Restructuring and insolvency in the renewable energy industry: Q&A with Nick Middleton and Andrew Eaton

This Q&A explores the current trends in restructuring and insolvency activity in the renewable energy industry and considers the industry-specific issues and risks practitioners should be aware of

11 May 2022

Overview

1. Have you seen significant restructuring and insolvency (R&I) activity in the renewables industry in the last 12 months?

It is difficult to comment definitively on this due to a lack of reliable, available data.

Further, the renewables industry covers a wide range of technologies, each of which is at a different stage of maturity (and so each technology has its own operational and funding considerations). As such, it is helpful to look at R&I activity on a technology-by-technology basis.

One technology which in some cases has been under the R&I microscope recently is biomass. This is partly due to the difficulties in sourcing a consistent supply of good quality feedstock (the lack of construction activity in the early stages of the pandemic had a significant detrimental impact on the availability of waste wood, which traditionally accounts for a significant proportion of biomass feedstock). More generally, some biomass technology itself has (relatively speaking and in the context of how it is currently deployed) at times underperformed against forecast outputs even where there has been enough good quality fuel to run these biomass plants.

For further discussion of different renewable energy technologies, including biomass, see Practice note, Renewable energy: types of technology.

2. Are current trends in R&I activity reflective of trends you have observed in this industry in the last five years or have there been any significant shifts?

We have not seen any significant shifts when looking at R&I activity in this industry, except that a broader range of investors have come to market and investor appetite for distressed renewable energy assets appears to have generally increased. Often these investors have existing renewable energy projects on their books and so aim to use the expertise (and liquidity) they may already have to turn around an under-performing project.

3. The industry is facing the triple challenge of Brexit, COVID-19 and climate change. Are these factors changing the way R&I activity is being conducted in the industry?

Brexit, COVID-19 and climate change have not had an exceptional impact on R&I activity in this industry. The trends which those issues have caused in other sectors can largely be seen in the renewables industry (where applicable).

Generally speaking, investor appetite for renewable energy assets has increased since the onset of the pandemic, with investors looking to move away from assets which rely on footfall. Climate change and the recent volatility in the wholesale energy markets have put the spotlight on the renewables industry which can only help with future investment in renewable energy projects and also the technologies themselves (as subsidy-free projects become increasingly common).

For further discussion of the impact of Brexit, COVID-19 and climate change on the industry, see:

4. Where in the industry are you observing the most R&I activity and exposure?

As mentioned above in 1. Have you seen significant restructuring and insolvency (R&I) activity in the renewables industry in the last 12 months?, we have seen a lot of R&I activity recently in relation to some biomass projects.

Industry insolvency regimes

5. Please outline any industry-specific legislation and industry regimes relevant to managing insolvency or debt restructuring.

Generally speaking, renewable energy generation projects are not subject to a separate insolvency regime, so the usual corporate insolvency procedures, rules and regulations apply.

One caveat is that there is a 'project finance' exception to the general prohibition under section 72A, Insolvency Act 1986 (IA 1986) on the appointment of an administrative receiver by the holder of a qualifying floating charge. This exception may apply to certain renewable energy project companies where the relevant criteria can be met (such as, for example, the company having incurred 'a debt of at least £50 million for the purposes of carrying out the project' (see section 72E, IA 1986)). For further information, see Practice note, Administrative receivership: Project finance.

6. What impact is the Corporate Insolvency and Governance Act 2020 (CIGA 2020) expected to have on this industry?

We would not expect CIGA 2020 to have an outsize impact on this industry, when compared with other sectors.

Renewable energy projects tend to be operated by project-specific special purpose vehicles (SPVs) with a (relatively) narrow creditor and supplier base. As such, they are not an obvious fit for a standalone Part A1 moratorium or a Part 26A restructuring plan, although the flexibility of the latter tool means it should not be ruled out and it may well be useful for a larger project. For example, the restructuring of Abengoa in 2017 involved a number of different restructuring processes across various jurisdictions. While an English law company voluntary arrangement (CVA) was one of those processes, future restructurings in the industry might consider using the new Part 26A restructuring plan tool to deal with niche creditor holdouts. See Practice note, Part 26A restructuring plans.

Of the three headline permanent measures in CIGA 2020, the new prohibition on termination of supply contracts is likely the most relevant. There is potential for renewable energy projects to both benefit from (should a renewable energy project company enter one of the relevant insolvency procedures) and be hindered by (in that its termination rights as a supplier are now limited in the insolvency context) this measure. Though, as this will always depend on the circumstances, it is difficult to draw any firm conclusions at this stage as to where that balance will ultimately sit. See Practice note, Restrictions on terminating supply contracts in insolvency proceedings.

For an overview of CIGA 2020 and relevant primary and Practical Law resources, see Practice note, Corporate Insolvency and Governance Act 2020: toolkit and tracker.

Supply chain risk

7. Where in the supply chain are you seeing the biggest areas of financial distress and insolvency risk? How is this impacting business continuity and operations in the industry?

