Off-balance Sheet Financing of Energy Efficient Infrastructure · SUSI Energy Efficiency Fund SUSI...

SUSI Energy Efficiency Fund

SUSI Energy Efficiency Fund – Investor Days, Madrid, July 2017

Off-balance Sheet Financing of Energy Efficient Infrastructure

Stefano Fissolo, Senior Vice President, SUSI Partners AGInvestor Days, Madrid, 10 July 2017



Executive Summary

▪ Despite the fact that energy efficiency projects do not yet meet the requirements of capital markets, SUSI Energy Efficiency Fund (“SEEF”) has signed several transactions in the last years for a total investment volume over EUR 100m, among those:

• refinancing of 39 energy delivery contracts in Germany;• refinancing of 1000+ lighting-as-a-service contracts in Italy; • refinancing of a Spanish street lighting project.

▪ SUSI Partners aims at investing € 200m+ in energy efficiency during the next 1.5 years, financing European energy efficiency projects/portfolios larger than € 2m and with terms longer than 5 years.

▪ SEEF’s unconventional financing has many advantages vis-à-vis bank financing, in particular the ability to invest up to 10 years with off-balance sheet structures is SEEF’s selling proposition for the ESCOs.

▪ A true sale of receivables is an effective structure to achieve off-balance sheet financing for ESCOs under IFRS with customer paying fixed yearly amounts. Sale of receivables is implemented through a securitization framework thus achieving both ring-fencing of the single projects and scalability of the financing model. According to IAS 39, when an ESCO transfers both cash flows and underlying risks, the receivables are derecognized from an ESCO’s balance sheet.

▪ Service Contracts in combination with a sale & lease back structure can be off-balance sheet for both the ESCO and the customers according to local GAAP (e.g. German). The legal transfer of ownership has to be well documented for each project in the portfolio with a separate agreement in order to achieve the de-recognition, therefore a common documentation is key.

▪ Due to lack of a standardization, energy efficiency projects are “bankable” only by niche players like SEEF



Agenda

▪ SUSI Energy Efficiency Fund (SEEF) selected transactions

▪ Key facts about SEEF

▪ Unconventional Energy Efficiency Financing

• True sale of receivables

• Service contract in combination with sale and lease back



Agenda




▪ Sale of receivables




Energy efficiency projects do not yet meet the requirements of capital markets...

[…] energy efficiency projects do not yet meet the requirements of capital markets. The industry is just too

disaggregated. No two projects or contracts are alike. Securitization is not practical or possible under these circumstances. Say you have 1,000 energy efficiency projects. Standard & Poor’s would have to read 1,000

documents to assess the risk. Fees won’t pay for that level of review.

[…] Common documentation is essential […]

[…] The energy efficiency industry must start discussing securitization more seriously.

Michael Eckhart, Managing Director, Global Head of Environmental Finance and Sustainability @ Citigroup

Source: Clean Energy Finance Forum 2015. http://www.cleanenergyfinanceforum.com/2015/01/30/citi-director-outlines-progress-and-hurdles-financing-clean-energy

The lack of technical and legal standardization prevents the creation of a new asset class for energy efficiency projects and the deployment of all the funds available for this market

http://www.cleanenergyfinanceforum.com/2015/01/30/citi-director-outlines-progress-and-hurdles-financing-clean-energy



…despite of that, SUSI Energy Efficiency Fund has closed several transactions in the last years for a total investment volume over EUR 100m

Transaction closed Transaction in execution

Track record in Energy EfficiencyMarkets

Country Project Financing structure ESCO

Spain Street Lighting retrofit Sale of receivables

Italy LED portfolio Off-Balance sale of receivables from an EE lighting player

Italy Street lighting in six municipalities

Off-Balance financing for a portfolio of municipalities

Italy LED retrofit True sale of receivables

Finland Portfolio of LED projects Notes subscription

Germany School campus retrofit Energy Performance Contracting Undisclosed

Germany Retrofit of glassmanufacturer

Off-Balance-Leasing solution Undisclosed

Germany Public buildings Sale of receivables

Germany Utility portfolio Sale and lease back solution Undisclosed

Ireland LED portfolio Sale of receivables via a facility

Slovenia Portfolio of EE projects Sale of receivables



▪ One of the largest regional utilities in Germany with a dedicatedcontracting subsidiary.

ESCO

▪ 11.5 YearsFinancing Tenor

Key Facts Project Overview

Selected transaction (I/III): refinancing of 39 energy delivery contracts

Country ▪ Germany

Financing Volume

▪ € 11 million

CO2-Savings ▪ 11,700 Tons of CO2 p.a.

