Your wind energy is my bond


February 28, 2013

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Securitisation. In the post banking-crisis world of 2008, it’s not a popular term.

But for most industries, securitising assets enables businesses to borrow, invest and raise debt for project finance.

For infrastructure projects, the move has a strong heritage. In the nineteenth century, railway bonds were issued by private US railroad companies to raise funds in order to build new lines. Investors were repaid by revenues generated once the line was operational.

And for renewable energy businesses, it’s not a new concept either. UK developer Ecotricity has issued a number of ‘Ecobonds’ to investors, as has Brazilian developer, Bioenergy, to fund 380MW of wind farm development.

But as yet, it’s not what could be described as an industry wide practice – and that’s for a host of reasons. Some projects are backed entirely on the company balance sheet. Others, by independent power producers, can attract funds from lenders such as the banks or fund community.

However, with the reticence of many financial institutions to lend to the market, there does need to be a consideration by the industry to look at other funding streams.

The issue with securitisation, however, lies with the fact that bonds are backed by assets, meaning that the underlying technology or structure has to be valued.

And this valuation is carried out by the external ratings agencies.

The question is, however, given the ever changing nature of wind energy technology, and the fact that the large scale projects have only just entered operation, the long term risks for wind energy assets are still uncertain.

And if the rating attached to the underlying asset is low, then interest paid on the bond will have to be higher – ultimately making the repayment options less favourable.

Additionally, it’s worth asking more broadly if the ratings agencies are the best arbiters for assessing the underlying value of such assets? For organisations that rated bundles of overvalued US mortgages as triple A grade, can they be expected to be able to provide a fair assesment of wind energy assets?

There is also an argument to say that since bond issuance wouldn’t be uniform across the industry, projects could run the risk of developing in a piecemeal fashion depending on the individual attractiveness of each development; something that is avoided with centrally supported schemes.

As with most options on the table for the wind industry, it’s not a perfect solution, but only when wind energy assets have a tradeable value will the sector secure real investor interest.

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