wind denmark energy annual event 2015 financing of companies within the wind industry from a bank...
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Wind Denmark Energy Annual Event 2015
Financing of companies within the wind industry from a bank perspective
Torben André Petersen, Head of Branch RegionNordea
22 September 2015
The wind industry is growing but is also facing challenges- the industry is volatile and strongly influenced by political and governmental decision-making processes
Strong industry
drivers and growth
opportunities
• Clean industry fitting well into overall global political agenda: Reduction of emission of green house gasses
• High growth rates and positive prospects in many major markets, including China etc. • Technological development and innovation
• The increasingly lower cost of wind generated electricity
• State tax and financial incentives• However, substitution risk by alternative energy sources
Volatile and political
influenced industry
• The players face significant fluctuations in turnover and earnings as well as share price development
• Very large investments – long decision-making processes increase uncertainty• Political issues
• US: PTC-schemes for renewable energy
• Dependence on governmental subsidies
• Market, wind and environmental risks
Small and medium sized companies as sub-suppliers- sub-suppliers to the wind industry should strive to achieve a high degree of financial robustness
Value chain pressure
• The sub-suppliers in the wind industry are often family owned, small and medium sized companies
• One product company and/or one customer company
• Customers are typically large (wind) companies
• Seeking outsourcing opportunities in order to be asset light
• Increasing value chain pressure
• Low price and margin pressure from large customers
• Short deadlines of delivery
Financial strength
• Cost-efficient and flexible production setup
• The financing conditions and payment terms are under pressure from customers as well as suppliers
• Requirement of enhanced financial strength and strong balance sheet
High business risks in the industry- the risk profile of the industry requires a strong capital structure and balance sheet of the company
Strong capital structure
• The nature of the industry - volatility and political issues - implies a strong capital structure in order to absorb uncertainties and fluctuations in earnings
• Equity financing • The owner(s) and external equity investors• Willingness to share profits with your external investors
• Debt financing• Credit facilities on a daily basis (bank)• Working capital finance (bank)
• Other credit lines and financial instruments (bank and other)
Management and reporting
• Strong management • Extensive and deep knowledge about the industry and dynamics
• Financial reporting: Budget / forecast, including P&L, balance sheet and cash flow statements on a regular basis
• Financial policy and risk management
• Financial covenants
Debt capacity is determined by several factors - but a number of the factors could be influenced by the company itself
Good corporate governance
Competition and barriers of entries
The industry
Business model
Country and debtor risks
Finance policy andRisk management
Produktansvar
Private consumption and investments
Debt capacity
Earnings and cash flow (accounts and
budget)
Capital basis and ownership structure
A strong capital structure deemed important especially in industries where:• Competition is fierce, earnings
are challenged and low profit margins
• Significant fluctuations in earnings and working capital
• Important to maintain a high operational and financial freedom
Political issues / duties
Predictability and transparency
Working capital(fluctuations)
Internal factorsExternal factors
Debt capacity
• Debt capacity is not just a question of financial ratios, but a level which is determined by many factors
The industry
EBIT interest coverage
NIBD/EBITDA Equity ratio0
20406080
100120140160180200
DKKm
Strong earnings and balance sheet is crucial- debt capacity is very dependent on transparent earnings and strong cash flow
Ne
t in
tere
st-b
ea
ring
d
eb
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GældskapacitetDebt capacity based on key financial figures
Debt capacity and capital structure
• A significant debt capacity is crucial for achieving a strategic and operational freedom, and allows the company even better to cope with unforeseen events and changing market conditions
• Seasonal fluctuations and significant changes in working capital may also mean that there must be a certain cash position
NIBD
Level is too highLevel should not be increasedLevel is appropriate
Summary - Compelling industry characteristics- growing industry which due to the risk profile demands a strong financial position
Strong capital structure
• Strong capital structure is needed due to the nature of the volatile industry, demanding a high equity ratio
Strong industry drivers
• On the overall global political agenda: Reduction of emission of green house gasses
Volatile and political influenced
• Volatile industry in terms of turnover and earnings and globally political influenced
Value chain pressure
• Increasing value chain pressure from customers and suppliers
Financial strength • Enhanced financial strength and strong balance sheet
Debt capacity• Although debt capacity is more than number, it is very
dependent on transparent earnings and strong cash flows