Utilization of Cash Flow Financing “Developing new, custom madesolutions, together”

President & CEO of Renova, Inc. Yosuke Kiminami

The Project Finance Department and the Business Incubation Department, VBI Promotion Division, Shinsei Bank, Limited Yuichiro Kawabe

Question 1

Could you please tell us about your businesses and how the relationship between Renova and Shinsei Bank started?

Kiminami: Renova specializes in environmental sector businesses with our three main businesses in mega-solar, plastic recycling, and environmental consulting. In the future, we are planning entry into other renewable energy sectors.
Our relationship with Shinsei Bank started when the Bank invested in us and became a shareholder when we were raising capital to invest in our first large recycling business. My first encounter with Mr. Kawabe was when we were developing our renewable energy business after the Great East Japan Earthquake.

Kawabe: I was introduced to Mr. Kiminami about six months prior to the launch of the feed-in-tariff system for renewable energy in July 2012, when there were only a few players in the mega-solar business. When I met Mr. Kiminami, Renova had already analyzed the risks of the mega-solar business to a considerable extent. It just do happened that Shinsei Bank had also conducted its own independent risk analysis and market evaluation of the mega solar business at an early stage from the perspective of a financial institution. We thought that collaboration between our two companies would be mutually beneficial, and started discussions.

Kiminami: Although we had developed a mega-solar power generation system and performed a sunlight analysis, we had not studied how to finance the project. The solar power generation business requires long-term financing so we thought project financing would be the optimal method of to raise funds. We are grateful for Shinsei to have started discussions with us prior to the launch of the feed-in-tariff system.

Kawabe: Approximately three months after I met Mr. Kiminami, around April 2012, the Business Incubation Department was established within the VBI Promotion Division of Shinsei Bank and I was made responsible for renewable energy businesses. At this time, given that the implementation of the feed-in-tariff system was well underway, management decided to include the renewable energy sector as one of its focus businesses. I think this was an excellent management decision which recognized the growth potential of this business sector at an early stage. We had already analyzed the risks of the mega-solar business, and we were confident in providing project finance to new players in the business.

President & CEO of Renova, Inc. Yosuke Kiminami

President & CEO of Renova, Inc.
Yosuke Kiminami

The Project Finance Department and the Business Incubation Department, VBI Promotion Division, Shinsei Bank, Limited Yuichiro Kawabe

The Project Finance Department and the Business Incubation Department, VBI Promotion Division, Shinsei Bank, Limited
Yuichiro Kawabe

The Project Finance Department and the Business Incubation Department, VBI Promotion Division, Shinsei Bank, Limited Shigehisa Murakami (Facilitator)

The Project Finance Department and the Business Incubation Department, VBI Promotion Division, Shinsei Bank, Limited
Shigehisa Murakami (Facilitator)

Kiminami: At that time, we did not have any financial know-how, such how banks view risk. We are really grateful to Shinsei for discussing the levels of the Internal Rate of Return (IRR), liabilities, and tenor with us.

Kawabe: Through such discussions, we were able to study the risks related to photovoltaic systems, risks of the deterioration of photovoltaic modules, and land usage risks. As a financial institution, Shinsei Bank provided Renova with information on financing structures and project-related agreements that would allow the successful launch of and the maintenance of stability in projects. Such sharing of information enabled both Renova and Shinsei Bank to make use of the shared information for subsequent projects. Additionally, we believe that this initial collaboration in establishing new frameworks as first movers is contributing to subsequent projects.

Kiminami: Traditionally, it has been difficult to select good module manufacturers. Prices vary between manufacturers. There are differences in prices between manufacturers, and there is a need to comprehensively evaluate manufacturers by taking into account quality, guarantee, and price. Shinsei Bank, on the other hand, did not approach the evaluation of manufacturers only from the perspectives of the scale and bands of the module makers, but focused instead on the performance of module makers. Performance has nothing to do with brand power. Because Shinsei Bank clearly separated these factors, we could conduct discussions with them very smoothly.

Kawabe: Project financing has very long durations so accordingly we need to analyze the innate risks of projects, such as the failure of power generation systems, and methods to mitigate these risks. As such, it is inappropriate to rely solely upon the credit worthiness of the corporation related to the project. As a general rule, we should give top priority to the stability of power generation systems including photovoltaic modules, and this idea is strongly reflected in Shinsei Bank's project financing policy.

