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Feliz Navidud: A Case Study in Spanish Regulatory Risk and Investor Response image

Feliz Navidud: A Case Study in Spanish Regulatory Risk and Investor Response

Sunday, April 17, 2016


Most of the 22nd and 23rd December 2010 was spent making cellphone calls from the car in Norfolk, England.  The calls were part of an investor last -stand against Spain’s newest round of retroactive photovoltaic (PV) tariff changes. Investors had battled Spain throughout the spring and summer of 2010.  In September 2010, Spain had made minor retroactive PV tariff changes, which were slightly damaging to our investments.  We thought that Spain was done, but just three months later, on 15th December, it leaked that Spain was secretly preparing swingeing cuts to PV. This was not only bad for HgCapital’s and other funds’ investments, but also for HgCapital fundraising.  We had launched our second renewable energy fund in April 2010, which stood at €200 million through two closings; a long way from the €500 million target.  Regulatory risk had been the number one concern of investors. On 23rd December Spain took the plunge, making Christmas 2010 a “Feliz Navidud” for investors. It was a bitter foretaste of what was to come from Spain.


The Spanish renewable retroactive tariff change saga is well known.  Spain’s retroactive changes to all renewables have impaired at least €30 billion of equity investments and €40 billion of project finance debt.  No one is immune. Other countries have since followed suit; Italy most recently.  This case study does not recount the litany of injuries Spain foisted on investors. Rather, it looks at how HgCapital and other investment funds sought to prevent the changes and how we and they responded and are still responding.  It also describes how HgCapital modified its investment strategy and regulatory risk assessment and how we communicated these developments to our investors.

Timeline to change

Below is a timeline of Spain’s actions, which provides the context of HgCapital’s efforts and those of other investors.  

  • March 2010 –rumors of potential retroactive changes emerge. 
  • July 2010 – Spain alters wind and CSP (concentrated solar panel) tariffs, and cuts PV tariffs from ‘asset life’ to 25 years. 
  • December 2010 – Spain uses emergency decree to cut PV tariffs by 20 percent to 25 percent for three years. 
  • December 2012 – Spain imposes a 7 percent tax on gross power revenues, in effect a further 7 percent cut. 
  • February 2013 – Spain changes the inflation index for renewable energy, reducing expected tariff rate growth. 
  • July 2013 – Spain passes legislation that cancels the feed-in-tariffs (FIT) regime and replaces it with a RAB compensation system. 
  • June 2014 – Spain publishes tariffs under the new law, permanently cutting PV tariffs by more than 25 percent on average and reducing or eliminating tariffs for all other technologies. 

HgCapital’s response to the changes set out above in ‘Timeline to change’ is analysed in three phases:

  • Phase 1: Collective action to prevent changes.
  • Phase 2: International arbitration.
  • Phase 3: Financial restructuring.

In each of these phases, in addition to stage-specific actions, there were three constant themes:

  1. Valuation.
  2. Investor reporting.
  3. Implications for long-term investment strategy and regulatory risk assessment.

The key learnings from HgCapitals’ experience, which are discussed in more detail in this case study, can be summarised as follows:

  • Collective investor action is stronger than individual investor action.  This requires having strong relationships with other investors.
  • Consistent regulatory engagement is critical, not only directly, but through industry and investor associations and through local embassies.
  • Debt restructurings require substantial planning and early engagement.
  • Communicating to investors early and often and strong valuation policies are essential.

Collective Action

In early March 2010, one of HgCapital’s investors and another fund manager inquired whether we had heard that Spain was considering retroactive tariff cuts to PV projects. We had not, and it seemed incredible. HgCapital sounded out its network – other fund managers, its local partner, developers, lenders and trade associations.  The calls revealed that something was afoot, not just for PV, but for wind and solar thermal (CSP) too.  When HgCapital reached a leading international CSP developer, they confirmed that Spain was indeed considering cuts.

Energy is a regulated business.  The US IPP (Independent Power Producer) business in the 1990s had demonstrated that regular investor regulatory engagement was required, and that collective investor action is stronger than individual action.  With that experience, when HgCapital established its renewables team in 2004, regulatory engagement was built into our day jobs; participating in trade associations, meeting regulators and responding to consultations.  Building relations with other fund managers and investors was also part of the strategy.  This groundwork would be critical in the weeks, months and years to come.