Contract Type ▪ Energy Delivery

End Customer ▪ The portfolio consists of large industrial and public customers.

Measures▪ Replacement of lighting, heating and compressed air assets with

more efficient equipment.

Financing Structure

▪ A Sale & Lease Back structure allows SUSI to purchase a portfolio ofassets and ensure that the transaction is off-balance sheet for theESCO.

Advantages

▪ SUSI assumes the credit risk of a portfolio, whereby initial losses arecovered via a “First Loss Piece Mechanism”.

▪ The transaction was successfully structured as off-balance sheet forthe ESCO allowing a significant reduction of its net debt.



▪ Italian company with international presence in development,production and distribution of LED-Lighting.

ESCO

▪ 12 YearsFinancing Tenor


Selected transaction (II/III): refinancing of 1000+ lighting as a service contracts

Country ▪ Italy

Financing Volume

▪ € 24 million

CO2-Savings ▪ 17,700 Tons of CO2 p.a.

Contract Type ▪ Energy Saving

End Customer▪ A total of 300+ customers (and 1000+ contracts) from an ESCO’s

contracting portfolio that meets the investment criteria of SEEF. Theportfolio consists of public and private customers.

Measures▪ Existing lighting is replaced by energy-saving equipment, enabling

remote monitoring and smart maintenance.

Financing Structure

▪ “True Sale of Receivables” structure allows SEEF to purchase aportfolio of receivables that is off-balance sheet for the ESCO.

Advantages

▪ SUSI assumes the credit risk of the portfolio, whereby initial lossesare covered via a “First Loss Piece Mechanism”

▪ The transaction was successfully structured as off-balance sheet forthe ESCO allowing a significant reduction of its net debt.



Selected transaction (III/III): refinancing of a Spanish street lighting project

▪ Energìa Eléctrica Eficiente (3E). A Madrid-based ESCO specialized inLED luminaires design and installation.

ESCO

▪ 10.5 YearsFinancing Tenor


Country ▪ Spain

Financing Volume

▪ Undisclosed

CO2-Savings ▪ 750 Tons of CO2 p.a.

Contract Type ▪ Supply-service contract

End Customer▪ A Spanish municipality located about 20 km from Madrid. It belongs

to the broader autonomous community of Madrid and itspopulation is 17’195 inhabitants.

Measures

▪ Existing lighting is replaced by energy-saving equipment; enablingremote monitoring and smart maintenance, including both streetand inner lighting.

Financing Structure

▪ “Sale of Receivables” structure allows SEEF to purchase thereceivables arising from the component P1 of the contract.

Advantages

▪ SUSI completely assumes the credit risk of the municipality, with anon-recourse purchase of the receivables.

▪ The ESCO successfully terminated the leasing contract it had inplace, in favour of SUSI financing that is characterized by an higherfinancing quantum, with a no-recourse nature, at a comparablereturn.



Agenda




• Sale of receivables




SUSI Partners AG finances the entire spectrum of the energy transition

Renewable Energy

Investments in solar and wind parks within Europe

• SUSI Renewable Energy Fund IEUR 60m fully invested

• SUSI Renewable Energy Fund IIEUR 380m committed, currently investing

Energy Efficiency

Financing of energy efficiency measures in Europe

• SUSI Energy Efficiency Fund (SEEF)EUR 200m committed, currently investing

SEEF is Europe’s largest fund dedicated to Energy Efficiency and is (re-)financing projects or project portfolios, among others, in the following areas:

Institutional capital

The investor base mainly consists of:

▪ Pension funds from countries incl.:• Germany• Switzerland• Netherlands

▪ Supranational institutions incl.:1

SUSI Partners (SUSI) is a specialist investment advisor focused on financing sustainable infrastructure projects.

The investment team of SUSI is made up of clean investment professionals with experience in Project Finance, M&A, Banking and Asset Management.

Founded: 2009Locations: Zug, Zurich, Luxembourg, FrankfurtEmployees: 44Total committed capital: ~ EUR 800 millionTotal CO2 savings: ~ 250,000 tons

Founders: Dr. Tobias Reichmuth,Otto von Troschke

Board of Directors: Kai-Uwe Ricke (President)

Regulation:

€€€

Buildings Industry Public Infrastr.

▪ HVAC

▪ Building mgmt.

