Large PV plants should survive Spanish cuts

Fitch argues that ‘although some projects will be forced to renegotiate their debt facilities’, recent retroactive cuts to solar subsidies in Spain are unlikely to jeopardise the long-term debt servicing capacity of large-scale PV projects of at least 1MW in scale.

Ratings agency Fitch has evaluated the recent retroactive cuts to solar subsidies instituted by the Spanish government and concluded that they are unlikely to “cause systemic long-term impairment of the debt financing of large-scale photovoltaic (PV) projects”.
“What we had in mind [in the report] was very much project-financed PV plants that have at least 1 megawatt in scale,” explained Federico Gronda, one of the authors of the report. “We are not referring here to smaller panels installed on the rooftops of houses,” he adds.
Fitch analysed a pool of project-financed transactions to see how they would react to the retroactive cuts outlined in Royal Decree 14/2010, which has the potential to reduce solar subsidies by up to 30 percent between 2011 and 2013, when PV producers will suffer the most stringent cuts to production hours. The law works by retroactively limiting the number of hours eligible to receive the government’s feed-in tariff.
It found that “debt service coverage ratios will fall in the 0.8x-1.1x range in most cases”, compared to the “1.25x-1.3x coverage level around which most financings were structured”. Still, the ratings agency believes “the availability of structural facilities – such as cash reserves or liquidity facilities – should theoretically prove sufficient to enable most projects to reach 2014 (when project economics are currently expected to revert back to base case levels)”.
That’s not to say that loans won’t have to be renegotiated. According to Fitch they will, especially for PV plants with “particularly high leverage”. But overall, lenders like BBVA should be able to breathe a bit easier. BBVA is said to be the biggest lender in the sector with some $3 billion in loans granted; Santander, the second-largest lender with some $2.3 billion committed; and Caja Madrid, which has lent $1.9 billion to the sector, the third-largest, according to data from consultancy New Energy Finance.

Unsurprisingly, Fitch believes the cuts will “have a material negative outcome on equity returns” during the three-year period to 2013. Assuming there are no other legislative changes, profitability should return to pre-2011 levels in 2014, Fitch says.
However, while the ratings agency argues that the cuts are “targeted at achieving short-term savings” during the next three years, it notes that “it appears that future support for renewables – and in particular PV – in Spain is dependent on the government finding a permanent fix to the [electricity] tariff deficit”.
The government needs to pay back some €16.5 billion to utilities in the electricity sector to compensate them for the difference in regulated power tariffs and real electricity costs over the last 10 years. But it has been having difficulty raising money in the capital markets to fund the shortfall.
As such, investors believe the Spanish utilities bearing the working capital burden of solar PV projects have put pressure on government to address the issue, leading to the current retroactive cuts.