Q&A with Barney Schauble, Chairman, Nephila Climate

Filmed By: Jen Neville
April 23, 2018

risk management

What role do financial products play in managing developers corporate deal risks?

Barney Schauble
Chairman
Nephila Climate

What strategies can developers use to manage the risks in corporate deals?

Barney Schauble
Chairman
Nephila Climate

Norton Rose Fulbright advises on global proxy revenue swaps for solar and wind

A cross-border team from global law firm Norton Rose Fulbright has advised Allianz Global Corporate & Specialty’s alternative risk transfer unit, together with its partner Nephila Climate, on a proxy revenue swap for the 98MW Susan River Solar Project and the 78MW Childers Solar Project.

These two transactions were a first of their kind not only in Australia but also in the global energy renewables market.

The Norton Rose Fulbright team spanning Sydney and New York advised on this transaction, drawing upon the New York team’s previous work with Allianz, Nephila and REsurety, Inc. to structure and document the first proxy revenue swaps for wind projects in the US. [read more]

Following the success of the Susan River and Childers proxy revenue swaps, the Sydney and New York-based Norton Rose Fulbright teams have recently advised Allianz, Nephila and REsurety on two proxy revenue swaps for the Lal Lal Wind Farm. Separately, the firm’s Melbourne-based project finance team has advised the financiers on the successful financial close of the Lal Lal wind farm, which occurred on 15 June 2018.

The structure of the proxy revenue swaps will allow the solar and wind projects to protect their revenues from the financial risks associated with uncertain production volume, timing of energy generation and future energy prices and present an exciting new development in financeable offtake opportunities in the Australian market.

Norton Rose Fulbright projects group partner in the US, Robert Eberhardt, commented: “The Allianz, Nephila and REsurety teams are pioneers in developing innovative, financeable risk transfer solutions for renewable energy projects. We appreciate having the opportunity to help them successfully close their first renewables transactions in Australia and to expand their product offerings to solar projects.”

Norton Rose Fulbright banking and finance partner in Sydney, Vittorio Casamento, commented: “We were delighted to be able to assist Allianz and Nephila to bring these new and innovative transactions to the Australian market. The strength of the NRF network was on display, as we were able to work closely with our colleagues in New York to implement these transactions in the Australian market.”

A separate Norton Rose Fulbright team advised the financiers, Export Development Canada, National Australia Bank, SMBC and Westpac, on the project. Norton Rose Fulbright project finance partner and lead partner on the financier team, Jo Crew, commented:

“It has been a pleasure to work alongside the financiers, sponsors and their respective advisors on another innovative deal for the project finance renewables market.”

The Allianz and Nephila client team was led by Robert Eberhardt (Partner, New York), Vittorio Casamento (Partner, Sydney) and Kelly Davies (Senior Consultant, Sydney), with assistance from Christine Brozynski (Senior Associate, New York) Shen Low (Associate, Sydney) and Christopher Vale (Associate, New York).

The financiers client team for the Lal Lal wind farm was led by Jo Crew (Partner, Melbourne) with assistance from Joanna Taylor (Special Counsel, Melbourne), Claire Whitney (Senior Associate, Melbourne); Celia Boyle (Senior Associate, Melbourne), Hector Sharp (Lawyer, Melbourne) and SuZanne Yap (Graduate, Melbourne). [/read]

Please tell us a little bit about the history of Nephila Climate?

There's really two parts to the history. There's our parent company, Nephila, which has been around now for a little over 20 years. It started investing in April of 1998. The parent company came about because there were concerns in the insurance market that there was too much catastrophe risk for insurance companies to digest. So in the early 1990s, there was this idea that you could package and distribute insurance risks, specifically catastrophe risk, to investors who could provide additional risk capacity. The reason that they would do that is you are paid more than the odds of a catastrophe to take that risk, and it doesn't correlate with broader financial markets, so that's how the firm started.

There were some transactions which were similar to that, that linked to temperature or rainfall. Nephila thought of that as a distinct risk. It's not the same as hurricane or earthquake, it behaves slightly differently. But investors may also be interested in what you can think of as weather risk, in addition to catastrophe risk. Thus, Nephila Climate became a new division within Nephila. But we've been investing in what you can think of as weather risk, on a specific basis, since 2005. [read more]

What would you say is Nephila's business model? And who are the investors that you had mentioned?

