Analysts at Moody's Investors Service say that rising investor interest in the European renewable energy sector is leading to refinancings, which could result in lower credit risk.
In a report published today, the analysts state that the credit risk could be lowered in particular for certain projects in Spain and Italy.
The study, called ‘Project Finance: European renewable energy assets poised for refinancing’, says that refinancing activity in the European renewable energy sector is on the rise thanks to growing interest from infrastructure funds.
“After a period of regulatory instability, lingering uncertainties over the extent of subsidy cuts in Spain and Italy, and European Union state aid concerns in France, have been resolved, creating further investor appetite,” it states.
“In Spain and Italy, a number of renewable energy assets built during the boom years were financed with short-term construction loans Intended, or required, to be refinanced in the early years of operations. Replacing this debt with longer-term finance on more attractive terms may mitigate some of the recent subsidy decreases in Italy and Spain.”
Moody's analyst Christopher Bredholt explained: "European renewables projects that have achieved successive years of strong operating performance may be able to refinance on more favourable terms, which could lead to a reduction in credit risk.”
However he added that “it is also important to look at fundamental project characteristics such as portfolio diversification, leverage, and regulatory and acquisition risk".
The report highlights that refinancing deals will also be influenced by the choice of financing structure. “Investors in a bond refinancing, where existing debt is repaid via a new bond issue, typically benefit from strong protection, including recourse to physical assets. In contrast, those who buy debt issued by a holding company owning shares in several projects may rank below lenders to the projects themselves.”
Moody’s points out that the rising demand for renewable energy debt coincides with an increase in refinancing opportunities, as existing loans expire, and as banks and utilities face pressure to sell their interests due to stricter capital rules and subdued power prices respectively.