With the low interest rate environment, changes to banking and money market regulation, an increasing local authority reserve position together with pension funds exiting their fossil fuel investments, councils are looking at the alternative investment class.
Warrington and other councils are achieving this by investing in green energy solar bonds which offer a viable alternative, fully secured and high yielding investment class.
In August 2016, Warrington invested alongside Newham and Thurrock Councils in a 60MW solar farm in Swindon which is the second largest in the UK. Recently they announced an investment with Onesource Councils in two 5MW solar farms in Wales and Shropshire.
The major reasons that we have invested in solar bonds is for security, yield, diversification / risk mitigation and ethical investment exposure. All the bonds we have invested in are fully secured asset back investments that are paying us a good investment return above what we would get in traditional investments. The appeal of the sector is perhaps evidenced by the recent Swindon Council public £1.783m solar bond offer that was oversubscribed a month before the offer closed.
Investing in solar bonds is no different to investing in any other alternative investment category. There are key due diligence factors that authorities need to consider
Confirm that you have the counterparty class in your treasury management strategy (TMS). This may seem obvious but we have been contacted by a number of councils wanting to invest in our bonds to date only to find out later that they cannot due to the counterparty not being in their TMS.
Talk to councils who have invested in this asset class before to seek their experience and advice.
The liquidity of these investments is generally between 1 – 5 year periods. Certify you have got the funds to invest for this period of time. Although the bonds can be liquidated sooner if required, a buyer would need to have been found first (this works the same way for property funds).
Accounting for this asset class needs to be determined. For the bonds we have purchased we have classed them as an investment and have determined this by taking advice from a number of national Big Four accounting firms. All the investing councils have agreed the treatment with their auditors.
Thoroughly check the security package underpinning the asset.
Ensure appropriate bond documentation is in place with an industry standard investment trustee and use a reputable and experienced bond organiser. For both investments to date we have partnered with specialist investment manager Rockfire Capital.
Ensure that there is a financial model and valuation report for the solar farms under consideration. The financial model should also have been subject to a full sensitivity analysis covering the major risks of falls in energy prices, increases in rents, falls in electricity output and increases in interest rates. This will establish that sufficient profit headroom exists to pay interest under all sensitivities.
In addition:
- Ensure a comprehensive due diligence pack of information should be made available on the proposed investment
- Pay a visit to the solar farm before you invest.
- Ensure that the due diligence pack has been compiled by reputable companies.
- Make sure the operating and maintenance contracts are in the due diligence pack and reviewed.
- Establish that insurance documents are included in the due diligence pack and are reviewed.
- Determine that investment reports are supplied to the authority on a regular basis.
- The Power Purchase agreements of the solar farm’s electricity will also need reviewing.
The considerations above may seem daunting to an authority considering investing for the first time, but the solar bond investment model is in effect a simple one that can be evaluated fairly quickly. Due diligence can either be carried out internally, independently or by collaborating with other potential funding investors.
Energy has become a big focus for many local authorities. Councils spend over £1bn a year on energy (this equates to around 3% of total annual spending) which has more than doubled over the last ten years. Councils are now taking the lead on the green agenda and green investment bonds can make an important VFM contribution to that journey.
Danny Mather is head of corporate finance at Warrington Borough Council