Project finance
Project finance is a method of financing where a loan is granted for a specific project. In particular, the main source of repayment is the cash flow from the project. Collateral to be submitted to the lender is, in principle, limited to physical assets owned by the project or the related contracts. Out of the loans in project finance, those that do not permit lenders to request repayment from the sponsor are called non-recourse loans and those that limit lenders to request repayment from the sponsor are called limited-recourse loans.
Feed-in tariff system for renewable energy
Feed-in tariff system for renewable energy is a framework whereby electric utilities are obligated to purchase electricity generated from renewable energy sources (sunlight, wind velocity, hydraulic power, terrestrial heat and biomass) at a fixed price determined by the government for a predetermined period of time. The Renewable Energy Feed-in Tariff System started on July 1, 2012.
Renewable energy
Renewable energy refers to energy using such as solar power, wind, hydraulic, terrestrial heat, and biomass.
IRR stands for the Internal Rate of Return. It is the rate of discount at which the Net Present Value (NPV) of future cash flows exactly equal to the investment outlay. IRR shows the average yield in instances where future cash flows from the investment are not flat.
Module used herein means solar power generation panel.

Question 2

Please outline the Kikugawa Project, the first project with Shinsei Bank.

Kiminami: The Shizuoka Kikugawa Project covers two sites (Kikugawa Horinouchiya Solar and Kikugawa Ishiyama Solar). The total generation capability of the project is 17MW and the total cost is approximately 5.4 billion yen. The sponsors included Renova and its partner AEON DELIGHT CO., LTD., and Shinsei Bank granted financing for the project. We successfully closed the transaction in November, 2013. This project was originally planned because we just so happened to be operating a recycling factory in Kikugawa City. However, it turned out that the site was very difficult to utilize in the project because it turned out that there were over 100 owners with claims to the land. However, we started looking into the project with encouragement from the land owners and relevant parties who were very supporting of the project.
Since the project covers two sites, the necessary time and effort was doubled, and we obtained approval for the use of the land from all land owners after holding at least 10 meetings on the sites.

project Structure

Kawabe: I believe that it was in the summer of 2012 that we were approached for the Kikugawa Project and, honestly, I thought that the project could not be closed. However, Renova was able to successfully close the project, and I presume that the project members involved had to overcome many challenges in order to be able to do so. In many mega-solar financing projects that we have concluded in the past, most of the agreements related to the use of land and acquiring approvals necessary to launch projects were relatively simple. Renova expanded the possibility of mega-solar projects with complicated issues in regards to land usage rights and approvals.

Kiminami: Thank you. In fact, it took about one year to establish the business model after we approached Shinsei for this project. We decided to ask Shinsei to become the arranger for the project because it continued discussions with us, rather than declining the project in its initial phases.

Question 3

What are Shinsei's characteristics as shown in this project?

Kiminami: Frankly, the most helpful characteristic of Shinsei Bank is that we are able to have direct discussions with staff members who fully understand our project. Since our team is small and handling multiple projects simultaneously, we need to be swift in our operations. Shinsei was able to provide its opinions quickly, from the viewpoint of a bank, which was extremely helpful. Moreover, in regard to risks, Shinsei Bank made very reasonable decisions on minor matters which are insignificant from the standpoint of business operators, which enabled us to have, in essence, high-level discussions. It was in areas such as this where we felt that discussions with Shinsei were very smooth.

Kawabe: Like your company, our project finance team is small. Accordingly, our team members are responsible for the overall loan process, from sourcing to disbursement, rather than being in charge of specific duties only. They understand the overall process of their transactions, and this is our advantage as an arranger as it allows us to independently control transactions, make adjustments between relevant parties, and close transactions within a designated period.

Kiminami: Shinsei Bank being able to utilize this independent viewpoint was very helpful.

Question 4

What is the impression which you had of the Shinsei Bank Group through the initial investment in the Kikugawa Project?

Kiminami: Shinsei has a clear policy on position taking. In other words, the actions of front-office staff members are completely consistent with the Bank's policy. As a result, we were able to decide whether our plan was in accordance with the policy.

Kawabe: In the initial phase, as we had determined our policy regarding this initiative through sufficient discussions with management, we had a clear policy and mission going forward. All front-office staff work to ensure that their responses are quickly delivered, and are mindful of what they convey in their responses. This is possible because the front offices are "close" enough to management to have a shared understanding.

Question 5

The dawn of the mega-solar market is ending. Please tell us about the market outlook, including other forms of renewable energy.

Kiminami: We believe that the mega-solar market will continue expanding for the time being. This is because there are a considerable number of domestic projects for which facilities have been, or are being, approved, and the amount of work and number of financing transactions will increase for several years. However, if the purchase price (tariff) continues to decline, developments will become much more difficult. In such a case, the number of companies entering the market or continuing developments will decrease and the market will become a "professional market" where only players with expertise and track records can survive. The annual generation capacity of newly introduced mega-solar plants is currently 7-8GW, and we expect this to soften to 4-5GW. On the other hand we expect the government to shift their focus to the wind power, off-shore wind power, and geothermal power generation, and expect these markets to steadily expand in the future. However, all of these are sectors in which it will take time until groundbreaking can begin, and perseverance will be necessary in developing projects.

