Energy Sector Corporate Finance – The Financing Decision

Meeting corporate finance objectives requires that any corporate investment be financed appropriately. Oxford Energy advises its clients on the relevant strategic financing options in the bank sector and capital markets to meet energy sector companies’ capital needs.

Today’s markets are characterised by an ever tighter regulatory regime for market participants (Basel II and III for banks, and Solvency II for insurers). In the past, substantial creditworthiness support of infrastructure projects was provided by sovereigns. This line of support is weakening both by factual decrease of sovereign creditworthiness and by EU restrictions on public debt.

New approaches to raise long term debt and committed equity are needed to meet the long term duration intrinsic to energy and infrastructure investments. Understanding the concepts and the logic of capital markets’ decision makers is essential to prepare successful bank interviews and convincing road shows.

Optimisation of the partly conflicting interests of shareholder value and minimisation of the probability of default has become an integral part of project and investment design. Debt is usually the biggest single coherent balance sheet item. Therefore understanding and controlling the rating process promises big interest cost saving potential. Understanding the nature of the asset over its life-cycle allows for long term financial modelling and for convincing investment stories and good rating results. Our dedicated Life Cycle Amortisation Module (LCAM) serves as a comprehensive decision-making tool in this regard.

The volume of long term debt that needed to finance new energy assets and distribution networks, necessitates to “think big”. Banks (and their regulators) are worried about balance sheet growth and risk concentration. Debtors are advised to tap the bond markets and address institutional investors not only locally but internationally. This inclines IFRS accounting and sustainable fund raising programmes like standardised Medium Term Note issuance programmes. Current market conditions do not allow issuing bonds with maturities that match the entire financing period. Consequently, issuers are exposed to a refinancing risk when their bonds mature. Thus energy companies need to become “frequent issuers”, and need to take this into account when designing their balance sheets. The role of the European Investment Bank (EIB) is certainly crucial, European project bonds could have an additional significant impact in this regard.

We frequently support Management to identify the “optimal mix” of financing—the capital structure that results in maximum firm value. We also advise Management on matching the long-term financing mix to the assets as closely as possible in terms of timing and cash flows. Managing any potential asset liability mismatch or duration gap entails matching the assets and liabilities respectively according to maturity pattern or duration. It therefore pays off to think in terms of life cycles also with regard to financing topics. 

We understand and manage the subsequent decision making process including market information requirements, rating processes and methodology, pricing policy, syndication approach and documentation needs.

Among others, we also devise the structure of the internal and external execution process for successful deal financing. Beside a benchmarking of which counterparties offer the most (cost)effective financing solution, Oxford Energy provides guidance as to how the decision making process of the capital providing institutions is structured. Oxford Energy will structure the communication with banks and other capital markets counterparts. On request, we can also accompany the negotiating and closing of the deal. Oxford Energy also supports the investor as sparring partner for avoiding negative surprises later on with regard to contractual „small print“.