Impact of COVID-19 on borrowers in the renewable energy sector

The spread of COVID-19 continues to have far-reaching consequences with falls in oil and power prices, business shutdowns, financial market downturns, and a shift to the “new normal” of social distancing. Despite this current flux in the financial, commodity, and labour markets, renewable energy assets – particularly those with long-term, stable, contracted cash flows – remain relatively more resilient in the face of such situations.

It is nevertheless vital that sponsors and developers in this sector identify and seek to resolve potential issues that may impact their renewable energy project financing schemes. Elgar Middleton considers the following to be such issues:

Liquidity and solvency

A combination of financial market distress, lower power prices, and supply chain disruption associated with COVID-19 may impact the near-term cash flows of some renewable energy assets – particularly those with pre-existing distress or a large proportion of uncontracted revenues. In certain instances, this may impact the sponsor’s ability to meet its loan obligations.

It is imperative that borrowers review their obligations and, if they have any concerns, engage proactively with lenders to discuss measures such as: extensions to short-term credit facilities, reduction in the repayment amounts, deferred scheduled payments – and in more extreme scenarios – seek to refinance their entire project finance loans.

Ratio covenant tests and other documentary conditions

Even if current cash flows do not result in immediate concerns, COVID-19 may have an impact on financial covenant tests typically required by project finance schemes. Borrowers should consider early engagement with lenders to discuss amendments or waivers to these clauses, as necessary

Other contractual positions in existing loan agreements which are becoming particularly relevant during these times include drawdown conditions on revolving facilities and reserve accounts, material adverse effects, representations and warranties, and events of default.

Market for project finance debt

In response to the current situation, borrowers who are looking at their capital structures and ways to optimise them or most effectively inject new funds – be it through bridge financing, revolving facilities, or replacing long-term debt, need to be aware of additional considerations.

We are currently seeing lenders reviewing key areas including downside sensitivities, the risk allocation between borrowers and key counterparties, and reporting requirements relating to future outbreaks.

It remains crucial for sponsors to structure resilient financial packages that consider these factors without jeopardising returns. It is also worth highlighting that the project finance lending market has not stalled, with deals continuing to progress during these turbulent times.

COVID-19’s impact on renewable energy projects and their financing remains uncertain and will vary significantly between projects. As this situation develops, Elgar Middleton remains keen to share real-time insights with our clients. If you want to discuss these topics further, please do not hesitate to contact us.