The general answer to this question is that the industry is not immune from the supply chain issues which the UK as a whole has been experiencing. A good example of the supply chain impacting on business continuity and operations is, as discussed above, the supply of waste wood and other fuel to biomass plants. There has been a severe shortage of supply, with suppliers routinely unable to meet their contractual minimum supply commitments. The fact that the issue is industry-wide and these suppliers are often small operations with limited creditworthiness means the options available to these plants are limited. Finding alternative supplies is very challenging and it is often not financially worthwhile pursuing the existing supplier for breach of contract.

8. How should industry participants seek to protect themselves against this risk to maintain supply chain continuity and resilience?

Unfortunately, as with all industries, there is no easy solution to supply chain risk. The right path will always depend on a number of factors, for example, industry competition or the level of exposure (both financial and commercial) a company has to a particular participant in the supply chain. And ultimately, there is no substitute for good supplier management practices.

One general point to add is that the renewable energy industry is expanding and diversifying extremely quickly, with new participants entering the industry every week, leading to increased competition. So, while this may not help with short-term, or market-wide, supply chain issues, it is worth bearing in mind that, in general terms (albeit there are always exceptions), the range of alternative suppliers is increasing all the time.

Acquisition opportunities

9. Please describe trends you are seeing in distressed M&A in the industry. What areas of opportunity are there for prospective buyers of distressed or insolvent companies?

We would not say that there are any dominant trends in distressed M&A in this industry, other than the general observation that (as mentioned above) the appetite for renewable energy investment opportunities is increasing.

As for opportunities for prospective buyers, the market in certain areas of the supply chain (for example, operations and maintenance (O&M)) is diversifying and maturing, and so cost savings or other efficiencies could be made there. A lot of the long-term project contracts (such as O&M contracts, power purchase agreements and feed stock supply contracts) will be quite historic, and the market now is very different to when those contracts were put in place.

10. Are there any industry-specific risks prospective buyers should be aware of? What actions can they take to mitigate these risks?

The key project contracts (for example, leases, O&M and power purchase) should be the focus of any prospective buyer’s due diligence. The transferability of those contracts and any change of control restrictions in those contracts have the ability to make or break a deal.

A buyer will also need their advisors to confirm that the relevant project holds the correct environmental and waste management licences (these vary from project to project and from technology to technology), and how and if they can be transferred (or if a new application needs to be made). The project’s planning consents should also be carefully reviewed to ensure the project is fully compliant.

Lastly, where an incoming investor envisages injecting new funds to finance any required capex to turn around a project, it would be worth checking that the additional capex work will not breach any of the existing licences or permits or require any new licences or permits (for example, where there is a need to build some additional storage or infrastructure).

11. How are sales of insolvent businesses generally structured in the industry?

We see both asset sales and share sales in this industry, with advantages and disadvantages to each. The choice will be dictated by the relevant circumstances and we do not tend to see one structure prevailing over another.

Where the relevant project holds an environmental or a waste management licence, the timelines for the licence to be transferred or a new licence issued should be factored into the transaction timetable (as with many regulatory approvals, this may mean a split exchange and completion is required for the transaction). The procedure for transferring an asset’s Ofgem accreditation should also be built into the transaction timetable.

For further discussion of M&A in the renewables industry, see Sector note, Power and renewable energy M&A: Q&A.

Approaching a restructuring or insolvency process in the industry

Restructuring

12. Can you outline any industry-specific considerations and risks in a restructuring process in these industries, from the perspective of both (i) a financially distressed entity in the industry and (ii) a creditor of this type of entity?

When looking at a restructuring of a renewable energy project SPV, the relevant considerations will vary according to the status of the relevant project (for example, is it in the construction phase or is it operational) and the underlying cause of the distress (such as cost overruns during construction, a dispute with a key contractor or an operational fault).

Where the issues stem from one particular project contract, project financiers will usually have the right to step in and remedy those. Where issues have arisen due to cost overruns or an operational fault, then the viability of any restructuring will hinge on the willingness of any investor (whether existing or new and whether debt or equity) to inject further capital.

Insolvency

13. Are there any industry-specific considerations and risks to be aware of when advising (i) an entity in the industry that is going through a formal insolvency process and (ii) third parties dealing with such an insolvent entity in the industry?

As mentioned above, understanding the key project contracts is of paramount importance for an insolvency practitioner when assessing a renewable energy project company. The status and position of those contracts (and their counterparties) will have a significant influence on the proposed strategy of the insolvency process. For example, have they been terminated or has termination been threatened? Are they assignable? Does the insolvency practitioner need to invoke the CIGA 2020 protections for supply contracts?

Further, as with any other manufacturing or infrastructure project, insolvency practitioners should be mindful of any environmental or other contamination issues at the site, given that these liabilities can be significant. Insolvency practitioners should check prior to their appointment whether the company holds any environmental or waste management licences and, if so, how they can be preserved and ultimately transferred. The relevant issuing authority should be consulted, where appropriate.

If you would like any further information, please contact Nick Middleton or Andrew Eaton.

This Q&A has been reproduced from Practical Law, with the permission of the publishers. For further information visit uk.practicallaw.thomsonreuters.com

Key contact

Andrew Eaton

Andrew Eaton Partner

  • Corporate Restructuring and Insolvency
  • Private Equity
  • Banking and Finance

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