HgCapital first used collective action in 2005 when the UK government threatened retroactive changes to the old NFFO (non-fossil fuel obligation) projects.  Several investors were mobilised to present a unified, joint response, which was instrumental in killing that proposal.

Having confirmed Spain’s intentions, HgCapital quickly confirmed the common interest of more than 15 investors in joining forces.  Some were considering separate, but not joint action.  The group decided that our pressure should be as investors; that is, as sources of foreign direct investment. This separated the investors from the local industry associations that represented PV equipment suppliers, project developers, operators, construction companies and investors, all of whom had different objectives.  The developers, equipment suppliers and construction companies were more interested in continuing to grow the market rather than protecting existing investments; many of them would have traded cuts for the ability to build more PV.  As investors, each member of the group was focused on protecting its respective investments, not with growth, which would be limited if retroactive changes were made.  Therefore, the investor message the group focused on conveying to Spain was that retroactive changes were not only bad for us, but for overall foreign direct investment.

The investors, sometimes as a group, sometimes individually, employed several strategies and tactics to deliver our message to government, including:

  • Preparing joint submissions to the Spanish government, signed by the group indicating the amount of capital at risk and the negative implications for Spain.
  • Engaging with the foreign services and embassies of several governments.  The investors (and underlying fund investors) came from seven countries.  Led by HgCapital, several group members explained to diplomatic and commercial staff at the Madrid embassies, as well as to diplomatic staff in their own home countries, that capital was at risk.  Several foreign governments became active allies in the fight.  With their relationships with Spanish officials, the embassy teams became a critical source of intelligence on Spain's plans and objectives.  They were also vital in helping investors shape messages that would have a greater chance of success. 
  • Requesting and holding a series of meeting with various Spanish government officials, including ranking officials in the ministries responsible for energy and the economy, and the Spanish President's office.  These meetings gave us opportunities to convey in person our message and gauge responses, and put real names and faces to the issues. 
  • Supporting the local renewable energy trade associations with detailed financial analysis of the impact of the changes being considered. 
  • Commissioning a survey of sovereign debt traders and fund managers outside Spain about how they would view the impact of retroactive changes on their willingness to invest in Spain and on Spanish sovereign debt costs. This resulted in a 15-page survey document showing concern over retroactive changes. 
  • Compiling data from the investor group on the total amount of capital invested, and the underlying countries from which the capital came.  This built up a picture for Spain that the retroactive changes being proposed would, if implemented, impact over 80 underlying pension funds and insurance companies from over 12 different countries.
  • Engaging the EU Commission, including providing them with detailed financial analysis of what was going on.  In many cases, the intelligence that the investors gleaned from our discussions with Spain and through the embassies was superior to the EU’s knowledge. 
  • Working with reporters from the international press to provide well-placed articles and commentary about the negative impact of Spain's retroactive changes. 

In the process, the group not only got its message across, but members forged strong working bonds with each other, and established an intelligence network that gathered and shared a level of information far greater than any investor could achieve alone.  Further, the size and the scope of the group gave better access to Spanish decision makers than any single investor would enjoy alone.  Looking back, the group met in person or by phone nearly every week. The group became effective in quick decision making to protect its interests.

Initially, investor efforts appeared to succeed.  In July 2010, Spain backed away from the worst retroactive changes under consideration and made some minor, but still retroactive changes.  The group was cautiously congratulating itself in October and November 2010 that the worst was behind us; that was until 15 December when news leaked to HgCapital that Spain was back at it old games. 

HgCapital reactivated the network and quickly confirmed that cuts were again on the table.  Unlike in the spring and summer of 2010, when Spain used the normal legislative and consultative processes, this time Spain employed an emergency legislative process that allows changes without public consultation. Furthermore, the changes could not be challenged by the private sector in Spanish courts.  They were trying to implement these actions in secret.

The investor group moved swiftly, this time focusing on the press and senior government officials.  The survey described above, which we had given to Spain privately, was released to the press.  Investors worked closely with several leading international financial newspapers to get our story out.  Originally, Spain had targeted 30 December 2010 as the date that the Spanish Council of Ministers would vote on the new retroactive changes.  We believe that the very public investor response to what was intended to be a secret process was critical to Spain’s decision act on 23rd December 2010, before the wheels of public opinion could turn. 

