The post-Fukushima opportunity

The shut down of nuclear plants post Fukushima, with only two out of the 54 reactors nationwide still operational a year after the disaster and a 30 percent reduction in generating capacity led to a rush of new entrants into the renewables space, both domestic and foreign firms, with solar power becoming a particular focus area.

The newcomers include the giant domestic trading houses such as Mitsubishi and Marubeni, local ventures with experienced staff such as NRE and foreign developers and financiers such as Gestamp of Spain and Goldman Sachs. Over 50 gigawatt of projects was announced in this initial phase, in comparison to the Government’s projected capacity of 50+ GW by 2030.

This was primarily driven by the high feed-in tariff of 42 yen per kWh set by the Government in June 2012. This tariff has since reduced, first to 38 yen/kWh in April 2013 and 32 Yen/kWh as of April 2014.

Concurrently the challenges of developing renewables projects in Japan became clearer. The terrain is often mountainous and levels of urbanization are high, thus suitable tracts of land are scarce. Permission to use agricultural land is difficult to obtain and requires local level applications and dealing with issues over title and subdivision.

In terms of financing, bank debt has been available from three distinct sources up to now.

First, the domestic Japanese banks have lent either to the big local players or to foreign groups with whom they have existent multinational lending relationships. They have offered the best terms, with interest rates of below 2 percent and the highest loan-to-values (LTVs). However, they have also typically demanded expensive Japanese equipment and engineering, procurement and construction (EPC) contractors are used.

Second, Japanese banks with foreign coownership such as Aozora have been willing to provide construction finance to foreign investors using non-Japanese equipment suppliers with interest rates of 3 percent plus, and LTVs which are significantly lower than those offered by the domestic banks.

Finally foreign banks were early testers of the market but struggled to provide financing as local lenders had the relationships, better pricing and a willingness to proceed without and the guarantees and other security package enhancements that foreign house typically insist on. However, this has changed recently with some foreign banks such as Deutsche Bank providing aggressively priced short-term loans to cover the typical 6 – 9 month development period.

This is where a potential opportunity may lie for private debt funds.

BANK DEBT SATURATION

Up until now investors have been focusing on developing renewables projects to operational stage, holding them for a number of years to demonstrate the project viability and then selling on to Japanese institutional investors such as pension funds or insurance companies.
The hope is clearly to sell to these longterm investors at a significantly lower yield. The first such disposal has yet to be achieved.

But now this market has become saturated with debt capital from the banks. Competitive pressure has squeezed terms to a point where debt funds with a higher cost of capital cannot compete.

This leaves true development capital financing for taking projects to the “shovel ready” stage, i.e. when the main developer takes over and the EPC contractor begins construction. This is where there is room for bridge financing from debt funds, and it seems likely that here
activity might pick up as the market regains some of its initial enthusiasm.

Still, for any foreign debt fund looking to enter the market the key will be to find the right local partner. This is going to be a very local market outside the big cities where it will take cultural nuance and negotiation to find the right projects. Without a local partner any foreign debt fund will struggle to successfully access this opportunity. Take advantage of all the hard work and mistakes made by foreign players up until now – and try not to repeat them.