Energy Developments Ltd (EDL) has closed the refinancing of its 10 operational English landfill gas-to-energy (GTE) sites, taking advantage of an improved power market and international hunger for such debt

EDL - an international provider of renewable energy and low-emission energy - owns and operates an international portfolio of 64 power stations in Australia, US, Europe and Asia.

The total capacity from these facilities is 445MW from a range of fuel sources including:

• landfill gas
• coal mine methane 
• natural gas

This deal sees EDL carry out a portfolio refinancing of its GTE assets in England, a move that is becoming increasingly popular and wherein the company is effectively hedging its exposure to a single asset's performance.

It also sees EDL create a far less intense security package for all of its English GTE assets - a move that enables improved flexibility and the release of a substantial amount of cash to the equity investors.

The 10 facilities include:

• Brazier
• Poole
• Pitsea
• Waverley Wood
• Sidegate Lane
• Ryton
• Mucking
• Rainham
• Barling
• Bellhouse

The original financing for £25 million and the refi - which is far from being the first for these assets - also sees the company capitalise on Australian banks' hunger for such assets.

Australia-based ANZ associate director of power and utilities, project construction finance Michael Olsen says that one of the key elements of the deal was EDL's growing portfolio of assets.

'Up until the recent refi - even at a sole bank basis - it was only at the £25 million level. But over the last three years additional facilities have been added and are now operational,' he says.

'The portfolio has gone from around 20MW two years ago to 51MW of installed capacity now. That is pretty impressive growth - and a number of the landfill sites are still open which means the gas curves have not started their decline as yet.'

Financing

The power company sought to refinance the debt to take advantage of vastly improved energy prices in a market that can only be described as power-hungry. The refinancing sees ANZ return to the deal that it originally financed for £25 million back in 1998.

This time, EDL put the refi out to a competitive process as it was keen to get more than one back involved - opening the door for National Australia Bank to step in and take the joint mandated lead arranger role.

The refinancing takes the shape of £36 million in a 13-year term loan, and £24 million 7-year reducing revolving credit facility.

Australia-based ANZ associate director of power and utilities finance Michael Olsen says: 'Given the up-sizing of the debt to £60 million, it was opened up to other financiers and the client wanted up to three financiers. We had actually pitched for a 100 per cent underwrite, but they went for two.'

Olsen adds: 'The seven year point on the £24 million is a key point when EDL has a market re-test for the merchant exposures in this portfolio of assets. There is also a step-up in the debt service reserve account from three to six months.

'At the seven-year point, EDL has the option either to repay that wholly or via an agreed cash flow or have pari passu at the time.

'Underlying this, on the project side, they are pretty heavily contracted in NOFFO contracts until about 2015. After that stage most of the NOFFOs have gone and ROC generation has taken over as the main green form of revenue.

'Because that is not contracted, the banks saw the seven year point as the refinance point - if required - and only if the market was in trouble at that point. But, of course, the transaction is supported by a market forecast which supports a long-term price forecast for the government's RO [renewable obligation] measure.'

This deal, according to Olsen, was particularly interesting to Australian banks as the UK's RO measure is supportive of renewable projects.

'In Australia we have the REC [renewable energy credits] which is rather limited as the government measure was only designed to generate an extra 2 per cent of renewable energy from the 1997 levels - as distinct to the RO levels which was 20 per cent by 2020,' says Olsen.

'In Australia we had a rush - especially in the wind sector - for three years. But then that died off. Our bank did a number of landfill gas assets and a number of wind deals, but our local market dried up.'

RBC Capital Market acted as financial adviser to EDL on the transaction.

Sophie Justice at RBC Capital Market says: 'What we were looking to do was structure around EDL's contracting strategy. They have NOFFO contracts in place for about 60 per cent of the output and going forward that is going to incrementally fall off and be replaced by ROCs.

'The structure assumes that from day one there is a certain amount of debt that EDL wants to draw down today, that it is going to amortise over time - but likewise it wants to retain a bit of flexibility in the near term by having additional leverage over the period when there is greater contracting within the portfolio that it can use for its general corporate purposes.

'After year seven any drawings that are under the revolver can either be cash swept down, fully repaid in a bullet repayment or they can refinance that element of debt and leave the 13-year piece still outstanding that would rank pari passu with it.'

Justice adds that it priced 'inside where you have seen the other two financings' that RBC has worked on - the disposal of ENER-G's landfill assets to Viridis and United Utilities' exit from GTE.

Legal issues

Watson Farley & Williams won the mandate to advise EDL and established an interesting structure that saw the law firm take something of a banking role on the deal.

Interestingly, EDL also appointed the law firm that was to act for the banks - Norton Rose - which won a beauty parade for the contract against rival Linklaters.

Watson Farley partner Evan Stergoulis says that the market risk element was particularly interesting in that it has a lot of NOFFO (non fossil fuel obligation) contracts which had a good return at their inception. However, since the change of the renewables support to a market-based regime (ROCs), the market is a great deal more lucrative and impacted positively on the portfolio value.

However, landfill gas - which in itself is a fairly unproven technology as there is limited evidence of its long-term sustainability - has jumped on the bandwagon for refinancing in recent times. Banks are increasingly comfortable with the valuations such assets command once they are constructed and operational.

'The unusual element of this deal was that EDL went out with a package to the banks - something we are seeing increasingly - going out with an information memorandum, coordinated by RBC,' adds Stergoulis.

'Then we had fully comprehensive legal, technical and insurance packages and a very comprehensive term sheet which ran to 100 pages - much like a facility agreement.

'It went out on that basis and EDL effectively appointed the lenders' counsel before there were any lenders. The process was driven by the borrower and created tension in the market by asking bankers to come back and bid on that basis.'

He adds: 'We effectively did something that was a banker's role as well.'

This reduced the banks' structure fees - though they still receive their arrangers' fees - and is a model that is increasingly being used in instances like this.

Conclusion

This transaction sees two Australian banks refinance EDL's portfolio of landfill GTE assets - one with an existing involvement in the deal, the other a new entrant.

This is far from being the first time that an Australian bank has stepped into a deal like this in the UK, and it is far from being the last.

The banks from down-under became swiftly comfortable with such deals in their own country when there was a glut of them on the market.

However, the Australian government has not matched international efforts to drive the adoption of renewable power and, as such, the market has dried up.

This has forced the Australian banks to travel to find such opportunities in countries where there is greater appetite for clean power and - in Europe's case - targets to have 20 per cent of power from renewable sources in place by 2020.

In the meantime, the market can expect Australian financial institutions to continue competing for roles on deals like this.

The project at a glance