So the early investor victory was illusory, but it was clear that group investor action and the ability to mobilise opinion did have an impact on how Spain proceeded. 

Jumping forward to 2012, the new Spanish government reignited discussions of retroactive changes, not just for PV, but all renewables, including CSP.  When word came of new changes, the PV network was in place, but HgCapital reached out to wind and CSP investors.  Initially, the wind and CSP investors dismissed the rumours because, following the 2010 PV debacle, they received assurances that Spain was done with retroactive changes and that wind and CSP were safe. Our early warning system, however, gave us a quicker insight into the situation, which when communicated to the other investors allowed them to quickly realise that their investments were at risk too.  HgCapital encouraged them to follow the PV playbook. 

In the end, the retroactive changes of 2013 and 2014 happened, but collective investor action across the board may have mitigated some of the worst changes for some technologies.  For example, many wind and CSP investments did not see as great a reduction as PV.

The key learning is that it is important for investors to:

  • Keep in touch with regulatory developments.
  • Develop networks both within the industry and with governments, foreign and domestic.
  • Give an early read of possible adverse changes. 

It is also clear that working together as an investment industry had a stronger impact than any individual investor could have had.

International arbitration

With the 2010 changes made, the next question was what investors should do about them? There was a strong consensus among the PV investors that "this cannot stand".  Unchecked retroactive changes could lead other countries to follow suit and expose us to further damage.  Sadly, with the Czech Republic, Bulgaria, Greece and now Italy following Spain's lead, this concern has come to pass. The group strongly felt that holding Spain to account was critical for long-term stability and was required as a fiduciary for our investors. 

The means by which Spain made the changes – the emergency legislation process – did not allow investors to access the Spanish courts.  Further, as has been proven since, Spanish courts can show a tendency to defer to their government, meaning that local courts were not a solution.  In January 2011, HgCapital started looking at pursuing the matter through the EU courts and through international investor arbitration under the Energy Charter Treaty (ECT).  HgCapital spoke with lawyers, read cases and treatises and became convinced that the ECT was a viable avenue of recovery.

Unlike large infrastructure and oil and gas investments, PV investments are small.  Investment arbitration costs are substantial and therefore, in many cases, beyond the means of smaller investors. HgCapital went back to the PV investor group and found that some members were already thinking along the same lines and a core group was willing to proceed on a joint, shared-cost basis.  In March 2011, HgCapital and our local partner organised a day in which  eight law firms with specialist arbitration teams were asked to come to Madrid to pitch on the strength of our claim, and to set out their strategy and budget for arguing our case. While selecting a law firm, the group reached out to other investors. As a result, we received inbound interest from other investors who, hearing of our fight against the changes, wanted to join us in the arbitration.

The group selected Allen & Overy as counsel, but still had to figure out how to run the arbitration.  This would be the first multi-claimant arbitration under the ECT and, with 14 claimants who held PV investments with an original cost in excess of €2 billion, one of the largest claimant groups under any international investment arbitration.  With the group’s consent, the investors created a ‘steering committee’ to negotiate the terms of Allen & Overy’s engagement, agree how costs would be shared among investors and how to manage the arbitration and interfaces with the law firm. One can imagine the cost implications of 14 investors all calling and asking work of Allen & Overy, and the risk of delays in decision making.

The group settled on a funding and governance structure not unlike a partnership agreement, with a steering committee with HgCapital in the chair. The group also created and funded professional ‘Secretariat’ in Madrid to handle case administration, control costs and day-to-day coordination.

This is about all that can be said about the arbitration because the details of ECT arbitrations are confidential.  But the group works because of the relationships and trust built over time. A decision is expected in 2016.

Debt restructuring

The 2010 retroactive changes restricted dividends from HgCapital’s PV investments, but did not affect our ability to repay the scheduled project finance.  The 2013 changes were a different matter, however.  When it became clear that deeper, permanent cuts were coming, HgCapital began evaluating how to approach the restructuring of our six project financings, representing over 15 Spanish and non-Spanish lenders.

Restructurings are nothing new, but this was different.  It was not one lending syndicate and one project, but for HgCapital six projects, six project financings and six syndicates.  It was also an entire sector – hundreds of Spanish PV, Wind, Biomass and CSP loans with hundreds of syndicates would need restructuring.  There is and was no precedent.