Our business model is pretty simple. On one side of our business are people who have risks that they would like to hedge. And historically, most of those companies have been insurance companies, reinsurance companies, owners of buildings, assets, homes, hotels who want to buy protection against something bad happening to their property. Then on the other side of our business are investors who are seeking some sort of new investment that's not correlated to broader financial markets: the stock market, the commodity market, the interest rate market. Our business is really standing in between those two things, people who are seeking protection and people who are seeking a not-correlated investment.

The same is true for the Nephila Climate part of our business. It's just that people are seeking protection against it being very hot or not being windy, in the case of a wind farm, or drought, in the case of agriculture.

Our investors are almost all global pension funds, so large, sophisticated, global pension investors who hold the investment as a small piece of their overall investment portfolio. They're institutions and they are looking to have a diversified portfolio of lots of things, not just their home equity markets or more conventional strategies.

At Nephila, we manage about $11 billion of total institutional assets across insurance risk and climate risk.

You referred to your platform as one of your competitive advantages. How does that work? And what are the benefits that the platform provides to your clients?

When Nephila began, it was really just a fund, and that's how many investment businesses start. But over time, what we realized – and I think what many people realize as they grow into these businesses – is that you need an array of different functions, not just internally but externally. So when we talk about a platform, what we mean is that internally we have people who are analysts who have backgrounds in statistics, energy markets, engineering, and meteorology who can help us think about risk. We have people who are technology developers and who are structuring experts from the banking or legal industries to help us design the right vehicles so you can have different vehicles for different investors who want different portfolio compositions.

We also have other capabilities. For example, we were the first of non-traditional insurance groups to be approved to have a syndicate at Lloyd's of London. So that gives us access to a different market, and a different structure, and a different vehicle. We have relationships with external companies. KKR owns a part of our company. Allianz is a long-standing strategic partner. When we refer to the platform, we mean beyond just some investment professionals. We have a whole array of internal experts to help make sure that we're providing the right kind of reporting to investors, risk analysis to counter-parties. And that's a big investment. That's an investment of our own money and capital. We also have over 150 people at Nephila as part of that internal platform. But then also those external relationships– we've been in the climate business for over 10 years and then the overall weather and catastrophe business for 20 years. The relationships that we have in terms of when we go to try to help solve a problem for somebody in Australia or talk to a pension fund in China- that overall platform gives us a lot of capabilities that you don't have just as a fund manager with a small staff.

What products does Nephila offer that are of particular value to wind, solar, or hydro energy projects?

Within our Nephila Climate division, within what we think of as our sort of weather risk strategy, we have a long history of working with owners of renewable energy assets. Because when you look at the core function of those businesses, as long as the technology is good, the turbines or the solar panels, the key driver of revenue in a power generation is obviously linked to weather.

Going back 15 years, we've had large risk-transfer contracts with companies in the hydro space in particular where, if they do not get rainfall or stream flow and have to then– but they still have to provide power to their municipal clients or even, in some cases, within their country. They have to then go and buy that power from somewhere else, and that's expensive. Over time, people in the hydro space – and this is becoming increasingly true in the solar and wind space as well – recognize that that variability and that volatility in their output is something that you can go and buy protection against. You can, for example, say if rain falls below a certain level or stream flow falls below a certain level, need to receive a payment as an operator in order to go and buy power or in order to go and take care of all the things you need to take care of, and you need to pay a premium for that or can exchange cash flows when the stream flow is high. You're generating excess power that you're then selling into the grid.

The core risk in wind, solar, and hydro energy projects is weather-related, and so we have a whole suite of products that we offer to owners of those assets, competitors to those assets, off-takers from those assets to try to remove that volatility.

That's great. Our publication consists mostly of renewable energy professionals, so we are happy to work with you and get the word out.

And I think that's important. You know more about this than I do, but I think many people in that industry are unaware that these tools exist. So some people are just through historical accident or through somebody who happens to have met somebody. But I wouldn't say that we're yet at the point where it's widespread knowledge or a commonly accepted tool to go and consider these types of restraints for alternative.

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Barney Schauble finance hedging