Downing Reserve Power Bond – 7.6% p.a. fixed-rate secured bond

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This asset-backed Reserve Power Bond managed by Downing launched earlier this year. It seeks to raise £10 million to lend to reserve power projects that help the National Grid cope with the peaks and troughs of electricity demand and supply.

Downing will invest in projects only once they have acquired the site, secured planning permission and commissioned the works required for grid connection, thereby mitigating risk although this bond should be considered high risk, for experienced investors only. Two large projects have already been identified, in the West Midlands and North Wales.   

The bond aims to pay investors a 7.6% p.a. fixed rate of interest over a fixed-term. Capital should be repaid at the end of the bond period which is planned for 18 December 2020. Interest and capital repayment are not guaranteed. 

Highlights

  • Fixed rate of 7.6% p.a. (not guaranteed), secured on  UK reserve power projects
  • Fixed term to 18 December 2020 with early repayment possible from September 2019
  • Asset backed – bondholders have first charge over all the assets of the project companies 
  • Growing market – reserve power plants offer vital balancing services to the National Grid
  • Experienced manager in the energy sector and bond instruments
  • Equity sponsor in both projects identified
  • Maximum 65% loan to cost
  • 1.26x interest cover
  • Interest accrues from date of the bond certificate and is paid annually
  • Minimum investment £10,000

Read important documents and apply

Attractive fixed rate

Investment amount £10,000 £25,000 £50,000 £100,000
Interest rate (not guaranteed) 7.6% 7.6% 7.6% 7.6%
Gross interest earned p.a. £760 £1,900 £3,800 £7,600
Total gross interest earned over the term (Oct 2018 – Dec 2020) £1,647 £4,117 £8,233 £16,467

Please note: any interest you receive is normally subject to income tax, deducted at source. Please remember tax rules can change and benefits depend on circumstances. 

Interest is calculated annually to 31 March each year (pro rata where the bonds have not been held for a full year) and at the end of the term. Interest is paid on 4 April each year (or on the nearest business day). The first calculation period is to 31 March 2019. The date for the capital repayment is 18 December 2020. However, Downing may redeem the bond early from 30 September 2019, subject to 10 days’ notice.

Reserve power market

Downing will focus on reserve power plants, such as gas-fired engines, that can provide back-up power to the National Grid. 

In April 2017 Britain had its first continuous 24-hour coal-free period since use of the fossil fuel began. In the first quarter of 2018, nearly a third of all electricity came from renewable sources – only gas produced more. The UK’s power supply has been transformed.

However, renewable energy sources produce by nature intermittant outputs, whilst the National Grid needs to maintain continual grid stability and balance supply and demand.

Reserve power and energy storage systems could provide a solution. In simple terms, they collect excess electricity and store it so it can be used when needed, thereby helping the National Grid with the peaks and troughs of energy demand and supply.

Reserve power and energy storage are a growing market in the UK as we follow in the footsteps of China and the US, where deployment of energy storage systems is expected to nearly triple this year.   

How will the funds be used?

Downing Reserve Power Ltd (“DRP”) is a company set up to lend to companies constructing and operating reserve power facilities that provide balancing services to the National Grid.

DRP will only lend to project companies once they’ve acquired the site, secured planning permission and commissioned the works required for grid connection. An equity investor is expected to have completed due diligence and provided funding for this initial phase.

Once Downing makes the decision to lend, the project companies will use the bond proceeds from DRP to purchase gas-fired engines. From placing the order, the gas fired engines should take six to 12 months to arrive. During this period, the project company will monitor and connect the site.  Once the engines arrive they will be connected to the gas supply and the site can begin to generate electricity.

The project team will be responsible for maximising revenues from the generation of electricity and there will be a mix of contracted revenues with the National Grid along with trading energy in the wholesale markets.

Downing has identified two projects into which bondholders’ capital will be invested. 

The first is an 18MW reserve power plant in the West Midlands, consisting of nine gas-fired engines. Construction has started already and it is expected to start generating revenue by January 2019. The second project is in North Wales. 