During the summer of 2013, HgCapital interviewed creditor lawyers specialising in multinational insolvencies.  We spoke with large and small investment banks and restructuring teams; all to see how restructuring could proceed in these unique circumstances.  Our local partners and HgCapital started meeting our lenders, asking them how they were going to approach the coming restructuring tsunami.  It became clear that the banks knew it was coming, but they would not enter into detailed discussions until the final rules were known. That did not happen until July 2014.  But HgCapital and our local partners were able to determine how the various lenders would approach restructuring.

At HgCapital we started with the idea that the PV arbitration group and others could jointly hire restructuring advisors and lawyers to keep costs down, and present lenders with a more efficient way to restructure several projects at once.  As we gathered information, HgCapital discarded this method for two primary reasons: 

  • Although investors had common causes of action in the ECT arbitration, when it came to restructuring PV performance, debt levels and bank syndicates were too different and there were no management economies. 
  • We could not see benefits in joint action and concluded it was likely that joint restructurings would be based on the least common denominator – both in projects and lenders – which would not allow HgCapital to optimise the value in our investments.

HgCapital decided against retaining an investment bank. In more traditional corporate restructurings, the value of a bank advisor is its understanding of the bank credit committee process and senior relationships with workout.  But at least with the Spanish lenders, the PV loans would be restructured by the loan origination teams and because of the industry-wide need for restructuring, their relationships were less useful.

HgCapital decided to do it in-house, but we hired a Spanish project finance lender and based him in our operating partner’s Madrid office, where he leads negotiations and liaises with our local partners on a day-to-day basis.  With most of our loans managed in Spain, we became convinced that a day-to-day presence in Spain was required, as lenders in restructurings frequently call and request unscheduled meetings. The restructuring process is underway, and our strategy is playing out much as we expected following our year of groundwork.

Implications of response to regulatory changes  

So far, this case study has described what HgCapital and the other investors did, and are doing, to defend our investments.  Also important, however, have been the implications for how HgCapital acts and reports now and in the future. This section looks at the implications of our response to the changes in Spain on strategy, regulatory risk assessment, reporting and valuation.

Investment strategy

Spain’s 2010 changes came in the middle of HgCapital’s second renewable fundraising; very bad timing indeed.  We had already scheduled a team offsite in early January 2011.  We changed the agenda, spending two days on the implications for existing investments and how we would invest the new fund, and looking at the changes we would need to make to our investment strategy.

HgCapital’s strategy had always emphasised that the best power sector investments are the best projects – good wind, good technology and good financial and contractual structures.  But looking at this through the lens of Spain’s changes, we added another criterion – low cost renewables. Not necessarily unsubsidised, but less subsidy relative to other technologies.  This led HgCapital to focus on onshore wind, small hydro and biomass district heating.  Using this criterion, we ruled out offshore wind, CSP and new PV, despite regular entreaties to invest in Italian PV and Spanish CSP.  HgCapital also evolved a worst-case scenario screen: should all support be removed after a few years, could we still recover our investment in a reasonable period, even if debt had to be restructured. These elements have been part of our investment selection process since.


All investors are more attuned to regulatory risk in 2015. Energy is a regulated industry; regulatory risk comes with the territory. To better assess risk, HgCapital has tried to understand what combination of factors led to retroactive changes in Spain, many of which are macroeconomic.  This led to us creating a risk factor matrix, which compares a new country or new investment against countries and existing investments that suffered retroactive changes.  It started as a traffic light system, but is evolving into a weighted scoring system.  The factors include:

  • The amount of premium over conventional power paid for the renewable technology.
  • Whether the country has a history of retroactive energy or infrastructure changes.
  • The existence, power and independence of the energy regulator.
  • The transparency and scope of the regulatory change process (for example, Spanish Emergency Laws bad).
  • The independence of the court system and whether it has ruled against the government.
  • Whether there is an all-party political consensus on renewables or private infrastructure.
  • The ability of consumers to bear higher energy costs/relative energy costs to international averages.
  • The extent that local utilities are in renewables, and in the specific technology that we are considering.
  • Whether costs are to be passed on to consumers, or whether the Exchequer funding part of the costs.
  • Country credit rating and long-term outlook.

Looking back, had this traffic light system been in place, Spain would have showed lots of red lights; so too in the case of Greece and Italy before they made retroactive changes. 

