severity of the drought, and on oil price levels.
"The size of the transaction was very important in generating interest from public utilities," says Hector Ibarra, senior financial officer at the World Bank. "Several of them who have reached out to us have said that they [previously] hadn't approached this market more seriously because of the perception of lack of liquidity" in the weather risk market.
"We've already received several follow-up enquiries" from other utilities looking to hedge against adverse weather conditions, he adds.
Ibarra says the interest from weather risk providers in this deal was high. "even the investors that couldn't participate in the programme were very helpful during the design phase. Our role as market maker was made possible because of the important input from the market in the design of the programme and design of data settlement protocols."
Karsten Berlage, a managing director at Allianz Risk Transfer, says: "What triggered this deal was primarily that in the past few years there was fairly low rainfall. A lot of utilities [in Latin America] depend on hydropower production and if there's not sufficient rain then they have to go to alternative power sources which can be much more expensive."
"Several other Latin American countries are in dire need of these solutions," he says, adding that Allianz is in talks with other utilities in the region looking for similar protection. "This is more of a structural need than a corporate need from one individual counterparty."
He says the biggest challenge in putting the deal together was to access data. "Rain is a very localised phenomenon," he says. "We had to install 39 weather stations where we measured rain" in order to get sufficient data to design the protection.
Structuring a deal with two triggers also made it more challenging to complete.
"One thing that, usually, utilities [in South America] try to do is to explore a rain-only cover," he says. Adding a second trigger, in this case oil prices, adds more complexity to the deal and makes it more expensive for the company wanting to hedge, but gives greater protection, he says. "UTE understood that," he says, but adds that being able to explain the benefits of deals with two triggers to utilities will be crucial for those deals to take place.
Ibarra agrees, saying that it was a "very complex process" for the World Bank to build confidence with public officials in Uruguay that weather risk protection would benefit them.
"We had to prepare several technical briefings and do several market soundings before zooming in to the final structure design," he says.
After suffering billions of dollar of damages from superstorm Sandy, New York's Metropolitan Transportation Authority (MTA) in July sponsored the first ever catastrophe (cat) bond protecting against storm surge.
The move meant that MTA was the first transport organisation to sponsor a cat bond.
Superstorm Sandy in 2012 left MTA with damages worth an estimated $4.8 billion, as railroad and subway lines, vehicular tunnels, subway stations and power and signal equipment were damaged by corrosive salt water during the storm.
Thomas Prendergast, MTA chairman and CEO, said at the time of the deal that the traditional avenues the firm uses for insurance and reinsurance "contracted dramatically" after Sandy, making it difficult for MTA to obtain insurance.
He added that the $200 million cat bond could represent "the start of a long-term alternative reinsurance option that diversifies MTA's risk management strategy".
Cat bond activity has been strong in recent years, and Sandy did not put investors off the market. Last year was the second largest in terms of cat bond issues, with $7.1 billion of cat bonds being sold, according to Willis Capital Markets & Advisory.
Insurance broker Marsh and its sister company GC Securities developed the cat bond, which was placed through the newly-developed MetroCat Re, which will protect MTA's captive insurance subsidiary, First Mutual Transportation Assurance Company, against storm surge.
The three-year bond will pay out if water levels reach a certain height at five locations in new York City during a named storm. GC Securities was the lead manager, joint structuring agent, and sole bookrunner and Goldman Sachs was co-senior manager and joint structuring agent.
Investors will be paid a coupon of 4.5% above US Treasury Money Market earnings, and S&P rated the bond 'BB-' .
GC Securities says investors were attracted by the new trigger and new sponsor, which paved the way for an oversubscribed book. They says the bond was placed with more than 20 investors.
"Although tailored to the specific needs of the transportation assets of the MTA … it is possible that this kind of tool may lend itself to other vulnerable municipalities," wrote Georgia Levenson Keohane, a fellow at the Roosevelt Institute, in an article published by the New York Times. "And there are more than a few. By some estimates, 90% of the world's cities have developed along waterways (lake, rivers, oceans) and are prone to flood. Those along a coast, like new York, are also exposed to wind-induced storm surge."
UpEnergy/Swedish Energy Agency
A significant boost to the Clean Development Mechanism (CDM) came last year with the Swedish Energy Agency's commitment to buy 500,000 carbon credits from a cookstove project in Uganda developed by UpEnergy.
Projects to install clean cookstoves have been one of the few bright spots in the depressed CDM market in recent years. The number of credits sold from such projects rose four-fold in 2012, according to the Global Alliance for Clean Cookstoves, a public-private development initiative.
In a study published in March this year, the Gold Standard certification body concluded that each cookstove project it had approved yielded $96 in health benefits and $55 in livelihood benefits in addition to each tonne of carbon dioxide it saves.
UpEnergy claims its wood-burning stoves use only half the biomass burnt in open fires or traditional, less efficient stoves, and thereby reduce deforestation. They also produce far less carbon monoxide and particulate emissions – a major cause of respiratory disease which is a bigger problem than malaria in many countries. Most poor families in Uganda still cook food in a pot over an open fire.
UpEnergy's mission is to use carbon finance to lower the cost of clean energy technologies in the developing world and thereby reduce poverty, improve health, and protect forests. It buys the efficient wood-burning stoves in bulk and sells them to poor families in both urban and rural communities using local retailers, community organisations, NGOs, and governments, as well as making direct door-to-door sales itself.
Most of its stoves are made in China and assembled in Uganda, but the company is looking to develop local manufacturing and to lower the price – currently around $24 per stove – says CEO Erik Wurster.
The agreement with the Swedish Energy Agency offers UpEnergy the stability and attractive pricing it needs to expand its cookstove campaign for several years. "CER proceeds are reinvested in our distribution business to continue to grow our Uganda operations so that we're able to reach more households," says Wurster.
Since beginning operations in 2011, UpEnergy has sold about 25,000 high-efficiency cookstoves in Uganda, says Wurster, each of which is estimated to save four hours a day of cooking and fuel collection time for each household. The environmental impact is also significant, with more than 30,000 tonnes of carbon dioxide emissions avoided and at least 120,000 trees saved.
The deal formed part of a Swedish government initiative to buy a total of 40 million carbon credits, from CDM and other UN-approved projects, to help it meet its self-imposed target for emissions reductions by 2020.
The aim is "to develop the [UN] flexible mechanisms to help lay the foundation for continued and expanded international climate cooperation, achieve cost-effective greenhouse gas reductions and contribute to sustainable development in the host countries of the projects," says Kenneth Mollersten, senior scientific adviser at the Swedish Energy Agency. EF