Pension fund investments in wind farms laying the ground for Wind ABS

In Barcelona recently I had a chance to listen to Torben Möger Pedersen, mild-mannered CEO of the €16.4bn PensionDanmark fund. PensionDanmark have been investing in wind farms - in a big way - showing the worth of mature wind farms as solid, long-term investments to meet long-term pension liabilities.

The headline deal this year has been an investment of $620m in an offshore wind farm developed by Danish state majority-owned Dong Energy. 50% ownership of the wind farm is now shared between PensionDanmark and pension fund asset manager, PKA.

Wind projects are nowadays seen as risky because regulation is uncertain and the wind doesn't always seem to blow as reliably as expected. PensionDanmark takes a different view, believing that over 20–30 years wind farms will provide a steady cash flow. Torben Möger Pedersen says that they expect of their wind farm investments "a return with a spread of between 300 and 500 basis points above a government bond", that is “very much less risky than listed equities”.

They're not the only ones: we've seen other institutional investor equity deals this year by Munich Re (€600m so far this year), PGGM and Allianz.

I mention this because we expect what are so far equity plays to be matched by the issuance of asset-backed securities in coming years. Utilities will start issuing bonds backed by portfolios of wind farms, retaining a management contract. The only question is the level of management lock-in that ratings agencies will allow for utilities to treat the assets as off-balance sheet. We expect to see some guidance from at least one rating agency before the year's out.

Interestingly, PensionDanmark is aiming to allocate 10% of its investment capital in energy and infrastructure from about 6% at present - and against an average of less than 1% among institutional investors (according to the OECD).