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Refinancing

Description

Refinancing entails changing or replacing existing lenders or the terms under which debt commitments have been established between the borrower and its lenders. Refinancing usually occurs when the borrower has the opportunity to negotiate better terms than existing ones, when additional funds are required (rescue refinancing) or when the loan matures but the borrower still requires financing (e.g., bridge financing).

 

Benefits

Refinancing has several advantages. In case of favorable change in market conditions, it can allow borrowers to obtain better terms, reduce the cost of their debt or change their capital structure. It can also be used to harness a decrease in the overall level of project risk over time. For instance, refinancing could intervene after solid operating performance has provided reassurance to investors as to overall levels of project risks. Alternatively, refinancing has also been used as a way to clearly separate the construction phase financing, from the operating phase financing, in order for project owners to reap the benefits of successful construction phase completion and benefit from improved conditions in the operation phase.

In some circumstances, refinancing may be an additional risk to the project if it is required to cover the full operation of the project, taking on the risk of deteriorating market conditions.

 

Case Study

IDB Invest refinancing solar photovoltaic projects in Uruguay

In 2013, the Government of Uruguay launched a 200MW tender program to attract private sector participation in the development of the country’s first utility scale solar photovoltaic (PV) power plants. By opening up the renewable energy sector to private ownership, the government aimed to increase the share of non-conventional renewable energy in Uruguay’s energy matrix, thereby easing the country’s dependence on strained hydroelectric power generation and costly, high-emission fossil fuel imports.

Between 2014 and 2016, IDB Invest, the private sector arm of the Inter-American Investment Bank Group, together with the Canadian Climate Fund for the Private Sector in the Americas (C2F), an innovative blended finance mechanism managed by IDB Invest, invested in three large scale solar projects in Uruguay (La Jacinta; Natelu & Yarnel; Casablanca & Giacote) to emerge from the tender program. Between 2018 and 2020, after the solar financing market for Uruguayan assets had matured and the projects had begun operating, the projects were refinanced in the international capital markets.

In 2018, IDB Invest provided an “A/B bond” financing structure to La Jacinta solar farm, where IDB provided a share of the refinancing for its own account (A loan) and a B loan issued by a special purpose vehicle which issued a senior note to institutional investor on the market (B bond). In the La Jacinta B bond, IDB Invest did not seek to refinance the C2F participation with the bond proceeds but rather restructured the sizeable C2F tranche specifically to ensure an investment grade rating for the issuance; a critical element in attracting the interest of a large-scale institutional investor. This refinancing structure helped the project to diversify its investor set, separate operation risk from construction phase financing and freed IDB Invest balance sheet for further investments. In 2020, following the successful refinancing of the La Jacinta project, the same “A/B bond” refinancing mechanism was applied to the Natelu & Yarnel project. This time IDB Invest refinanced 100% of the C2F participation with the bond proceeds as the market had matured sufficiently such that credit and pricing support were no longer necessary. Similarly, the entire financing of the Casablanca & Giacote project was refinanced in the private loan market.

The additional innovation in this case is that the IDB Invest took a systemic and strategic financing approach at the country level by investing in and monitoring multiple first-mover projects in parallel rather than a project-by-project approach, with a long-term view to support the viability of the sector in Latin America as well as capital market formation. The original financings included blended finance in standard project finance formats to support credit quality and project returns in the face of illiquid capital markets for these new assets, with limited commercial financing. Blended finance also supported the initial entry of institutional investors. As the solar market became more competitive, even outcompeting fossil fuel fired energy, the risk perceptions of institutional investors towards the asset class shifted. As a result, commercial financing – or more specifically, institutional capital raised in the capital market – evolved into a more competitive option and began to gradually replace the subsidization model. IDB Invest actively sought to refinance the projects not only to relieve its own balance sheet, but in service to its development objective of promoting capital markets for infrastructure development.


Additional Sources

Locations
Latin America, Uruguay
Year published
01 January 2018
De-risking tool
Refinancing
Risk category
Financial sector risk

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