The last number of years have been a very difficult environment for any company seeking to raise finance or funding and it is no different for companies in the renewable energy sector. Indeed, while the sector is generally an attractive one for investors, it has its own particular challenges when seeking to raise funds including the long lead-in time before projects become cash-generating and uncertainty over government policy and regulation.
There are a lot of positives in the sector, however, and even in the very difficult environment since 2008, many Irish renewable energy companies such as Mainstream Renewable Power and OpenHydro have managed to raise very significant amounts of capital.
So what are the different legal structures available for fundraising? Finance can be raised at both a corporate level and a project-specific level.
At a corporate level the following type of structures are common:
1. A straightforward ordinary share equity fundraising. This is where a new investor subscribes for new ordinary voting shares which has the effect of diluting existing shareholders. It is probably the riskiest form of investment from the point of view of the investor and, of course, dilutes the percentage shareholding of the other shareholders but avoids incurring debt and the complexities involved in providing security.
2. A capital markets transaction. An IPO may be an appropriate structure for a company which is reasonably established and perhaps cash-generating and markets such as the Developing Companies Market or the AIM can be considered for developing companies. The IPO market has not returned yet and there is a very significant increase in regulation and compliance involved in being a public company which would need to be borne in mind.
3. Corporate debt. This is borrowing at corporate level usually underpinned by security and group guarantees. It has the advantage of not causing any shareholder dilution. The security structures, however, can be complex to put in place.
4. Mezzanine finance. This is a structure where private investors will lend to the company by way of loan notes or preference shares generally with fairly high interest rates. It is often accompanied by a right of conversion into shares or an equity kicker.
The following structures are options at a project-specific level:
1. Project finance. This is borrowing at a project level where security is provided over the assets and future revenues of the project and is probably the most common form of project-based financing.
2. Equity investment. It may be possible to source an investor who will invest for ordinary equity at a project level rather than causing shareholder dilution at corporate group level.
3. EIIS investment. This is an equity investment at project level under the EIIS Scheme which will give the investors a tax deduction from their taxable income as long as the investment is held for three years. It can be an attractive way to raise funding but the take-up under the EIIS scheme has been much lower than the old BES scheme due to the high earners restrictions.
4. Mezzanine finance can also be introduced at project level.
Any company which is looking to raise finance should ensure that it takes good corporate finance and legal advice with a view to concluding a successful fundraising transaction.
Neil Keenan is a Partner and Head of Corporate at LKG Ballagh Solicitors.
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