June 1, 2018 / 10:48 AM / a year ago

Tailwind for Taiwan Green loans

* Loans: Offshore wind farm projects offer multi-billion-dollar financing opportunities

By Evelynn Lin

Hong Kong, June 1 (LPC) - Taiwan’s ambitious plans for offshore wind farms are luring international project financiers with the promise of at least NT$400bn (US$13.35bn) in lending opportunities.

Underlining Taiwan’s commitment to the development of renewable energy, its government expects to auction two gigawatts of wind power capacity in June, in addition to the 3.8GW it already awarded in late April to 10 offshore wind farms proposed by seven developers.

“We estimate that the 10 projects need a total investment of around NT$600bn, and around NT$400bn will be raised from financial institutions. There is a huge potential of jumbo deals coming out in the second half of this year,” a senior loan manager at a state-owned bank said.

International developers, mainly from Europe, have flocked to grab lucrative wind farm development rights, seeking a foothold in Asia for a technology that has expanded rapidly back home.

Germany’s wpd has won two projects for a combined 1GW in the Yunlin and Guanyin regions. Denmark’s Orsted is the other big winner, bagging a contract to install 900MW capacity.

Copenhagen Infrastructure Partners, Canada-based Northland Power, Taiwanese state-run companies Taiwan Power and China Steel Corp, and Swancor Renewables are the other companies picked for developing the seven remaining projects.

Banks are bidding for a NT$120bn 15-year project financing for the two wpd projects with strong interest from domestic banks eyeing better returns than typically available in Taiwan’s loan market.

“These project financings offer much higher interest margins and pay a premium of 150bp–200bp over similar plain vanilla loans,” the first banker said.

Asia’s loan market has begun to welcome Green financings following the publication of a set of green loan principles by the London-based Loan Market Association and the Asia Pacific Loan Market Association in March. CHALLENGES AHEAD Taiwan has set a target of installing 5.5GW of offshore wind power capacity by 2025. While the green energy drive will provide promising financing opportunities for Taiwanese banks, the road is fraught with hurdles relating to credit risks, exposure limits, and potential political potholes.

Two financings for offshore wind farm projects point to relatively low participation from Taiwanese banks.

“We welcome the new lending business, but we have very little experience in providing non-recourse project finance and assessing credit risks for those financings. We need to cooperate with foreign banks and at the same time develop specific funding solutions locally that are suitable for Taiwan,” said the banker at the state-owned lender.

A NT$16bn 16-year loan backing Stage 2 of the Formosa I OWF, the country’s first commercial-scale offshore wind project, attracted only four domestic lenders. Danish export credit agency EKF provided insurance cover on the financing, which is in documentation and has eight international banks as leads. It follows a NT$2.5bn five-year club loan in May 2016 for Stage 1 of the project in which two Taiwanese banks and BNP Paribas participated.

“We see foreign offshore turbine manufacturers are seeking to comfort the local lenders by bringing in ECAs, but the standard international practice may not be entirely applicable to Taiwan,” said another Taipei-based senior loan banker.

Although Taiwan has relaxed regulations on lending to the sector to encourage investment in renewable energy, domestic banks could face sectoral limits as more jumbo financings emerge.

Another constraint for lenders is the long tenor on the financings, which goes well beyond the date for presidential elections in Taiwan slated for 2020. A potential change in government and policy around renewable energy poses risks to lenders committed to these wind farm project financings. VOLUME BOOST Nevertheless, the deals would add to the flow of financings in a year that has proven to be resilient for Taiwan, which was one of two loan markets in Asia to record significantly strong growth.

In the first quarter of 2018, Taiwan recorded 29 syndicated loans for a total of US$6.29bn, up 68% from US$3.73bn from 26 facilities in the same period last year, as top-tier and frequent borrowers launched sizeable financings to take advantage of the abundant liquidity and falling pricing.

That tally will get a further boost from jumbo loans that have followed and with the expected flow of wind farm financings. In April, Advanced Semiconductor Engineering wrapped up a NT$90bn five-year term loan backing its planned merger with peer Siliconware Precision Industries. It was Taiwan’s biggest and most successful acquisition financing with a blowout response from 35 banks in general syndication.

A couple of other big-ticket loans are in the market with LCD maker Innolux and its peer AU Optronics raising a combined NT$70bn.

Reporting by Evelynn Lin; Editing by Prakash Chakravarti and Steve Garton

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