Downing has a pipeline of other projects and bondholders’ capital may be deployed in other projects, but this is not guaranteed.

What protection do bondholders have?

Bondholders will invest in DRP and have a debenture over its loan book. DRP will lend money to project companies and will have first ranking security over all the project’s assets, including land, plant and machinery, primarily gas-fired engines. DRP will rank equally alongside other debt providers but ahead of equity investors. Bridging Trading (“BT”) is another Downing-managed lending business and is also involved in these projects. DRP and BT will rank pari passu. 

Downing expects to repay the capital to bondholders from either selling or refinancing the sites. It is hoped that, once trading data and performance is available, the sites will be attractive to potential buyers.  If the sites do not perform, they will be worth less and may not be attractive to a buyer or a bank to carry out the refinancing. In that case, DRP will be able to force a sale of the assets. Most of the value is expected to be in the plant and equipment.  There is a strong global market for second-hand engines.

Please remember, this is an investment. Returns are not guaranteed and capital is at risk. So, it should only be considered by experienced investors who can afford to potentially lose their money. 

The Financial Services Compensation Scheme deposit protection does not apply to this bond.

What experience does the manager have?

Downing has been lending to and investing in UK renewables and energy generation projects since 2010, deploying over £500 million to date. Projects include solar, hydro, energy infrastructure and anaerobic digestion. Downing is experienced in obtaining subsidies, tariffs and energy prices and managing construction projects and grid connections.

Downing Crowd launched in 2016 and has raised over £50 million. Around half of that amount was lent to 11 energy businesses across the UK. Downing has confirmed 100% success rate on its bond products with all capital – just under £30 million – and interest being paid in full and on time (September 2018). Please remember though there is no guarantee this will be the case in future.

Ed Simpson, Partner and Head of Energy and Infrastructure at Downing, will lead the team. He has 12 years of experience in venture capital and private equity with a focus on the environmental sector.

Risks

This bond is illiquid and not readily realisable and should only be considered by experienced investors. Capital is at risk. You should not invest money you cannot afford to lose.  The bond has limited diversification. 

The bond is technically transferable. However, there is no secondary market, so investors should assume it will need to be held for the full term.

The Financial Services Compensation Scheme deposit protection does not apply to this bond.

If this bond is held outside an ISA it will have income tax deducted at source, details of which will be available at the time interest is paid and annually. Please remember tax rules can change and tax benefits depend on circumstances. 

Read more details on the risks in the Bond Offer Document. 

Fees

There is no initial charge and no other fees directly payable by investors. 

Downing will receive an upfront and arrangement fee totalling 1.5% of loans made by DRP to the borrowers. It will also receive a fee of 2% p.a. on funds raised on the bond from DRP. This annual monitoring fee is contingent on investors receiving their capital back and interest paid in full.

The interest rate of 7.6% p.a. is the rate paid to investors after deducting the fees paid by DRP to Downing. In the event of a transfer, there is a £25 transfer fee. Downing will pay Wealth Club annual commission of 1% for arranging the sale, out of its own fees. Please see the Bond Offer Document for more details of the charges.

Our view

Reserve power is a growing market and we think this is an interesting bond offer. We find comfort in the fact that DRP will lend to projects which have already secured funding from an experienced equity sponsor. The due diligence carried out by the equity sponsor should help DRP lend to well-managed projects. One of the projects identified is expected to be revenue generating early next year so is quite advanced. Downing is an experienced asset manager and has a good track record in returning capital and delivering returns to investors although past performance is not a guide to the future. For experienced investors, this could be an interesting investment opportunity. 

Read important documents and apply

Wealth Club aims to highlight investments we believe have merit, but you should form your own view. You should decide based on the provider's documents and ensure you have read and fully understand them before investing. This review is a marketing communication. It is not advice or a personal or research recommendation to buy the investment mentioned. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination. 12 October 2018

The details

Type
Secured bond
Target raise
£10 million
Interest rate
7.6% p.a.
Term
18 Dec 2020
Loan to cost
65%
Minimum investment
£10,000
Deadline
30 Nov 2018