Currency risk mitigation via hard-currency denominated bonds

Oaxaca II Wind Farm

Context

• The Mexican government sought to increase its wind energy production and reduce its reliance on fossil fuels. The Mexican government set a goal of reducing the country's greenhouse gas emissions by 50% by 2020
• The government managed the diversification process of its energy mix via the Comision Federa de Electricidad (CFE), the state-owned electric utility that controls the issuance of USD-denominated power purchase agreements (PPA) in Mexico

Problem

• A combination of the 2008 financial crisis and increased currency risk associated with Mexican renewable energy projects caused various commercial banks to rescind debt funding from multiple project developers
• Mexico's wind energy industry was brought to a halt at just 85MW of installed capacity, well short of the c. 500MW required for the industry to reach scale
• In 2012, a developer-operator (Acciona Energia) that had been awarded a 20 year, fixed-price PPA found itself unable to refinance loans from its Spanish and French investors due to shrunken dollar liquidity

Innovation

• Acciona Energia (AE) sought to refinance its initial USD 350M bridge loan and attain long-term financing for the operation of its Oaxaca II wind farm
• AE re-financed its loan by issuing project bonds in the US bond market (therefore, denominated in USD), raising USD 148.5M, at a yield of 7.25%, maturing in 2031 at the same time its PPA with the CFE ends
• By leveraging the dollar-denominated PPA granted by the CFE, AE was able to list its bonds in the US bond market and mitigate currency risk for investors

Stakeholders Involved

• Acciona Energia (AE) – A global renewable energy, infrastructure and water services group that was awarded the power purchase agreement (PPA) for Oaxaca II-IV wind projects
• Comision Federal de Electricidad (CFE) – the state-owned electric utility of Mexico, which manages the PPAs for the wind industry
• Administradoras de Fondos para el Retiro (AFORE) or Retirement Fund Managers – Purchased 61% of the project bonds issued by AE

Results/Impact

• The Oaxaca II project bond issue (rated BBB) raised USD 148.5M, with 61% of the bonds being purchased by Mexico's pension funds (AFOREs1), 27% by insurance firms, 10% by hedge funds and the final 2% by commercial banks
• Mexico grew its wind energy installed capacity to c. 2000MW, generating USD 12B in investments and spillover effects on the local value chain that includes over 45 developers, equipment manufacturers and service providers
• Oaxaca II, III and IV wind farms produce electricity that covers 700,000 homes cutting CO2 emissions by 670,000 metric tons – equivalent to the cleaning effect of 33.5 million trees on the atmosphere

Key lessons learnt

• Government was faced with a volatile domestic currency and leveraged hard currency-denominated payment agreements to support fund raising for project developers seeking long-term, project specific investment, mitigating currency risk for potential investors
• The sale of project bonds to institutional investors e.g., pension funds, can serve as a catalyst for further investment in a given sector by offering such investors an opportunity to gain experience in nascent or immature sectors
• The provision of hard-currency guarantees is no panacea. Institutional investor participation in renewable energy infrastructure in Mexico relied on the presence of completed, operational, and revenue generating projects, and stable regulations