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A solar bond with a difference




By David Stevenson on 15th April 2016


One of the more interesting developments of recent weeks has been the emergence of mainstream asset managers within the alternative finance space. Just this week for instance AltFi reported that Octopus has launched its own peer to peer lending platform – the article is at http://www.altfi.com/article/1882_octopus_launches_p2p_product.

 

Octopus is a major player in the world of early stage investing, with market leading VCTs and EIS schemes. But one of their biggest competitors Downing beat them to the alternative finance space back in March with the launch of DowningCrowd, led by Julia Groves, ex head of the UKCFA and Trillion Fund. The website is www.downingcrowd.co.uk. The platform’s inaugural product was a one-year solar bond which managed to raise of £3.2m. 

 

While the launch of the P2P lending platform by Octopus seems like the bigger industry move, the Downing bond looks to be a great product, even if demand from IFAs means that it closes any day now. The box below has more details on the bond itself. In simple terms you’re being asked to lend money to a solar farm for one year for a rate of 6.25%.

 

Details on Bond

  • 1 year, 6.25% fixed rate bond
  • Interest: Fixed 6.25% including 'early bird bonus' in first 14 days, 5.75% thereafter
  • Instrument: Secured Bond
  • Term: 1 year
  • Available: mid-March 2016
  • Offer closes: 14 April 2016 (or sooner if target is hit)
  • Interest paid: 6-monthly
  • Capital repaid: end of term
  • Security: Debenture, holding first charge against Kenninghall Solar Farm, Norfolk
  • Total raise: £3.2 million
  • Investment amount range:  £100 to £100,000
  • Loan to value: Estimated at 44%

 

According to Downing, Kenninghall Solar Farm was connected to the grid in March 2015. The asset manager says that the “site had generated income of £500,000 as at 31 January 2016, which comprises proceeds from the wholesale of electricity exported into the grid, plus income from the sale of Renewable Energy Certificates (ROCs). The owner of the solar farm secured OFGEM accreditation, effective from 31 March 2015. This entitles the owner to receive 1.4 ROCs per MW of energy generated for 20 years. Changes to solar subsidies announced after the accreditation date do not affect Kenninghall. Downing has assessed its value of the farm at £7.2m, which would mean the £3.2m Bond has a loan to value (LTV) ratio of 44%. The Borrower’s estimated annual net income covers the Bond interest approximately 2.2 times.”

 

We have no way of verifying these numbers but on initial inspection this bond looks reasonable value. There are currently very few alternative finance products that offer a term of one year – peer to peer lending platform Ratesetter is one of the few to offer a 1-year account with an income level of 3.8%. In the past the UK Bond Network has also offered a one-year bond from Iwoca which paid 9% - but this bond is not currently available. Rival alternative finance provider Abundance also offers what are in effect bonds (actually debentures) on renewable assets but the terms on offer are usually much longer with a higher interest rate.

 

So 6.25% for one year looks a decent rate. There are of course risks with this kind of investment, including operational issues as well as the ever present challenge of government subsidy. What happens if the Uk government decides to change the rules for tariff subsidies? This has already happened and we think it extremely likely that it’ll happen again in the future. But we also think that the chances of a big change in the policy regime having an impact in the next 12 months is fairly low. There’s also some comfort given by the fact that Downing is a respected asset manager. The LLp is a long-established, FCA-authorised investment manager with over 90 staff and more than £700 million of assets under management. Its funds have invested more than £350m in renewable energy, including approximately £150m in solar energy. Crucially Downing has a long track record of working with independent financial advisors who are notoriously conservative about investing. Interestingly industry veteran Ben Yearsley, Investment Director at WealthClub, seems to be a fan of this new issue. Yearsley has a huge amount of experience in the VCT and EIS space and admits: “Like many, I have been pretty sceptical about crowdfunding to date. I haven't been convinced there has been enough due diligence or investment research available to enable the average investor to really assess the risks and rewards of the highlighted investments. Downing's new crowdfunding platform brings their heralded VCT, EIS and investment expertise to this exciting, but risky market, which can only be a good thing for investors.”

 

So in sum, this looks an interesting first crowd investment from Downing and as a bond it offers a reasonable return. But there are risks with solar projects, not least from operational issues and although the LTV ratio (loan to value) looks more than decent at 44%, these assets can change in value very suddenly. It’s also true that there have been more than a few solar bonds issued in the past by much less reputable businesses, pushing the bounds of investment legitimacy. But Downing is a respected asset manager with a good track record. Despite the provenance of the issuer and the decent rate, this bond needs to be treated as a potentially higher risk idea for the more adventurous, more sophisticated investor only.

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