Monday, 23 July 2018

Renewed enthusiasm

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As ECM activity falters, bankers tip renewable energy as a sector where deals are still possible leaving Germany well placed amid challenging markets. But as non German renewable energy companies advance, could Frankfurt's status as a listing hub for the sector be under threat? Chris Vellacott reports.

Deal pipelines are shortening fast but the renewable energy sector is regarded as a niche where ECM transactions are still possible in certain conditions.

With Frankfurt as the world's hub for renewable energy listings and its companies dominating the sector, Germany could emerge as a rare ECM bright spot amid the gloom that has descended over the rest of Europe.

German companies are world leaders in renewable energy; there is little doubt that its renewable energy infrastructure is better developed than anywhere else in the world. The proportion of electricity generated from renewable sources in Germany has almost doubled since 2000, from 6% to more than 12% in 2006. The government target that renewables account for 27% of energy by 2020 far exceeds a European Union requirement of member states to reach 20% over the same period.

Germany is also the world's largest producer of wind power which accounts for 5% of the total energy generated in the country. According to the German Wind Energy Association, installed capacity in wind energy is 20,622 megawatts, nearly double the amount in Spain which is widely regarded as a possible rival for Germany's renewables crown.

Figures from Germany's Federal Ministry of Economics and Technology show the country produces 39% of all the solar power generated globally, slightly ahead of its nearest rival Japan, which accounts for 38%.

Demand for additional capital among issuers remains robust, driven by projected growth in the industry as well as a desire to have the upper hand in any future wave of consolidation.

Meanwhile, investor demand has also emerged relatively unscathed from recent turmoil and the virtual shutdown in equity issuance. Renewable energy stocks have conspicuously outperformed the broader market over the past 12 months. The European Renewable Energy Index posted a 4.7% gain over the year to March 16 while the DJ Eurostoxx declined 13%.

Deals are still challenging in the current climate, however, and in spite of their relative outperformance, renewable stocks are prone to high levels of volatility, resulting from a combination of uncertainty about the regulatory environment and the viability of new technologies.

ECM deals in the sector are therefore characterised by relatively deep discounts as bankers push to attract investment. Despite high demand for renewables most deals still require a hands on approach by lead managers.

One recent transaction, a €54.3m rights issue by Solar Millennium, was completed successfully with close to 100% subscription, rendering plans for a rump placement of unsubscribed shares unnecessary. Lead manager Commerzbank played the market by ear, waiting until one week into the subscription period before fixing a price towards the lower end of initial expectations. But while weak markets required an active approach, bankers involved in the deal acknowledged a deal in another sector would have been harder still.

Driving investor interest in renewables is a favourable political environment, with political priorities across the world increasingly skewed to encourage development of alternative energy technologies. Germany is at the forefront of international moves to subsidise research and development of new technologies as well as domestic installation of equipment such as solar panels.

A stubbornly high oil price, with no sign in sight of a significant drop over the medium term, has also increased the incentive to develop alternative energies.

German companies are dominant at all levels in the value chain, from solar equipment suppliers such as Manz Automation, Roth & Rau and Centrotherm, to cell producers such as Q-Cells and Solarworld.

But upstarts elsewhere are vying for attention and speculation is mounting that other markets may start to attract business away from Germany.

ECM bankers with a grounding in the German renewables sector reject such threats to the country's hegemony, however. They argue benign government policy and an established network of expertise reflecting the country's head start in renewables development mean the threats are insignificant.

A bearish view comes from Goldman Sachs, which recently published research stating German energy companies are overvalued and that the market has failed to account for their vulnerability to cyclical economic downturns. Goldman focuses on manufacturers of solar panels for domestic installation, a sector in which German companies are well represented.

The current vogue for all things renewable, its analysts say, means investors have neglected threats to the revenues of such companies as Solon and Aleo Solar. A rooftop solar system costs up to €12,000 and therefore should be treated in the same way as other "big ticket" purchases such as cars.

Solar panel makers will logically behave like auto makers in an economic downturn, and Goldman consequently advises against holding German renewables shares until the economic outlook improves.

Carsten Klante, managing director of equity capital markets at Sal Oppenheim disagreed, arguing the regime of government subsidisation in Germany means that in spite of the outlay, rooftop solar panels will save households money. The sooner a consumer installs solar panels, the earlier they will recoup their investment whereas a car suffers instant depreciation of value.

"Regulatory incentives mean it is a different decision to buying a car which only loses its value over time," he said, meaning consumer demand for renewable energy is not economically sensitive.

What of the threat from advances in renewable energy outside Germany?

The €4.4bn IPO of Iberdrola Renovables, the renewable energy business of Iberdrola last December focused the attention of investors on Spain. Spanish power companies have made considerable progress in developing alternative energy capacity and Madrid may itself one day start to attract listings of renewable energy companies from elsewhere in the world.

Spain is not just a technological hub of wind generation and home to wind turbine manufacturer Gamesa, but also sits in the so-called "sun belt" of regions across the world where solar power is considered most viable for climatic reasons. Solar Millennium lists Spain as one of the principal focuses of a planned international expansion.

Spanish companies such as Iberdrola and Gamesa have also established themselves in the US which is widely tipped as an important growth market in renewables.

But the sophistication of a few utilities is unlikely to make Madrid a listing hub to rival Frankfurt, bankers argued. "There are some excellent companies in Spain… but a Spanish listing would not reach the same investor base as it would in Germany," said Klante.

Oliver Bruch, head of the equity syndicate at Commerzbank agreed: as important as the advancement of local companies in attracting new listings is the level of investor demand, he noted. Germany is the most mature market for renewable energy and many specialist investors are located in German speaking countries.

Bruch also noted that in spite of the rise of Spanish companies, they are some way yet from posing a real challenge to their German rivals. "As most of the leading renewables companies of the world are German, the likelihood is very high that Frankfurt will remain the world's hub for renewable energy listings," he said.

Another ECM banker who has led a number of bloc trades in renewable energy companies noted that high profile deals have not attracted significant numbers of new listings to their local markets in the past. However, that this may change as global patterns of demand shift and tips the Middle East as a potential centre for renewable energy listing, he conceded.

Middle Eastern economies, hitherto dependent on oil for power generation and the home of energy intensive industries such as water desalination, are likely to come under international pressure to reduce their carbon footprints.

The region also holds obvious potential for solar energy development given its climate.

Meanwhile, Asia is also commonly tipped as a potential hub for renewable energy companies with China and Taiwan identified as likely contenders. Both are projected to see in increase in local demand for alternative energy and a more generous package of incentives put in place by governments could start to attract listings away from Frankfurt.

But any serious challenge to German hegemony remains a distant prospect and few experts harbour any serious predictions of an upheaval in the hierarchy of renewable energy industries.

The sector may, however, start to fragment with different markets becoming world leaders in distinct areas of the industry. Up to now, investor demand has not discerned between segments of the renewable energy industry and allocations to the sector make no distinction between solar, wind, biofuels, or others. But there are few signs that is changing as certain technologies emerge as more viable as power sources than others.

Neither are investors concerned yet about alternative technologies that threaten to take the shine off the allure of renewable energy, such as the revival of nuclear power or the development of carbon capture. The latter, for example, would make coal an acceptable means to generate electricity by absorbing carbon dioxide emissions and putting them into storage.

"You would have to talk to real experts to find someone who would run away from a bloc trade from the technology point of view," one ECM banker said.

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