On March 19, 2020, CEE Legal Matters reported that Linklaters had advised Sovcombank on its arrangement of a RUB 5.7 billion domestic green project bonds issued by an orphan special purpose vehicle, SFO RuSol 1 LLC. We spoke to Sergei Kaduk, Executive Director for Securitization and Project Finance at Sovcombank, about the Issuance.
CEELM: To start, can you give us some details about the deal?
Sergei: SFO Rusol1 is the first in Russia securitization of Solar Power Stations’ receipts. It was also the largest ruble “green” bond transaction ever, at 5.7 billion rubles.
The originator of this transaction, Solar Systems, has built two power stations of 15 MW each in the Astrakhan region of Russia as part of Government Ordinance No. 449, dated May 28, 2013, “On stimulating renewable energy sources in the wholesale market of electric energy and capacity.” Under this Ordinance the investor receives guaranteed payments over 12-15 years to compensate his investments with a certain rate of return. With power stations being completed and set to start production Solar Systems was able to refinance its debt and leverage up with the help of securitization.
CEELM: Why did Sovcombank choose to take the lead on this debt issuance?
Sergei: Our main consideration was to break into the utility market and to create a new securitization class of assets. Virtually all new power generation in Russia is built using the same mechanism, called DPM. DPM – agreements for providing power – are the contracts under which investors get compensated at a certain rate of the returns of large commercial off-takers.
We securitized just 30 MW and the total new generation is over 1500 MW. Sovcombank has now a lead over bigger rivals such as Gazprombank and Sberbank.
In addition, our creative structuring (three tranches, subordination, etc.) has allowed for very low capital reserve requirements for investing in Class A. The Bank’s ROE from investing in these bonds was close to 100%. It is impossible to get these rates of return if you just provide a commercial loan to the stations.
CEELM: What would you say were the most complex aspects of this particular green bond issuance?
Sergei: Very soon we realized that we could not do a classic securitization because the true-sale of DPM contracts to the SPV bore a significant tax risk.
We had to create a synthetic securitization – something that had not yet been done under Russian law. We were able to effectively replicate a eurobond structure when bond proceeds are given in the form of a loan from the SPV to solar stations.
It also meant that we needed an unsecured bridge loan to facilitate the transition of pledged assets from the existing creditor, EuroAsian Development Bank, to the SPV.
CEELM: How did you split the legal work involved between your in-house legal team and your external advisors on the matter?
Sergei: We mostly relied on Linklaters' expertise and their team lead by Andrei Murygin to prepare all the necessary documentation.
The bank's in-house team mostly just reviewed the documentation. We paid more attention of course to the agreements where the bank was a party, such as the bridge loans, service and payment agent agreements, pledging the SPV bank account, and so on.
Solar Systems also hired Bryan Cave Leighton Paisner to help them understand and review the project documentation.
CEELM: And while on the subject, why did you turn to Linklaters for support?
Sergei: Linklaters is among the three major legal firms that have the most experience in securitization in Russia. They have knowledge not only in capital markets but also in project finance so their expertise was most relevant for such a novel and complex deal.