Last December, Antin Solar Investments, the Italian solar platform of French infrastructure fund manager Antin Infrastructure Partners, pulled off a remarkable feat: it managed to refinance seven separately-financed solar plants under one umbrella debt structure, combining Italy's first-ever project bond with bank debt.
Led by Natixis, the hybrid €165 million refinancing secured domestic and international institutional investor buy-in for an €85 million dual-tranche project bond. Three investors within Aviva Group – two of them Italian – and SCOR Global Investments bought into €65 million of floating rate notes paying six-month EURIBOR plus 335 basis points and €20 million of fixed-rate notes paying 3.552 percent. Both tranches mature in 14 years. The rest of the debt package came in the form of an €80 million bank loan from Natixis and UBI, including liquidity and VAT facilities.
Sister title Low Carbon Energy Investor caught up with Antin Solar chief executive Umberto Tamburrino (UT) and associate Pietro Roulph (PR) to find out how the 15-month refinancing came together, the efficiencies of its new hybrid structure, and how it managed to use the refinancing to mitigate the damage done by the Italian government's retroactive tariff cuts.
Q: How did you come up with the idea of the refinancing? And how closely did you work with the market on structuring it?
UT: Antin Solar is a build-up story. We first wanted to achieve critical mass by aggregating smaller plants and then leverage the benefit of this newly created platform to improve the financing conditions by refinancing the business at portfolio level. We acquired nine plants in different parts of Italy (Lazio, Sicily and Apulia regions). Each of the plants had an existing sub-optimal financing in place which was embedded in our acquisition price.
We worked very closely with the market from day one. We decided to go down the private placement route and have a selected group of long-term investors with whom we felt comfortable. We were financing Antin Solar for the long term and finding people that spoke the same language and understood our needs was absolutely critical, because there are always things to be discussed over the course of a long-term business. We went out and met with many different investors.
We initially approached 20 investors which was ultimately pared down to a final investor group of four.
Q: What kind of financing efficiencies were you looking for then?
UT: When you build a project, you create a project finance structure which is very suitable for construction.
Antin Solar's objective was to acquire existing plants which were already connected to the grid and had financing in place. So we inherited several project finance/leasing structures that mostly dealt with construction costs whilst ignoring, to some extent, operational margin and cash flow generation.
We had a two-to-three year historical track record for these plants, allowing our investors to test our capability to generate cash. They did not look at construction costs but assessed our ability to serve the new debt.
We ended up with a structure that is much more efficient from a project finance perspective. This is optimal, because it gives us sufficient incentive to distribute cash and be aligned with the debt providers whilst meeting our investors' requirement for yield.
This project bond is an instrument which may increasingly become a substitute for the banking market because it's more efficient for investors and sponsors – it's a win-win.
Regulations have constrained banks and one could challenge whether long-term exposure is still a bank's business or whether it is going to be the natural domain of institutional investors.
PR: It's fair to say, though, that banks are very capable in terms of structuring. Part of the win-win solution in this deal is that you had institutional investors bringing in certain types of capabilities and cost of capital, but on the other hand, you also had banks bringing in their structuring capabilities.
Q: How has this refinancing affected your debt costs?
UT: It significantly reduced our average cost of debt.
PR: It's important to point out that this improvement is a combination of both margins and base rate decrease. Most of the original financings were done in 2011 when base rates were higher, but at the time Italian sovereign risk was also higher.
Q: Did you manage to mitigate any of the damage done by the Italian retroactive subsidy cuts via your refinancing?
UT: That ended up being the cherry on the cake. We were one of the few operators that could actually choose the most appropriate tariff structure for our portfolio. Since we were refinancing, we effectively structured the debt around the tariff structure which was best for us.
The option we chose implied accepting an immediate tariff decrease. This was only possible if you were refinancing the debt, otherwise you would risk default. That was not the case for us because we designed the debt repayment in a structured way, therefore maximising distributions to the sponsor. This is a very interesting feature of the refinancing.
Q: Given this was a first-of-its-kind transaction, how would you rate it in terms of difficulty? And would you say it's replicable?
UT: It was not easy. We needed to devise a completely new contractual framework. It is a hybrid structure and the first project bond in Italy under new legislation. When you put all of that together, it resulted in a complex set of several transaction documents.
The structure is replicable provided you have the right portfolio and the right investors. In fact, our investors told us they could be willing to look at subsequent tranches.
PR: There were many key financial achievements, but it is important to stress that there were also significant operational advantages to doing this transaction. This comes mainly via two aspects – the operational flexibility you get with this new structure compared to the previous one and the reduction of the management burden (for example, the time that management previously needed to spend to manage multiple facilities). That time can be better spent in other value-added activities. From an operational point of view, a single facility at portfolio level is much easier to manage.