AFRICAN HOLDCOS
Holdco financing structural features While there are a number of permutations of a portfolio financing structure , there are a number of key structural features typical to most portfolio financings that distinguish it from traditional PF :
• Holdco financing – The borrower is a holdco SPV that sits above the individual project SPVs in the structure such that the borrower is the owner of and recipient of revenues in the form of distributions from multiple project SPVs . With the borrower being a holdco with its only assets being the shares in the underlying project SPVs , the nature of the covenant package is typically targeted at and only applicable to the borrower holdco , and would not look down to individual projects : with the holdco lenders being asked to rely primarily on the financial covenants being tested on the financials of the holdco SPV only .
• Senior secured vs structurally subordinated – Portfolio financings can be done as a senior secured financing with the project SPVs granting upstream guarantees and security . These financings are more common for portfolios of smaller assets where the cost of getting project finance is not economic given the size of the individual assets .
Often , the construction of these small assets has to be financed initially with equity from the sponsor , with a plan to do a portfolio financing when these assets become operational , and are generating cashflows with part of the proceeds being returned as special dividends .
For portfolios that contain larger individual assets within them , holdco financings are done on a structurally subordinated basis with the project SPVs still retaining their own individual asset level project financings , which could include PF level mezz or junior debt with no interaction , for example through an intercreditor agreement , between the two sets of lenders and there is no asset level security granted in favour of the holdco lenders .
In these circumstances the debt service is entirely reliant on distributions from the individual project SPVs and so the lock-up tests and distribution policies at the project level are critical to the sensitivity analysis for the holdco debt .
• Debt platforms and operational flexibility – Typically one of the key advantages to sponsors of portfolio financings is the debt platform structure , with its ability to provide for individual projects and assets to be acquired and sold , and with additional debt to be raised on a pari passu basis without any existing lender consent ( s ) being required .
This is negotiated through a pre-baked “ permitted acquisitions ” and “ permitted additional debt ” regime , often augmented by some fixed parameters to determine what is and is not allowed to be part of the portfolio .
In this case the portfolio test will typically stipulate eligible technologies , jurisdictions , construction vs operational and fixed vs merchant offtake , expressed as a percentage of the total NPV of the cashflows from all the projects in the portfolio .
Key credit features There will inevitably be different sensitivities and credit features in any particular deal . However , compared with traditional project finance , there are a number of distinguishing features in a portfolio financing , notably :
• Diversification of revenue risk – Possibly the most important differentiating credit feature is the portfolio effect . By having revenue generated from multiple projects , the risk of default at the holdco level from any one single project is reduced . How significant the portfolio effect is depends on a number of factors , including : the number of projects in the portfolio ; the weighted average asset life of the different assets ; what proportion of the total revenue any individual asset accounts for ; the number of offtakers , and their respective contribution to the total cashflow of the portfolio ; how diverse the currencies are in which the offtake agreements / revenue streams are in ; the number of jurisdictions the portfolio encompasses ; what stage of the life-cycle the assets are in – ie construction , in operation with little or no track record , in operation with long track record , etc ; and the proportion of the platform ’ s cashflow being generated in jurisdictions that are considered lender friendly .
By way of example , having a large portfolio of operational projects in South Africa ’ s REIPPP will greatly reduce the operational risks of any single project causing a default under the financing but ultimately the entire portfolio still has a concentration of revenue risk in a single offtaker , being ESKOM in this case .
• Distributions and lock-up tests – Where the portfolio financing is structurally subordinated with asset level project finance in place below it , a key sensitivity analysis for the debt sizing and setting the financial ratios is the ability of the underlying projects to be able to make distributions up to the holdco in order to meet debt service at the holdco level .
Given the potential for multiple levels of holding company vehicles between the asset-owning SPVs and the holdco borrower , anti-layering and leakage provisions need to be appropriately enforced to protect the dividends moving up through the structure to provide the holdco lenders debt service .
This will be a key diligence feature at the outset , requiring analysis of the sensitivity on the lock-up tests under the project finance documentation , as well as detailed diligence of any shareholders ’ agreements and distributions policies within the articles of the project vehicles where the holdco does not own 100 % of all the individual projects , which is often the case in Africa – where a minimum percentage of local ownership may be required .
Where the relevant holdco is a minority interest in the underlying projects then even
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