Danish renewables major Orsted has revived a 20-year financing of around NT$65bn (US$2bn) for the construction of an offshore wind farm in Taiwan, betting further on its prospects on the island despite the strong headwinds it is facing from a decline in market value and a rating downgrade.
In mid-2023, Orsted put the latest Taiwanese financing on hold because of the planned divestment of a 50% stake in the 583MW Greater Changhua 4 project. The loan finances the construction of the wind farm, as well as the 50% stake sale to Taiwanese insurer Cathay Life Insurance, which was picked as the preferred bidder last October.
The return of the world’s largest offshore wind farm developer to the loan market follows close on the heels of S&P's downgrade of its credit rating to BBB from BBB+ in February due to higher leverage and increased industry risk.
Orsted says it has been facing "substantial challenges" that contributed to a net loss of DKr20.2bn (US$2.9bn) last year. These included cost pressures and interest rate rises that forced it to scrap two US wind projects off the southern New Jersey coast with a combined capacity of 2.2GW in November. Orsted's shares have fallen 35% in the past year.
However, lenders in Taiwan are taking a sanguine view of its prospects.
“While most of the terms on Orsted’s PF were finalised before the downgrade, we are not too concerned about the situation for now as Orsted is still the world’s number one wind energy developer,” said a senior loan banker from a Taiwanese bank. “It has a quite good construction record in Taiwan and has already secured a very high level of local content on its previous projects.”
In late February, Orsted announced that it had completed the installation of all 111 wind turbines at the 900MW Greater Changhua 1 and 2a offshore project, making it the largest offshore wind farm in Asia Pacific by capacity and number of installed turbines, and the farthest offshore wind farm in the region. Orsted also co-owns Taiwan’s first commercial-scale offshore wind project, Formosa 1, that started commercial operations in late 2019.
Some lenders view the proposed involvement of Cathay Life Insurance in the Greater Changhua 4 project as an additional credit enhancement.
“Cathay Life Insurance is Taiwan’s largest life insurer with strong financial performance and capital strength, and we are confident that its venture into the offshore wind project will help manage the substantial industry risks,” said a second banker from a Taiwanese bank.
“In addition, Orsted’s divestment plans in other regions may also help it focus on the remaining investments in Taiwan and ensure a robust balance sheet,” the banker said.
The company is cutting planned investments by US$5bn over the next three years, pulling back from markets in Spain, Portugal and Norway, and cutting its 2030 renewable energy development target to 35GW–38GW from 50 GW.
State support
State-owned Taiwanese banks, which have typically been conservative towards highly risky greenfield projects, are expected to become more involved in Orsted’s offshore wind PF. Three of them – First Commercial Bank, Mega International Commercial Bank and Land Bank of Taiwan – are close to obtaining internal approvals, which would unlock a deeper pool of domestic capital for the sector.
“It would be the first time that three state-owned banks would participate in an international sponsor-led offshore wind farm, and it could set a good example for the large pipeline of offshore wind PFs in Taiwan,” said a third banker from a state-owned Taiwanese bank.
In late March, the country's National Development Council met senior managers from eight state-owned banks to encourage them to support the offshore wind market, and by extension Taiwan’s ambitious path to net-zero emissions by 2050.
But sources at the risk-averse public lenders have said they are yet to get comfortable with the construction risks involved as they lack the necessary expertise. This has slowed down their approval processes.
In the past few years, state-owned banks have taken part in only one PF from the offshore wind sector – a NT$45.2bn 20-year PF for the 300MW Zhongneng Wind Farm with Taiwan’s state-owned China Steel as the majority sponsor and provider of a letter of support.
Regulatory tailwinds
The state-owned banks looking to take exposure to Orsted’s PF will benefit from the support that the state-backed National Credit Guarantee Administration of Taiwan will provide to the project. Orsted is the first offshore wind developer to tap the Taiwanese export credit agency since its inception in 2021. The NCGA will cover 60% of the project's localisation content for 20 years, as one of the six ECAs for Orsted’s PF.
“Although NCGA mainly guarantees up to 60% of the financing, the overall guaranteed portion would be higher at 70%–80% as the other international ECAs would guarantee much higher portions,” said the third loan banker.
The NCGA also provides assurances to lenders about the coverage of potential cost overruns incurred as a result of delays to the offshore wind projects, helping ensure liquidity for the sector.
In July 2021, bankers had to shoulder a NT$6.54bn-equivalent incremental facility for the cost overruns due to construction delays at German wind project developer Wpd’s 640MW Yunlin offshore project.
Fitch also expects that NCGA’s scheme will mitigate the counterparty risk of offshore wind projects contracted under power purchase agreements with corporations and facilitate their project financing, it said in a report in February.
“We will wait and see how the NCGA works in practice for Orsted, and we hope the government will increase the guarantee portion to 80% to spur greater domestic involvement in offshore wind projects,” said a fourth banker from a state-owned Taiwanese bank.