Safety in numbers: renewables portfolio financing in the Australian market

Debt sizing remains a key focus for lenders. Despite there being a diversified portfolio of assets, lenders still size based on a thorough review of each individual asset, especially those portfolios containing relatively large assets compared to the portfolio as a whole.

Debt sizing criteria will be more complex than a single asset financing, with sizing parameters generally taking into account:

• the mix of asset types in the portfolio, with different sizing given to gas peakers, wind projects, solar projects and BESS projects, and to their different jurisdictions;
• the mix of operating assets compared to greenfield assets under construction or development;
• the level of merchant risk in the project, with sizing dependent on the extent to which projects have offtakes in place, the tenors of those offtakes and the ratings of the offtakers (or any parent that has provided a parent company guarantee to an offtaker); and
• the split between fully owned assets in the portfolio (over which all-asset security will be granted) and partially owned assets over which only there is only share security—in which case sizing will generally be restricted to projected distributions.

While debt sizing criteria is important when sizing the initial debt, it will also be important for ongoing reasons, including:

• potential for additional debt, eg raising further debt to fund the acquisition or construction of new assets; and
• resizing the portfolio after certain events, eg following receipt of mandatory prepayment proceeds or review events.

Whether the construction financing of greenfield projects is done under the portfolio financing structure (with the project included in the security pool), or separately financed outside of the portfolio through an excluded subsidiary mechanism and then brought in once the project is operational, will be something sponsors will need to consider on a case-by-case basis.

If the construction of a greenfield project is to be funded through the portfolio financing framework:

• finance for the construction is provided by some or all of the existing lenders or, if the asset is not part of the initial pool, potentially new lenders with additional debt; and
• security is granted so all lenders (existing and new) share in the total security pool comprising the existing portfolio and the new construction asset.

As a result, all lenders share in the greenfield risk of the asset and are focussed on:

• debt sizing criteria;
• the underlying project documents;
• how cost overrun risk is to be mitigated; and
• the due diligence for the asset,

regardless of whether they are providing the construction debt or not. Negotiating lender consent rights to the inclusion of new greenfield projects, and new project debt, will be a key focus for sponsors and lenders.

However, sponsors may look to keep construction projects out of a portfolio of operating assets. This is largely due to the higher risk of issues in a greenfield construction project potentially causing a lock-up event or an event of default in an otherwise performing pool of operating assets, and also to maintain a smaller and more manageable syndicate of lenders during the construction phase when consents and waivers are more common, and the contagion effect of cost overrun risk can be contained. In these circumstances, sponsors may prefer for projects to instead be held in ring-fenced special purpose vehicles (sometimes described as excluded subsidiaries within portfolios) with separate project financing sought for the individual project, and with those assets only being added to the portfolio once they are operational. This may particularly be the case where the greenfield project has a relatively large debt requirement compared to the portfolio as a whole.

Where an asset is 100% owned by the corporate group, full security can be granted over that asset in favour of the portfolio lenders, and the asset company included as an obligor under the portfolio financing.

However, it's common for large assets to be jointly owned by two or more different sponsors or investment funds. Where assets are held jointly with another investor in a joint venture, it is unlikely the other investor would accept the JV asset being included in the portfolio financing and being cross-collateralised with the other portfolio assets.

In those circumstances, security would be limited to the shares in the JV company (or its holding entity), but the JV company itself, and its assets, would remain outside of the portfolio lenders’ security net. Lenders would essentially view this as a ‘holdco loan’ subordinated to any senior project finance lenders of the JV company. Debt would be sized only on the basis of the project's forecast distributions.

Even though the asset itself is not included in the portfolio, portfolio lenders will still require a level of due diligence on the asset to understand projected distributions, which may include a review of:

• the underlying project finance documents to see if there are any unusual lock-up triggers or events of default that could restrict distributions; and
• any JV agreements or securityholder agreements, to see if there are any pre-emptive rights, drag-along or tag-along rights, that could impact enforcement by the lenders over the shares in the JV company.

