An important win

Proverbs are notoriously tricky to translate into different languages, but there’s a Spanish one that, given the recent international arbitration defeat incurred by the Spanish government, is worth a shot: dar gato por liebre. Roughly translating as ‘to give cat instead of hare’, this proverb dates back to the Middle Ages, when people sat down to eat hare (liebre) and were actually served cat (gato).

Well, gato was very much what dozens – if not hundreds – of investors got served when Spain put in a place a series of retroactive renewable subsidy cuts between 2010-13 that turned their shiny new investments – especially in the solar sector – into case studies in regulated value destruction.

Recently, though, international investors were given some hope of redress following UK-headquartered EISER Infrastructure’s €128 million in damages, awarded by the World Bank’s International Centre for Settlement of Investment Disputes. The latter found Spain in violation of Article 10 of the Energy Charter Treaty for failing to treat EISER in a fair and equitable manner.

EISER’s case is emblematic of what happened to many other managers, with the likes of Antin and HgCapital among 26 investors going through arbitration proceedings. Having helped put together €935 million of debt and equity to back three solar thermal plants with a combined capacity of 150MW, EISER and its partners found their investment case turned upside down following Spain’s retrospective cuts.

A read through the court’s sentence shows that one of EISER’s assets saw its cashflows slashed by 66 percent; in 2014, for example, one of the holding companies for the plants was generating €19.92 million in revenue to service €27.76 million in debt secured under the pre-cuts subsidy regime. Debt restructurings followed and it’s likely those CSP plants are not a highlight in EISER’s portfolio.

The win wasn’t a home run for EISER, considering it had been seeking €196 million in compensation for future cashflow losses. However, the court didn’t think EISER offered sufficient proof to justify €68 million of the €196 million asked, hence the €128 million final award. Still, the award is sufficient to cover the €126 million of equity EISER had ploughed into the CSP plants, with sources close to the fund indicating it now expects to break even on that investment.

That can have a material impact on the performance of some of the funds affected by the Spanish debacle. HgCapital is a case in point. As we reported over a year ago, HgCapital’s Renewable Power Partners I and II funds were posting respective IRRs of -3.35 percent and -33.6 percent as of 31 March 2015.

With one-third of Fund I and a quarter of Fund II invested in Spain, the vehicles got hit badly, but sources close to HgCapital told us that if it were to receive in excess of €100 million in compensation per vehicle, that would be enough to increase both funds' return multiples by up to 0.3x and bring their returns into positive territory.

Spain, clearly unhappy, called the award “excessive” and indicated it’s considering an appeal. Incredibly, it also said EISER should’ve factored the potential for cuts into its risk assessment before investing.

As much as we sympathise with Spain’s quest to cut its multibillion euro electricity tariff deficit, retroactive changes are not the way to do it. If it gets hit with hundreds of millions in compensation payments, Spain might belatedly find that out too.