Tariff used herein means the purchase price under the Feed-in-Tariff system ("FIT" for short).

Question 6

Please explain Renova's future strategies.

Kiminami: We are planning to undertake developments that are of larger scale than that those of last year, and we are sourcing projects in this fiscal year even though the tariff is 36 yen. We will continue developments in the next fiscal year as well although the tariff may be approximately 32 yen. However, the number of projects for which income matches expenditures under next-year's tariff is currently unclear. For geothermal power generation projects we have started feasibility studies (FS). Although we are planning to limit the projects to developments of at least 2MW, we want to start construction for the first project as early as possible. We are also working on the development of certain off-shore wind power generation projects, and as there have been few domestic developments for off-shore wind power generation projects, we believe companies that establish an early track record will enjoy first-mover advantages. For this reason, we want to start our first development as soon as possible, and we would like to collaborate with Shinsei which we know is able to engage in such activities which require a sense of urgency.
In addition, we intend to consider entry into overseas markets in the future. Regrettably, Japan fell behind Germany and others in introducing the feed-in-tariff system. In Germany which took the lead in introducing the system, the manufacturers of various parts, such as power conditioners and platforms, and funds and developers with expertise, have entered overseas markets. In Japan, players including Renova have just started to get off the ground. However, in a way, we have been developed as a government institution, and therefore, we are determined to enter growing Asian renewable energy markets in the future as a company that represents Japan. From a medium-term perspective, we are planning a geothermal power generation project in Indonesia, a biomass power generation project in the Philippines, and a solar power generation project in Thailand.

Kawabe: Shinsei Bank's strategies are similar to those of Renova. Although we are currently focusing on mega-solar projects, we are examining other renewable energy projects, such as off-shore wind power and geothermal power, and environmentally friendly gas fired power projects as well. Although risks vary between projects, we can use the same knowledge we have accumulated for project risk assessments and controls. Shinsei Bank is determined to actively develop new businesses together with Renova as pioneers.

Power conditioner
Power conditioner is equipment for converting direct current provided by solar cell module to alternating current for home use.
Frame refers to a table or a platform on which the solar battery module of a solar power generation system is installed.

Question 7

Considering Renova's future challenges, what are you expecting of Shinsei Bank?

Kiminami: Currently, we are planning a large scale mega-solar project relative to the size of our corporation. We also intend on launching other renewable energy projects with high capital requirements, such as wind power and geothermal power. Although we do not have sufficient funds to finance these projects, we would like Shinsei to consider providing financing that is appropriate for our current growth stage.
This is one of the reasons why we asked Shinsei Bank to become the arranger for the Oita Kokonoemachi Project on this occasion. It is important for Renova, which has limited capital, to take out financing with an appropriate structure. Shinsei Bank made a proposal that meets our needs and we would like Shinsei Bank to continue enhancing their strengths to be able to continue doing so.

Kawabe: One of our important roles and challenges as a Bank is to support company growth. As one of our focuses as the VBI, we are actively evaluating the potential of early-stage companies and injecting capital where needed. Moreover, as with the recent Renova project we are actively evaluating project cash flows, rather than corporations themselves, granting cash flow-based financing in the form of participating in projects, and achieving growth together with project companies. In the future, we look to enhance these activities.

Kiminami: That is exactly what I wanted to say. We would like to receive true cash flow-based financing. Moreover, we would like access to leveraged financing. Growth companies tend to give priority to capital provided over the interest rate charged when receiving financing. I would like to ask that Shinsei Bank continues to keep this in mind. Additionally, in the process of developing new businesses in new sectors such as geothermal power and off-shore wind power that have little domestic precedent, we would like to study the businesses and develop expertise, including expertise of financing schemes, in collaboration with banks.

Kawabe: Shinsei Bank is actively developing expertise in project financing in order to be able to provide financing to renewable energy generation, including wind power generation, geothermal power generation, and biomass power generation projects, and is currently evaluation certain projects for investment. Further, we plan to provide more refined financing schemes for project financing for mega-solar generators with a proven track record. As a Bank and provider of financing, we are aiming to contribute to the development of the renewable energy business together with Renova.



In the text of this document, arranger means a party functioning as an organizer of the financial institutions who participate in the transaction. As a general rule, a financial arranger commits itself to grant the loan and, after agreeing on the basic terms and conditions of the loan with the sponsor and the borrower, solicits financial institutions that will participate in the syndicated loan. Also, a financial arranger negotiates with the sponsor and the borrower on the benefits and disadvantages by representing the lenders.
Corporate used herein means corporate finance/loan. Corporate finance means financing granted on the basis of credit standing of the company (borrower).