Utility Week

Utility Week 6th December

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Page 19 of 31

Finance & Investment Market view Analysis Big bucks from mini-bonds Holliday's Way With many banks effectively closed for business, mini-bonds offer a good alternative to SMEs, says Gerry McGowan. E nergy Bonds are a fixed term three-year investment, secured on the underlying assets of Secured Energy Bonds plc, paying interest to bondholders on a quarterly basis at a rate of 6.5 per cent a year. Launched on 5 October, Energy Bonds have raised more than £4.5 million to date, and with the offer period set to close on 9 December, we are optimistic that we will reach our target of £7.5 million. Energy Bonds are unlisted, untradeable corporate loans, known in the market as mini-bonds. The first mini-bond to launch, in what is still a nascent market, was by King of Shaves in June 2009, with numerous wellknown brands coming to the market since – John Lewis, Claxton FX, Hotel Chocolat and Ecotricity included. Indeed, this source of funding has quickly become mainstream, the pace of recent launches increasing rapidly, with as many as five different mini-bonds on offer through October. Capita Asset Services has acted as the receiving agent and registrar on most of the mini-bonds launched to date, and the firm expects to see strong growth in the mini-bond market to continue next year, and the sector to hit £1 billion by 2017. Mini-bonds have proved a particularly attractive source of funding for companies with a large customer base. These companies have been able to market their bond to a list of prospective investors who recognise their brand, and as such have enjoyed a high conversion rate among customers warm to new products and services offered under the brand umbrella. Purchasing a list capable of delivering similar conversion rates would be very expensive indeed. The mini-bond is also much cheaper to launch than its cousin, the retail bond – listed, tradeable, corporate debt – making it a more appropriate instrument for many SMEs looking to raise funds but struggling to access finance via the standard routes. Most banks still unwilling to lend. When we elected to use the mini-bond market, foremost in our mind was cost, as well as the experience of several renewables companies to have gone before. The approach recommended by our then 20 | 6th - 12th December 2013 | UTILITY WEEK adviser, earlier this year, on the launch of our first mini-bond, was an approach that in hindsight was better suited to companies with an established UK customer presence, and while we were happy with aspects of our first raise, it was a learning process and fell short of expectations. Second time around we asked our existing UK partner, Solar Cells, to work with us on the raise. Solar Cells undertook an extensive qualitative research programme to determine what investors were looking for in an investment product of this nature and it was the findings from this study that underpinned our product design. We made security an absolute priority and designed a product that is ethical in every respect, completely transparent, with no lock-ins and fish-hooks hidden in the small print. Energy Bonds are secured on all of the assets and undertakings (present and future) of Secured Energy Bonds plc, a newlyformed and wholly-owned subsidiary of CBD Energy Limited. As a bondholder, this means an investor stands ahead of other creditors and has first call on the cash, income and assets of the company. The money raised will be used to fund the installation of solar systems on commercial rooftops and brownfield sites. The electricity produced will be supplied to UK businesses at a substantially reduced rate, which we expect to be about half the cost of energy supplied by the major UK utilities. Assuming Energy Bonds hits its target, we expect to build about 40 installations across England and Wales. Since launching Energy Bonds to the market, we have accelerated our development and construction timetable. The construction of our first project, a 148kWp solar installation on a farm building in Ipswich, is already under way and more than two months ahead of schedule. Over its lifetime the system will generate more than 2,400,000kWh of electricity and save more than 1.24 million tonnes of carbon dioxide, as well as saving £150,000 for the businesses concerned. Gerry McGowan is executive chairman and managing director, CBD Energy Nigel Hawkins sees mixed messages in National Grid's interim results. A lthough last week's 2013/14 interim results announcement from National Grid contained no surprises, the mixed messages that it conveyed were of real relevance to the UK utilities sector. First, group chief executive Steve Holliday announced a 7.7 per cent increase in National Grid's UK operating profit, which was boosted by a sharp increase in revenues from the France Interconnector. Importantly, both its UK electricity transmission and gas distribution profits were up, despite the fact that the first six months of 2013/14 were the first period of the recently concluded – and unprecedented in length – eight-year RIIO pricing review, which stretches out to March 2021. Overall, National Grid's UK regulated businesses accounted for over 75 per cent of its operating profit. Returns from electricity transmission were £614 million compared with £547 million in the comparative period in 2012/13. The gas distribution figures were £456 million and £408 million, respectively. In terms of gas transportation, the outturn was less impressive, with operating profit for the period at £133 million compared with £162 million previously. For investors, the overall message was reassuring. There was no pronounced fall in regulated revenues, which used to be characteristic of the first period of a new pricing review. Second, beyond National Grid itself, Holliday's trenchant views on the current state of UK energy policy merit comment. He confirmed that, whereas National Grid had been planning for new generation capacity of 6GW to be added by March 2016, the revised expectation had slumped to just 2.5GW. Indeed, given all the major uncertainties in the energy sector, this adjusted figure may itself prove optimistic. In addressing the lack of potential investors in UK generation, Holliday pinpointed the key factor as being "a function of the fact that they haven't got clarity around the framework in which they are investing at the moment". With all the ongoing discussions about

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