Thursday, 20 September 2018

The Green capital

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As ECM activity falters, bankers tip renewable energy to remain relatively healthy, 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 looking pallid 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. A government target for renewables to account for 27% of energy by 2020 far exceeds a European Union requirement of member states to reach 20% over the same period. The country 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.

Surprisingly enough, 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.

Performing in tough times

Though broadly down overall, renewable energy stocks have posted a noticeable outperformance compared with the broader market over the past 12 months. The European Renewable Energy Index is 14% lower over the year to March 16 while the DJ Eurostoxx declined 21.5% (see chart).

Deals are still challenging in the current climate and in spite of their relative outperformance, renewable stocks are prone to high levels of volatility (see chart), the result of 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.

Equities bankers pushing deals have also adopted a hands-on approach to pricing, introducing greater flexibility to the bookbuilding process to better respond to market volatility. Schott Solar, which began roadshows for its €500m IPO on September 8, delayed setting a price range, choosing instead to arrange a series of face-to-face meeting between investors and managers. Bookrunners Commerzbank, Deutsche Bank and JPMorgan believe that this could earn them a 50 cent boost to the eventual price. Few investors have encountered the concentrated solar power technology employed by the company, bankers argued, so a meeting with management would help educate them. Premarketing also coincided with a week of exceptionally shaky markets in early September, and a pro-active approach would doubtless ease jitters.

Bankers working on German equity capital deals for renewables companies have developed a habit of waiting until a week or more into the subscription period until setting the price. The measure appears to work, with a series of successful transactions pushed past the post in defiance of unprecedented market volatility, including a €315m, multiple times covered IPO from SMA Solar Technology and a €112m rights issue from Manz Automation, both in June, and a €54.3m rights issue by Solar Millennium in March. In each instance lead managers played the market by ear, waiting well 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 these deals acknowledged a deal in another sector would have been harder still.

A favourable political environment is driving investor interest in renewables. Political priorities across the world are 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 imminent prospect of a significant drop, has 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.

Yet experienced ECM bankers reject such concerns. Benign government policy and an established network of expertise, reflecting the country's head start in renewables development, mean the threats are insignificant, they said.

A note of caution

A bearish view comes from Goldman Sachs. In recently published research, it said German energy companies are overvalued and argued the market has failed to account for their vulnerability to cyclical economic downturns. The argument 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 said, 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.

The regime of government subsidisation in Germany means that in spite of the outlay, rooftop solar panels will save a household money, he said. 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. Consumer demand for renewable energy, therefore, is not economically sensitive.

The world 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. It 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 said. "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, stressing investor demand is as important as the advancement of local companies in attracting new listings. Many specialist investors are located in German speaking countries. Meanwhile, he said Spanish companies remain some way from posing a real challenge to their German rivals. "As most of the leading [environmental] 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.

High profile deals have not attracted significant numbers of new listings to their local markets in the past, said another ECM banker who led a number of bloc trades in renewable energy companies. Yet this may change as global patterns of demand shift: the Middle East is one potential centre for renewable energy listing.

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. China and Taiwan are likely contenders, with both projected to see in increase in local demand for alternative energy. If governments offer a more generous package of incentives they could start attracting listings away from Frankfurt.

But any serious challenge to German hegemony remains a distant prospect. Few experts harbour any serious predictions of an upheaval in the hierarchy of renewable energy industries, though over time the sector may fragment, with different markets becoming world leaders in distinct areas of the industry.

Until now investor demand has not distinguished between segments of the renewable energy industry, such as solar, wind or biofuels. There are few signs that the sector is about to divide into sub sectors, though technological advancements may make some more viable than others. Neither are investors concerned yet about alternative technologies that threaten to undermine the appeal of renewable energy: the revival of nuclear power and the development of carbon capture could yet give them pause.

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