Mezzanine Financing for Wind ProjectsMezzanine Financing for Wind Projects

Mark Henderson

European Wind Energy Conference

28 February 2006, Athens

InvestecInvestec

• Founded South Africa 1974

• Dual-listed in Johannesburg and London Market cap : c. €4.5 billion; Assets : €30 billion Assets under management : > €65 billion

• Acquired European Capital 2002

• Shareholder in Viridis Energy

• Mezzanine in Power sector

What is Mezzanine Finance?What is Mezzanine Finance?

Mezzanine (n), Italian:Mezzanine (n), Italian: An intermediate level between floor and ceiling occupying a partial area of the floor space

• “A middle layer of debt – below the senior debt layer and above the equity layer…”

• “…Mezzanine finance shows characteristics of both debt and equity”.

• “There is no strict definition of mezzanine capital”

• “Mezzanine Finance” – general term to describe various financing arrangements that rank below the senior debt

high yieldConvertible exploding

Junior debt stretched seniorSubordinated debt

Why have Mezzanine Finance? Why have Mezzanine Finance?

• Reduce equity commitments Over €5 billion new projects in

Europe alone Needs >€1billion equity every year Plus need for new development

funds

• Fills funding “gaps”: Development period 2 – 5 years per

project Periods until grants received Bank vs. Sponsor base case

Need for Project Sponsors

Sponsor Base Case

Bank Base Case

EQUITYEQUITY EQUITYEQUITY

DEBTDEBT

DEBTDEBT

To

tal

Pro

jec

t C

os

t

Covered by:Missing Funding:

Either – More Equity

Or - Mezzanine

Why have Mezzanine Finance? Why have Mezzanine Finance?

Leverage additional cashflows Reduces equity requirement

Less project equity required Increases equity returns

Not diluting equity Maintains control

Benefits to Project Sponsors

StructureStructure

Either Or:

Sponsor

Project Co

Mezz Lenders

Senior Lenders

Intercreditor

Sponsor

Mezz Co

ProjectCo

Mezz Lenders

Senior Lenders

Mezzanine: CharacteristicsMezzanine: Characteristics

• Ranking behind senior in cashflow waterfall

• Second ranking security

• But ahead of equity

• May have conversion rights

Conclusion Conclusion

• Growing need with growing wind market

• Benefits to Project Sponsors

• Flexibility in structuring But banks need flexibility in risk appetite