Innovative Financing of Energy Infrastructure USAEE North America Conference November 2019
What is infrastructure debt? • A global asset class • Huge scale, measured in the trillions Energy • Diversified sector • Typically defensive / low correlation to the business cycle • Predominantly private debt – higher yield than corporate bond or leverage loans Energy debt • Backed by energy assets or projects – equity investors provide a cushion against loss 1
Energy Infrastructure, a diversified asset class 2
How infrastructure debt works • Own the project company Equity investors • On average, provide about 35% of the capital of the project company Lenders Project company Operator • Provide debt to a • Builds or buys an • Operates the project, secured on the infrastructure project project under a assets management • May own the assets contract • On average, provide outright, or through a about 65% on the capital concession of the project company 3
Defensive characteristics of infrastructure • Infrastructure is typically resilient in a recession • Moody’s research (chart below) shows that infrastructure credit is about one third as volatile as corporate bonds • Infrastructure performs well in recessions (shaded areas below) • Some infrastructure sectors (e.g. utilities, renewable energy) are more defensive than others (e.g. container ports) Ratings volatility (Moody’s research) Corporate bonds Infrastructure 83 86 89 92 95 98 01 04 07 10 13 4
Infrastructure debt is resilient Low default rates for infra debt Equity cushion provides protection • Averages 35% 1.2% Investment grade (BBB-) • Needs to be fully wiped out before 0.8% lenders suffer a loss 0.4% Infrastructure Security over assets loans • 0.0% Gives lenders control and a senior- 1 3 5 7 9 Years ranking position following a default High recovery following default Strong covenants 81.8% • Financial covenants provide 41.9% protection against underperformance • Operational covenants ensure the project is properly run Infrastructure debt Corporate bonds 5
Infrastructure debt has a high yield Historically dominated by banks, but Returns on infrastructure debt are following the financial crisis and tougher double those of high yield bonds, regulatory capital rules, bank lending has with lower volatility declined 145 Total return (dividends plus capital growth) 135 Demand for capital is higher than ever, leading to a supply-demand imbalance 125 115 Infrastructure debt is a specialist asset, 105 leading to high barriers to entry : many 95 lenders are not equipped to participate 85 Mar-15 Apr-16 May-17 Jul-18 Aug-19 Private debt backed by infrastructure can Share price of SEQI (46% total return) yield 3%+ more than equivalent bonds or NAV of SEQI (33%) leverage loans High yield bonds, Sterling hedged (16%) 6
Matching credit profile with capital providers The risk-return profile continuum Who is this for? ▪ Mezzanine / High Risk High Yield funds such as Sequoia High Yield High Yield ▪ Structured Finance LIBOR+ Lenders 500 - 700 Desks (DB, JPM, GS) ▪ Family offices etc. ▪ Banks (HSBC, Investment Grade Barclays, SocGen) LIBOR+ ▪ EIB / EBRD 100 - 250 Investment ▪ Insurance & Grade Lenders Return Low Pension (Aviva, Low High AXA, Allianz) ▪ IG Debt Funds 7
Developing the capital structure Simple capital structure Capital structure with junior debt ▪ Opco debt as before, ▪ Classic project now with the addition capital structure of a further layer of ▪ All debt at the opco OpCo debt OpCo debt debt with 2nd lien on (1 st lien Senior (1 st lien Senior level, with direct assets and/or shares pledge over all Secured) Secured) of the opco assets of the project ▪ Offers investors the ▪ Significant opportunity to difference between capture a yield debt yield vs equity Junior debt between opco debt IRR (2 nd lien / Mezz / and equity yields ▪ Requires significant Holdco) ▪ Less owners’ equity owners’ equity Equity needed contribution ▪ Higher equity IRR ▪ More conservative Equity achievable risk-return profile 8
Case study 1 – Forsa Energy (UK gas peaker construction financing) • Provided HoldCo debt to finance the construction of three 20MW gas peaking plants in UK Managed • Flexible generation technology is an emerging asset Lanes class expected to become increasingly important as renewables increase the intermittency of the grid. The need Sequoia’s proposition The value add ▪ ▪ ▪ Raise subordinated Provide a HoldCo Provide a flexible debt to participate loan with the platform to support alongside senior provision to increase sponsor growth financing to a facility size as the activity ▪ portfolio of gas sponsor rolls out its Enhancement of peaking plants portfolio equity returns to the ▪ ▪ Borrower need to Allow the borrower sponsor ▪ develop a platform to recycle equity Free up borrower to roll-out its future capital to future capital to utilise on plant construction projects future CapEx 9
Case study 2 – NEOEN (French renewables holdco financing) • Headquartered in Paris, France and active in the solar power (60% of portfolio) and wind power (40%) sectors • Significant presence in France, Portugal and Australia • Entered Euronext in 2018, raising €450 million • First French unicorn in the renewables field The need Sequoia’s proposition The value add ▪ Faster execution ▪ ▪ Raise €40 million Provide a loan at the than equity raise equity on existing holding company ▪ No mandatory portfolio to fund new level prepayment ▪ asset development Free up €40 million of triggered at the opco ▪ Need to achieve equity to fund new debt level quick turnaround of projects ▪ No equity ownership ▪ change of control No change of control dilution waivers from various triggered at the opco ▪ Enhancement of lenders at opco level level of any project equity returns 10
Conclusions • The addition of mezzanine debt on energy projects can fill the gap between senior debt and equity by reducing the size of equity commitment and enhancing equity IRR. • Private Debt funds, such as Sequoia’s infrastructure debt funds are well placed to provide junior debt capital to meet our energy capital needs: – Enhance value to all capital providers to a project – Provide superior flexibility in financing terms, which reflect the nature of our capital – Offer an attractive risk-return asset profile to investors • Growth of Private High Yield Debt funds goes hand in hand with: – Investors seeking to deploy their capital with more predictable performance than equity but having higher returns than senior debt – Equity sponsors adding a further layer of debt in order to enhance equity IRR 11
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