It's not a straight weighted average, as debt is typically for a shorter period than the duration of the asset (which is used for equity), so the calculation is 15-20 years of a mixed WACC, plus another 15-20 years of equity only, so it's a bit higher than your number. 3% would be a good approximation.
Obviously, absolute debt costs have increased lately as long term interest rates have gone up, so that number is currently trending up.
It means that you can borrow more money than the project cost to build - because the revenues allow it, once they actually exist and have much less uncertainly applying to their exact value: you apply a smaller debt service cover ratio, over a higher number, because the residual risks at that point are lower. Once the project is built, requiring sponsors to have "skin in the game" (the main reason for the leverage constraint) is less relevant - only the debt service capacity really matters for debt sizing.
When such a refinancing is performed, do you then usually add new loans or bonds on top of the old ones, or do you replace the debt side of the balance sheet with an entirely new financing structure? That is, a situation where the new loans are first used to repay all the old ones, and then used for e.g. a special dividend? Thus making it possible to switch the project from bank lending to bond lending, or the other way around?
It can be simply an improvement of existing terms (lower margin, etc) but yes, typically it will take the form of a new facility (debt or bonds or both) which is used to repay the existing debt, on better terms, and indeed to pay a dividend or the like.
No, they will lend only against firm revenues. You will not get >100% leverage with merchant revenues, but if you have fixed prices (FiT, CfD or otherwise), it's possible
Does this mean that the WACC for offshore wind is about 1.22 % ?
20 % equity share at say 5.5 percent and 80 % debt share at EURIBOR (about zero) plus 0.15 %, for a total WACC of (5.5*0.2)+(0.15*0.8) = 1.22 %
It's not a straight weighted average, as debt is typically for a shorter period than the duration of the asset (which is used for equity), so the calculation is 15-20 years of a mixed WACC, plus another 15-20 years of equity only, so it's a bit higher than your number. 3% would be a good approximation.
Obviously, absolute debt costs have increased lately as long term interest rates have gone up, so that number is currently trending up.
>100% leverage? How does that work?
It means that you can borrow more money than the project cost to build - because the revenues allow it, once they actually exist and have much less uncertainly applying to their exact value: you apply a smaller debt service cover ratio, over a higher number, because the residual risks at that point are lower. Once the project is built, requiring sponsors to have "skin in the game" (the main reason for the leverage constraint) is less relevant - only the debt service capacity really matters for debt sizing.
When such a refinancing is performed, do you then usually add new loans or bonds on top of the old ones, or do you replace the debt side of the balance sheet with an entirely new financing structure? That is, a situation where the new loans are first used to repay all the old ones, and then used for e.g. a special dividend? Thus making it possible to switch the project from bank lending to bond lending, or the other way around?
It can be simply an improvement of existing terms (lower margin, etc) but yes, typically it will take the form of a new facility (debt or bonds or both) which is used to repay the existing debt, on better terms, and indeed to pay a dividend or the like.
Right. So banks are willing to lend against the 'uncontracted' portion of the project, and lend against that?
Still, having 100% leverage, breaks principal agent theory :)
No, they will lend only against firm revenues. You will not get >100% leverage with merchant revenues, but if you have fixed prices (FiT, CfD or otherwise), it's possible
I'm member of WFO and have keen interest in CPPA for offshore wind in Europe
Thanks. I wrote an article on CPPAs not long ago: https://jeromeaparis.substack.com/p/cppas-are-a-regulatory-failure-big