Reporting and valuation

Reporting is easy; accurately tell investors what is going on. 

In the course of Spain’s ongoing injuries, HgCapital reported early and often.  In addition to the normal quarterly reporting, we updated investors on an ad hoc basis around material changes and developments in Spain as they happened, and before rules were finalised.  HgCapital provided extensive analysis on the financial impact on their investments, including on the ability to service debt. 

Valuation has been a challenge however. As with any fund manager, HgCapital reports the value of investments at fair market value.  Consistent with infrastructure and energy practice, we use the discounted cash flow (DCF) valuation methodology.  This presented several issues and challenges.

The initial 2010 changes – a reduction in tariffs for three years followed by an extension of five years – was not too hard; the cash flows just shifted out in time.  It was harder to decide what the appropriate discount rate should be because with the changes the market froze and we could not identify comparable transactions.  There were bottom feeders in the market with a wide range of offers, but no one was trading making it difficult to use a market comparable approach.  Ultimately, HgCapital chose a high discount rate based on a risk premium to Spanish sovereign debt. This resulted in early write downs.

When in early 2012 the Spanish Government announced that there would be more changes, and in July 2013 when they revoked the old tariffs but did not announce the new tariffs for over a year, HgCapital faced a new dilemma: what revenue line do we use?  We debated several assumptions – that the new tariffs would be equal to the temporary 2010 cuts, or higher or lower.  But this felt like guessing.  HgCapital decided to use the tariff and rules in effect on valuation date even though we knew changes were coming.  But we did so with an express caveat to investors that they would change with the final rules.  When the final rules were announced, we used the new tariffs and again wrote down the investments. 

The second valuation challenge was under the final rules it was clear that several projects would require debt restructuring.  The valuation question was whether to assume default and foreclosure, or debt restructuring.  One led to complete write offs, and the other to value worth playing for.  Because HgCapital had started discussions with lenders, focusing on how they would approach their sector loan books, we knew that they favoured amend and extend restructurings and would seek to avoid foreclosure.  We evaluated HgCapital investments to determine if they could be restructured within the parameters outlined by the lenders.  Having determined that they could, for valuations HgCapital presumed that loans would be amended and extended.  Several other renewable and infrastructure investors were also called to ascertain their approach to valuations when restructuring was necessary.  Most investors – including those outside of renewables – assumed that, absent disaster assets, valuation would be based on reasonable restructuring.

Because HgCapital’s investor-agreed that formal valuation policy should be based on DCF, we had to report on that basis, but to be certain we also engaged in a cross-check exercise by evaluating the scant recent comparable transactions in Spanish renewables, speaking with other fund managers about their valuations and using a probability of outcome and amount of proceeds method to value the arbitration.  These cross-checks supported the DCF valuation.  Some investors suggested combining the DCF valuations and the potential arbitration award that would determine a higher valuation.  Although this is supported by logic and good arguments,  HgCapital elected not to do so.

HgCapital learned, and continues to learn, a great deal from Spain’s destructive path.  For HgCapital, the key takeaways have been:

  • Collective investor action is stronger than individual investor action.
  • An information network is essential to get early wind of changes.
  • A broader, more comprehensive data and pattern-driven approach to assessing regulatory risk is needed.
  • Investment strategy needs to be reviewed in light of increased regulatory risk.
  • Forging strong industry and peer investor relations before changes occur is critical to developing the information networks and coordinated responses that are required to fight and mitigate changes.
  • Early engagement with lenders and investors about changes and what they mean is essential.
  • Approaching restructuring early, being prepared well ahead of the actual negotiations is critical.
  • Clear, early communications with investors, even if bad news, is rewarded, as is transparency in the valuation process.

Hopefully, HgCapital will never have to do this again, but if it does, we know what to do.

This Article originally appeared in the PEI/Infrastructure Investor publication “Infrastructure Risk Management: Assessing and Managing Dynamic Exogenous Risks” published in June 2015 by PEI

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Tom Murley heads the renewable energy team at HgCapital, which he founded in 2004 and which has raised over $1 billion in capital for EU renewable energy infrastructure, which is invested in over 70 wind, solar, hydro and biomass projects.  Tom has been investing in renewables since 1991 and has worked on over $5 billion of investments.  He is active in the industry, including serving as a non-executive director of the UK Green Investment Bank.