Sponsors should also be aware that not all lenders are comfortable lending to a portfolio of partially held assets, and whether they can participate in the portfolio financing at all may depend on the proportion of fully owned assets that have granted security, as compared to the partially owned assets over which only share security is granted.

The ability for sponsors to expand the portfolio with the inclusion of new assets will generally be a key driver in establishing a portfolio financing. This could be either through:

• the purchase of existing operating assets;
• transferring into the portfolio a previously greenfield asset that had been excluded from the pool during its construction, once that asset becomes operational; or
• the inclusion of a greenfield asset in the portfolio although, as mentioned above, there will be different risk considerations in having construction risk in the portfolio.

In each case, whether an asset can be included and whether additional debt raised against that asset, will be subject to:

• meeting the relevant debt sizing criteria, as set out above;
• meeting technology requirements (eg while onshore solar and wind projects will easily meet this hurdle, other technologies such as storage and gas peaking projects may need assessment on a case-by-case basis); and
• meeting due diligence requirements. Typically, lenders will require satisfactory due diligence on the asset, although the level of due diligence may depend on the type of asset and whether it is operational or in construction.

Lenders may have limited consent rights as long as the above criteria have been met.

Sponsors will generally look for as much flexibility as possible to raise additional debt within the portfolio financing framework. This could be:

• to refinance the existing portfolio financing, in whole or in part, with different types of debt (such as bank or bond), and with different tenors;
• for the acquisition of new assets and projects, or to refinance asset-level project financing;
• for construction financing of greenfield assets included in the portfolio;
• to raise debt to be used as an equity contribution to ring-fenced subsidiary companies looking to develop and construct new projects, but which are excluded from the security pool; or
• to re-gear the portfolio where the debt sizing criteria continues to be met, such as where a PPA is entered into for an asset that was previously on a merchant basis.

Additional debt may be raised through the inclusion of uncommitted accordion facilities or under a permitted debt regime, where additional debt can be incurred by existing or new lenders subject to meeting a set of pre-agreed criteria, such as satisfactory due diligence on new assets, meeting debt sizing criteria or potentially meeting credit ratings thresholds.

Where there are different debt types proposed or permitted as part of the refinancing, including short vs longer tenor debt and associated hedging, lenders will require intercreditor provisions, voting rights (including veto rights with respect to certain matters) in favour of each lender group, and protections available to individual lender groups in the context of permitted refinancing debt and additional debt.

Lenders typically want as fulsome a security package as possible, including security over all of the different asset types, eg real property, project documents and financier tripartite agreements. Sponsors, however, are likely to push for a reduced security package with fewer controls than would typically be seen on a single-asset project financing. This may include relaxed lender consent rights in relation to underlying project documents, greater remedies available and higher thresholds following project document defaults, and financier tripartite agreements limited to 'material' project documents.

Lenders are becoming increasingly comfortable with this—where the portfolio is significant in scale, there is relatively lower gearing and a substantial proportion of operational assets that are supported by investment grade offtake agreements (or where the portfolio has a subset of these features).

Given that many projects will have project financing in place ahead of the portfolio refinancing, an important structuring point to be considered at the outset will be the extent to which existing securities and financier tripartite deeds can be preserved as part of the portfolio refinancing. It is common for existing security trust structures to remain in place rather than new security trusts being set up. This will reduce the need to retake security and, importantly, mean that new financier tripartite agreements are not required, which can be particularly important on geographically large projects where there are multiple landowners and large portfolios where the volume of third parties to project documents can easily take the financier tripartite numbers to 50-100 or more.

To do this, multiple security trusts (ie one for each existing project) may be required and tied into a common terms structure. This can lead to complexities on closing due to the refinancing of many different assets at the same time.

To the extent that the security trustee is to be replaced, we commonly see a period of time allowed post-close of the portfolio refinancing for this to occur, given it will require novations of tripartites and security and can be time consuming.