▪ Lighting (LED)

▪ Watertreatment

▪ Electric motors

▪ Pumps

▪ Waste heat recovery

▪ Plants and processes

▪ Street lighting

▪ Hospitals

▪ Swimming pools

▪ Schools

Eidgenössische Finanz-marktaufsicht FINMA,

SUSI Partners is a registered Asset

Manager («Vermögens-verwalter»)

Commission de Surveillance du

Secteur Financier (« CSSF »). AIFM3 of the funds is HAIG2

Bundesanstalt fürFinanzdienst-

leistungsaufsicht(« BaFin »)

1

3

Energy Storage

Investing in storage capacity in OECD countries

• SUSI Energy Storage FundCurrently fundraising, targeted at EUR 250m

2



▪ Verifiable CO2 and energy reductions, obtainable from all mature technologies available on the market▪ Project rating must be investment grade according to SEEF’s credit risk assessment

Project characteristics

Volume▪ Min. € 2m for stand alone projects or a portfolio (exemptions possible)▪ Max. € 20m per single counterparty (e.g. end customer)

Geography▪ Euro-zone – EU member states with EUR currency▪ If repayments denominated in Euro, even projects in EU states without EUR possible

Risk

▪ Risks that can be assumed by SEEF• Credit risk of customer/technology partner• Non-substantial market risk (e.g. variable payments with a floor)

▪ Risks that cannot be assumed by SEEF• Substantial market risk (e.g. variable payments without a floor)• Currency risk• Technology/performance/construction risk

Tenor▪ Min. tenor: 5 years▪ Max. tenor: June 30, 2027

Without aggregating small projects into portfolios, it is very difficult to find deals

SEEF finances energy efficiency projects larger than € 2m but…



€50k

€100k

€200k

€150k

€50k

€50k

€150k

€50k

€200k

0

1

2

3

4

Tranche 1 Tranche 2 Tranche 3

Portfolio 1 Portfolio 2 Portfolio 3

in E

UR

mill

ion

Portfolio 1

With pre-defined contractual structure and counterparty selection criteria, it is possible to bundle various small-volume projects together. The Facility agreements are characterized by various financing

tranches to be deployed once the desiderable size is reached.

…small projects can be aggregated to reach the minimum volume

Project pipeline Financing framework agreement



Overview

▪ The Energy Service Company (ESCO) identifies projects withone or more customers and enters into one or more EnergyPerformance Contracts (EPC).

▪ The ESCO design, implements and operates energyefficiency measures taking over the technical / operationalrisk throughout the EPC life.

▪ After a DD process, SEEF finances up to 100% of themeasures through a customised financing structure andtakes over the credit risk of the customer.

▪ In most of cases, an SPV owned by SEEF finances the entireproject by purchasing a quota of the EPCs’ receivables.

▪ In such cases, the transaction is a true sale of receivableswith non-recourse, thereby enabling the receivables’deconsolidation from the ESCO’s books.

▪ Usually, the customer pays the contractual fees directly tothe SEEF-SPV’s bank account and the service component ispaid back to the ESCO.

▪ Industrial companies

▪ Public infrastructure

▪ Commercial real estate

Customer

EnergyEfficiencyMeasures

Credit risk

SEEF finances projects originated by Energy Service Companies, via non-recourse financing structures such as true sales of receivables

SEEF

▪ Developer

▪ Contractor

▪ Utility

ESCO

Market risk

Technical risk

Structure

With such scheme, SEEF successfully provides below-WACC non-recourse capital to fund EE projects’ CapexFor illustrative purposes only.



▪ Expertise in creating and adapting financing structures

▪ SEEF targets off-balance sheet solutions

Significant structuring expertise5

▪ SEEF can provide no recourse, long-term financing

▪ Fixed interest rate over financing period

▪ No upfront and commitment fees

Financing tenor and cost1

▪ Flexible amortisation structure

▪ Fast transaction process (2-4 months)

Flexibility and speed4

▪ SEEF usually assumes the credit risk of the customers

▪ There is no recourse on the ESCO in case of payment defaults

Outsourcing of customer insolvency risk 2

▪ SEEF finances up 100% of the project (including the ESCO margin)

▪ Refinancing is possible

100% financing or refinancing3

▪ Transformation of asset-heavy business (contracting) to low/no-capital service-business

▪ SEEF finances projects at conditions that usually are below the WACC, therefore contributes to improve capital based ratios such as RONA/ROCE

Release of capital and improvement of balance sheet ratios6

▪ Financing in the whole Euro-zone with one direct contact at SUSI

Multi-country / multi-site projects7

SEEF’s unconventional financing has many advantages vis-à-vis bank financing

The ability to invest over long terms with off-balance structures is our USP for ESCOs



