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Mezzanine Financing for Wind Projects. Mark Henderson European Wind Energy Conference 28 February 2006, Athens. Investec. Founded South Africa 1974 Dual-listed in Johannesburg and London Market cap : c. €4.5 billion; Assets : €30 billion Assets under management : > €65 billion
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Mezzanine Financing for Wind Projects Mark Henderson European Wind Energy Conference 28 February 2006, Athens
Investec • Founded South Africa 1974 • Dual-listed in Johannesburg and London • Market cap : c. €4.5 billion; • Assets : €30 billion • Assets under management : > €65 billion • Acquired European Capital 2002 • Shareholder in Viridis Energy • Mezzanine in Power sector
What is Mezzanine Finance? Mezzanine (n), Italian: An intermediate level between floor and ceiling occupying a partial area of the floor space • “A middle layer of debt – below the senior debt layer and above the equity layer…” • “…Mezzanine finance shows characteristics of both debt and equity”. • “There is no strict definition of mezzanine capital” • “Mezzanine Finance” – general term to describe various financing arrangements that rank below the senior debt • Junior debt • stretched senior • Subordinated debt • high yield • Convertible • exploding
Why have Mezzanine Finance? Need for Project Sponsors • Reduce equity commitments • Over €5 billion new projects in Europe alone • Needs >€1billion equity everyyear • Plus need for new development funds • Fills funding “gaps”: • Development period 2 – 5 years per project • Periods until grants received • Bank vs. Sponsor base case Missing Funding: Covered by: Either – More Equity Or - Mezzanine DEBT Total Project Cost DEBT EQUITY EQUITY Sponsor Base Case Bank Base Case
Why have Mezzanine Finance? Benefits to Project Sponsors Leverage additional cashflows • Reduces equity requirement Less project equity required • Increases equity returns Not diluting equity • Maintains control
Structure Either Or: Sponsor Sponsor Mezz Co Mezz Lenders Mezz Lenders Project Co ProjectCo Senior Lenders Senior Lenders Intercreditor
Mezzanine: Characteristics • Ranking behind senior in cashflow waterfall • Second ranking security • But ahead of equity • May have conversion rights
Conclusion • Growing need with growing wind market • Benefits to Project Sponsors • Flexibility in structuring • But banks need flexibility in risk appetite