A successfully placed 19 year, £305.14 million ($496m) bond to fund the acquisition of a large offshore wind energy transmission connection shows how the EIB’s Project Bond Credit Enhancement Initiative can make a real difference.
Balfour Beatty, Equitix and AMP Capital Investors today announced financial close on a £317m offshore transmission project connecting Greater Gabbard Wind Farm to the UK grid. The consortium was awarded the Ofgem tender to own and operate the high-voltage transmission link to Greater Gabbard (owned by Scottish and Southern Energy).
The acquisition is part-funded through the issuance of a £300m bond, priced last night at 125 basis points over benchmark gilts. That's a very good outcome.
The grid-connection-to-wind-energy assets involved qualifies it as a climate bond according to our Climate Bond Standard Taxonomy.
The Sterling bond was largely placed with a wide selection of the UK investor community, but also had strong interest from Canadian and Euro investors.
The bond has received an uplifted credit rating through the European Investment Bank’s Project Bond Credit Enhancement Initiative, allowing it to achieve an A3 rating from Moody’s. This is one notch above what it would have achieved without the enhancement and gets it just over what is the European investment-grade border nowadays (it's usually seen as Baa3/BBB-, but the demanding climate in Europe is leading many people to say A-/A3).
According to UK energy regulator, Ofgem, this is the first Offshore Transmission Owner (OFTO) project to be funded through capital markets. It's also only the second EU project to be funded under the Project Bond Credit Enhancement Initiative.
We've been a great supporter of the Initiative as a credit support tool; it's a guarantee pool that doesn't actually involve funds drawdown unless something goes wrong, so it's a very efficient use of EU capital. But we've been frustrated by the European Commission's unwillingness - so far - to narrow eligibility criteria so as to exclude high carbon assets. The first investment supported was for a huge gas storage facility in Spain (no, we do not count that as low-carbon).
Rumour has it that a bunch of motorways are coming through the system next; not exactly low-carbon either - the EU needs help with emissions not encouraging more car use. The Greater Gabbard deal, on the other hand, is exactly what the facility should be used for.
Hopefully, when the European Commission confirms that the Project Bonds facility is being continued beyond its pilot, they'll also amend the eligibility criteria to ensure low-carbon assets are the priority.
In the meantime, congratulations to HSBC as lead arranger and their joint bookrunner Banco Santander SA.
