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View Diary: How to keep on financing wind farms when banks have no money left. (147 comments)

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  •  We contribute what we used to (9+ / 0-)

    We take the usual project risks:

    1. that the project is not actually built, or that construction is delayed enough that it has a substantial cost that the investor has the right not to bear
    1. that the turbines perform less well than expected, because of poor design of the wind farms, technical problems not covered by available warranties or insurance, or because they break down more often than expected
    1. that the wind is not as good as was estimated;
    1. that the government of Aruba decides to change the price it pays over 15 years for the electricity

    These are understood and low, but they exist. If the project fail, then we will indeed have to come out with the corresponding amounts - which we are still able to do, it's just much less likely to happen than doing the funding and thus from a liquidity perspective it's a lot easier a commitment to make right now;

    The only difference is that someone else does the funding, and as that someone does not want to take project risk, we had to find an additional entity which (i) is willing to take project riks (ii) is an acceptable risk for the lender doing the funding and (iii) accepts to take the contingent risk on us.

    In practice, we initially were planning to work with that ECA from the start, but the usual way they work is that we would have done the full funding, and they provided a guarantee for their share of the risk. Given our funding difficulties, we found a way to revers that structure by bringing another bank in, with the ECA accepting to take risk on us instead of us taking the risk on them.

    •  Leverage (0+ / 0-)

      So the bottom line is that your bank has the money to make this loan directly, but there is some other investment with even lower risk it would rather loan the money on. So it's not loaning the money now, but rather will pay out that amount if the project fails, still a low risk.

      But that does sound like increased leverage, with your bank holding less in assets than it holds in total obligations. If its risks all come due, I suppose it's going to either borrow that money, or default/bankruptcy/etc.

      Which means the short answer to "how to keep on financing wind farms when banks have no money left" is the same as usual: "more leverage".

      "When the going gets weird, the weird turn pro." - HST

      by DocGonzo on Tue Dec 23, 2008 at 08:36:55 AM PST

      [ Parent ]

      •  Not really (7+ / 0-)

        We DON'T have the money to make the money directly. We're not making any loans right now. And the money that's made available to the project is made avaialble by an entity that's only willing to lend it to a AAA government-backed entity.

        The economy is being crushed by the banks not lending anything. Of course each bit of lending is "leverage", that's the nature of fractional reserve lending. But right now the banking system is not doing anywhere enough what would be needed by the "real economy" - so this structure here at least allows money that is parked in ultra-safe goverment bonds to be used in a productive way.

        •  How Do You Lower the Government Risk? (0+ / 0-)

          I'm still not sure how your bank improves the project, if you'll have to borrow the money if the project fails and your obligation comes due (or default). I suppose it's because the money you'd borrow ultimately comes from some other government than the Scandinavian one you're insuring, or a debt market in between. The Scandinavian government finds it politically easier to buy insurance from a bank in that position than to obtain a line of credit from the other government, or to sell more debt in the debt markets, directly by itself.

          Your bank's willingness to take that risk also tests the project's risk model against your bank's independent stakeholders, rather than just the Scandinavian government or the other direct players in the venture (the equipment vendor, the developer and the Aruban government).

          Other than the political benefits to the structure, the difference between this deal and a "normal" deal is that usually your bank would stand to lose cash, but in this case it stands to gain debt (or risk default at expense of creditworthiness or viability).

          "When the going gets weird, the weird turn pro." - HST

          by DocGonzo on Tue Dec 23, 2008 at 09:53:34 AM PST

          [ Parent ]

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