Agenda




• True sale of receivables




True sale of receivables Overview

ESCO concludes a project contract with thecustomer with fixed payments (embeddedfinancial lease) due by the customer

SEEF will buy the fixed payments out of the projectcontract from ESCO

SEEF will assume the insolvency risk of thecustomer, which enables ESCO to argue that themain economic risk has been transferred to SEEF,hence allowing for off-balance sheet treatmentaccording to IAS 39 (“de-recognition of a financialasset”)

Customer can potentially apply partial off-balancesheet treatment: fixed payments to ESCO can bedivided into fixed assets (on-balance) andconsumables and services (off-balance)

Customer (public/private)

Project contract

Fixed payments

Sale of receivables

contract

Purchase price

Fixed paymentsESCO

True sale of receivables is an effective structure to achieve off-balance sheet financing for ESCOs under IFRS when the customers pay fixed fees



According to IAS 39, when an ESCO transfers both cashflows and underlying risks, the receivables are derecognized from its balance sheet

No

Has the entity transferred legal title of financial asset?

Has the entity assumed an obligation to pass through all or some cash flows from an asset?

Is the entity passing on a fully proportional share of all or specifically identified cash flows?

Has the entity transferred substantially all exposure?

Continue to recognise the asset to the extent of the exposure/continuing involvement

Step-1Assessment of whethercash flows have beentransferred

Continue to recognise the asset

Derecognise the proportion sold

Derecognise the asset in its entirety

Step-2Assessment of whetherrisks and rewards havebeen retained

Yes

No

No

Yes

No

Yes

Yes

Srouce: IFRS – IAS 39 De-recognition of financial assets



▪ The Notes can be structured to incorporate further projects without any additional difficulties; this will accelerate the implementation of similar projects in the future.

▪ The receivables arising from different sale-of-receivables agreements are automatically ring fenced in the SPV.

Sale of receivables is implemented through a securitization framework thus achieving both ring-fencing of the single deals and scalability of the model

ESCO (Seller of Receivables)

Lux SPV (Securitization Vehicle)

SUSI Investors

Debtors (ESCO Customers)

Scheduled Payments

Purchase of Notes

Quarterly Payments

Scheduled Receivables

Purchase Price

Performance / Savings Guarantee



Penalty

▪ To be paid by the ESCO if it does not fulfil its contractual duties

▪ Has to be “reasonable”, i.e. it should not lead to a termination of the ESCO agreement for minor issues

Receivables from Energy Performance Contracts can be securitized if a) identifiable b) certain c) protected from easy payment delaysConsideration

▪ Fixed payments: ✓▪ Variable payments (with floor): ✓▪ Variable payments (w/o floor):

Construction phase

▪ Paid up-front (high risk): ▪ Paid in tranches along the construction phase

(lower risk): ✓▪ Paid at the end of the construction phase (low risk): ✓

Credit & Contract transfer

▪ ESCO contract sets out the right to transfer receivables and to transfer contract (in case of a funder request)

Term

▪ Contract term is longer than six years

Delay payments

▪ Contract should include a delay interest penalty, which is market standard according to existing national laws

Withdrawal consideration

▪ If a customer withdraws from the ESCO contract, the customer has to pay the ESCO at least the outstanding nominal value of the future receivables

The adoption of this simple “wish list” could improve the bankability of EPCsAt the moment we see an entire ecosystem of contracts that rarely meet the list



Agenda




• Securitization of receivables




Service Contract & Operating Lease Solution Overview

The ESCO enters into service contracts with theend customers.

The assets are recognized on the balance sheet ofthe ESCO.

The ESCO is responsible for the technical/operational performance and receives (fixed)payments under the service contracts.

SEEF uses an SPV to purchase the assets and leasethose back to the ESCO.

Consequently the ESCO derecognizes the assets ofthe balance sheet.

The ESCO transfers leasing payments to SEEF’s SPVwhich is usually a certain fraction of the totalcustomer payments under the service contracts.

Servicecontract

Service payments

(incl. rent for equipment) Sale & lease

back contract

Purchase price

Lease payments

Customer (public/private)

ESCO

Service contracts in combination with a sale & lease back structure are off-balance for both the ESCO and the customers according to German GAAP



The legal transfer of ownership has to be well documented for each project in the portfolio with a separate agreement

Risk allocation• The credit default risk of the end client is assumed by SEEF and is partly mitigated by a first-loss-mechanism. • The ESCO retains the technical and operational risk and guarantees the performance of the EE project.

