Duke Energy closed on $422 million in debt on 19 December as two financings for its Los Vientos wind farms. The 402MW Los Vientos projects are located in Texas near its border with Mexico, allowing Duke to qualify for cheap debt from the North American Development Bank. The financing from NADB, a San Antonio-based institution that the US and Mexican governments launched in 1993, benefited from the potentially high capacity factors at Los Vientos.

The NADB committed $110 million tickets to each financing – its maximum commitment to a single private borrower – one for the 200MW Los Vientos I and another for 202MW Los Vientos II. Both deals featured additional tranches of commercial bank debt; Bank of Tokyo-Mitsubishi UFJ and Mizuho participated in both Los Vientos deals, while Siemens participated in just Los Vientos I. BTMU, Mizuho and Siemens contributed $135 million toward Los Vientos I; BTMU and Mizuho chipped in $67 million toward Los Vientos II.

The commercial banks stretched to 18-year tenors, while the NADB went out to 25 years. Pricing on the commercial bank tranches was around the recent market floor of 250-275bp over Libor (and was later swapped to a fixed-rate), while NADB approved a fixed-rate margin just beneath that level. Duke, a large sponsor with utility affiliates, usually gets better pricing and tenors than pure developers, but Los Vientos exceeded even its norms.

Duke approached the NADB in 2011 during one of the more turbulent phases of the eurozone crisis and as lenders became more sensitive to looming Basel III rules. European lenders had been reducing tenors and increasing pricing, or leaving the project finance altogether. This prompted sponsors to seek alternative sources of debt and newer deal structures. Duke would have contacted the NADB regardless of market conditions, however, as Los Vientos fell within the bank’s coverage area.

But the NADB helped Duke reach a tenor of at least 18 years on more than $200 million of bank debt. Even double-digit tenors below that level are only available to the development subsidiaries of utilities, like Duke, NextEra and Sempra. “There is sufficient bank appetite for seven years, but scarcity of debt longer than 10 years,” says Todd Alexander, partner at Chadbourne & Parke, who advised the lenders in the Los Vientos I and II deals.

Lenders prefer tickets of $40-50 million per deal and only a handful – BTMU, CoBank, Mizuho and Sumitomo Mitsui Banking Corp. – routinely go beyond 15 years. Others, including Siemens, did so sparingly in 2012. Sponsors instead cobbled together short bank debt with long-dated institutional tranches to finance their North American renewables projects. Invenergy and LS Power each did so twice in 2012; Santander and Prudential Capital led those dual-tranche deals.

The Los Vientos deals resemble LS Power’s 2012 bank-bond deals for its Arlington Valley and Centinela greenfield photovoltaic projects, with the NADB taking the place of the institutional provider. Los Vientos I and II, however, feature less cumbersome inter-creditor arrangements than those in bank-bond financings. The deal also has similarities with the A/B loan structure that the IFC and IADB use in Latin America, though one motivation for that structure – political risk mitigation – is not a factor in Los Vientos. Those multinationals lend at slightly higher margins from multilaterals than the NADB, though still a touch below the recent market floor.

Duke identified its lender group by mid-2012. Siemens was the last lender to join, and only supported the project – Los Vientos I – that used its own turbines, though it does sometimes back deals with rival suppliers. Los Vientos I, located in Willacy county, Texas, consists of 87 Siemens 2.3MW turbines and sells its output to CPS Energy under a 25-year offtake agreement, while Los Vientos II, located in Cameron county, Texas, uses 84 Mitsubishi Heavy Industry 2.4MW turbines and sells power to Austin Energy also for a period of 25 years). General Electric’s 2010 lawsuit against Mitsubishi alleging patent infringements prompted Siemens to avoid financing Los Vientos II, according to market observers. In March 2012, the US District Court in Dallas ordered Mitsubishi to pay GE a reported $169 million.

Duke had to ensure that the involvement of the NADB, which is partially funded by the US government, would not disqualify the sponsor from receiving the federal production tax credit. It also had to cope with a small increase in the NADB’s cost of funding, which became apparent on the NADB’s October and December 2012 bond issues, though it remained cheap, according to market observers.

The NADB has focused on renewables deals with strong offtakers, says Geronomo Gutierrez, a managing director at the bank. In 2012 the NADB participated in the financings for Pattern Energy’s 265MW Ocotillo wind project in Imperial Valley, California, and SunEdison’s 65MW Picture Rocks photovoltaic project in Arizona. To be eligible for NADB funding, US projects must be located within 100km of the US-Mexico border, while Mexican projects can lie within 300km of that boundary.

Mexican wind projects in the Tamaulipas area are likely to benefit from NADB funding, as the country looks to expand its small 700MW operational wind fleet. Cetsa, a consortium of Spanish and Mexican developers, is a likely recipient. 

Los Vientos Windpower
STATUS
Closed 20 December 2012
SIZE
Approx. $700 million
DESCRIPTION
200MW Los Vientos I 202MW Los Vientos II wind projects, located in Texas
SPONSOR
Duke Energy
DEBT
$245 million for Los Vientos I and $177 million for Los Vientos II
LENDERS
North American Development Bank, Bank of Tokyo-Mitsubishi UFJ, Mizuho, Siemens
SPONSOR LEGAL COUNSEL
Andrews Kurth
LENDER LEGAL COUNSEL
Chadbourne & Parke