Transaction documents• Legal transfer of ownership of the tangible assets must be well documented to achieve the de-recognition.• Overarching framework agreement governs the major terms and conditions for the leasing of the assets.• 39 individual purchase and leasing agreements for the existing projects in the portfolio govern the specific

commercial aspects like e.g. purchase price, leasing payment schedule, detailed equipment ledger, etc. • Future/new projects will be included in the portfolio through the same framework agreement in combination

with further individual purchase and leasing agreements yet to be agreed between the ESCO and SEEF.

The existence of common documentation improves dramatically the Due Diligence speed, especially when there are different technologies in the portfolio



Due to lack of a standardization, energy efficiency projects are “bankable” only by niche players like SEEF

[…] energy efficiency projects do not yet meet the requirements of capital markets. The industry is just too

disaggregated. No two projects or contracts are alike. Securitization is not practical or possible under these circumstances. Say you have 1,000 energy efficiency projects. Standard & Poor’s would have to read 1,000

documents to assess the risk. Fees won’t pay for that level of review.

[…] Common documentation is essential […]

[…] The energy efficiency industry must start discussing securitization more seriously.

Michael Eckhart, Managing Director, Global Head of Environmental Finance and Sustainability @ Citigroup

In order to turn EE financing into a mainstream market, common documentation (across technologies) and adoption of EPC contractual standards are still needed



Your contact at SUSI Partners

Stefano FissoloSenior Vice President

SUSI Partners AGBellerivestrasse 36

CH-8008 ZürichTel: +41 44 386 98 20

Mob: +41 76 822 98 [email protected]



DisclaimerThis presentation is not an offer to sell or a solicitation of an offer to subscribe or purchase or a recommendation of any securities or interests referred to in this presentation and has been created by the SUSI PartnersAG (“SUSI”) to provide readers with general information in respect of its activities as the investment advisor for SUSI Energy Efficiency Fund (“SEEF”), a legal entity related to SUSI, exclusively for the benefit and internaluse of the recipient in order to indicate, on a preliminary basis, the potential and conditional feasibility of a possible financing transaction or transactions. The document may only be used for these purposes. Thispresentation incorporates third party information from sources believed to be reliable. The accuracy of such information (including all assumptions) has not been independently verified by SUSI and SUSI cannotguarantee its accuracy or completeness. Except as required by law, SUSI and SEEF, and their respective directors, officers, employees, agents and consultants do not make any representation, warranty or undertaking,expressively or implicitly, as to the accuracy, reliability, completeness or reasonableness of the information in this document and shall not be liable for any losses or damages which may arise from the access to orreliance on information contained in this document. The information contained in this document may be changed without prior notice. Past practices and performance of funds related to SUSI are not an indication ofthe future and SUSI does not guarantee any performance by, or return of capital from any investment in any existing or future funds related to SUSI. Nothing in this presentation constitutes a commitment from SUSI toprovide or arrange any form of financing or facility or otherwise imposes any obligation on SUSI or any of the entities related to SUSI.SEEF is an investment vehicle, operating in compliance with rules and laws applicable for Luxembourg SICAV SIFs. SUSI, and its directors, officers and employees have an advisor role and do not represent the SEEF andmay not make any commitment on behalf of SEEF unless and to the extent allowed by the applicable law and required by SEEF.

This presentation is only directed at persons falling within the following exemptions from the financial promotion restriction in s 21 of the United Kingdom Financial Services and Markets Act 2000 (“FSMA”): (a)authorised firms under FSMA and certain other investment professionals falling within article 14 of the FSMA (Promotion of Collective Investment Schemes) (Exemptions) Order 2001 Promotion) Order, (the “Order”); (b)high net worth entities (not individuals) falling within article 22 of the Order; and their directors, officers and employees acting for such entities in relation to investment; and (c) persons who receive this presentationoutside the United Kingdom, in accordance with applicable local requirements.This presentation is confidential and may not be reproduced, transferred, in whole or in part, to any other party, or used for any purpose other than the one herein without the express written consent of SUSI PartnersAG.

© Copyright 2017 SUSI Partners AG. All rights reserved

Off-balance Sheet Financing of Energy Efficient Infrastructure · SUSI Energy Efficiency Fund SUSI...

Documents

Transcript of Off-balance Sheet Financing of Energy Efficient Infrastructure · SUSI Energy Efficiency Fund SUSI...