How X-Elio completed Japan’s largest solar sale

How X-Elio completed Japan’s largest solar sale – and what it says about the sector’s evolution

  • The largest deal in the Japanese solar industry
  • Requiring industry expertise and cross-border capabilities: optimizing the potential pool of investors created price tension and secured the best outcome for the seller
  • A deal-contingent FX hedge helped X-Elio to mitigate the FX risk

KKR-owned X-Elio is one of the world’s leading solar companies, with a portfolio of assets that span the globe. A key part of its strategy is to recycle capital from solid and stable operating assets into its pipeline of projects. Its recent successful sale of a portfolio of Japanese photovoltaic (PV) plants to institutional investors for around ¥75 billion ($700 million) – the largest deal in the Japanese solar industry – therefore not only represents a landmark for Japan but an affirmation of X-Elio’s operational model.

The backdrop to deal was by no means helpful. Japan’s solar market received a massive boost in the years following the Fukushima Daiichi nuclear disaster, according to the Nomura team in Japan. However, the boom was relatively short lived, partly because of the volume of new projects but also because of limitations in Japan’s power infrastructure (which was designed for steady supply from nuclear or coal generation) could not easily accommodate fluctuating generation from solar.

In addition, as in other countries, there have been steady cuts in solar tariffs in Japan in recent years. As a result, operational solar plants, which have higher guaranteed tariffs than new build projects, are more highly valued. Indeed, Japan has a number of unbuilt solar projects that have received permission but have yet to generate electricity. The portfolio being sold by X-Elio cleverly brought together seven plants, four (106MW) that are operational and three (81MW) that are expected to become fully operational by the end of 2018.

Moreover, X-Elio’s solid track record of building solar PV plants – with a generating capacity of more than 1.1GW in the US, Latin America, Italy, Spain, the Middle East, South Africa, Australia, Japan and Southeast Asia – was a potential attraction for buyers.

As Jorge Barredo, X-Elio’s Chief Executive Office notes, the company has a “continuous ability to develop solar projects internationally that are attractive to local players and other investors”.

X-Elio has secured tariff projects with an aggregated capacity of 1.3GW that are either under construction or in an advanced stage of development.

Finding the right buyer

X-Elio and KKR mandated Nomura as sole advisor for the asset sale on the basis of its sell-side strength in EMEA and Japan and expertise in the solar, utilities and infrastructure sectors.

“Given X-Elio’s geographical breadth, with its headquarters in Madrid and the assets in Japan, it was critical to coordinate cross-border activity among country and sector teams,” says Gonzalo Zurita, Managing Director, Country Group Iberia, Nomura “It was also important to have deep roots in the Japanese market, where we anticipated many of the interest parties would be based, but be able to reach out to international prospects as well through our global natural resources team.”

In the event, Nomura coordinated a number of teams globally to create a highly competitive cross-border auction. More than 60 Japanese and international parties were contacted and invited to participate in the process.

“By optimizing the potential pool of investors, we were able to create price tension and secure the best outcome for X-Elio and KKR,” says Alex Wotton, Executive Director, EMEA Natural Resources team at Nomura.

The winning bid came from a consortium of two Japanese institutional investors: a Japanese financial institution focused on providing innovative financial solutions and financial services, which has been active in supporting the expansion of renewable energy in Japan in recent years; and a local real estate investment company involved in urban development, residential properties and health and fitness projects.

As well as providing advice, Nomura structured a deal-contingent FX hedge for X-Elio, mitigating the FX risk between the signing and closing of the transaction and ensuring that the dollar value of the transaction was assured.

“X-Elio wanted to hedge simultaneously with signing, so Nomura worked extremely hard to obtain approvals as the deal was being structured,” says Maria Ana Richter, in EMEA Risk Solutions at Nomura.

Deal contingent hedging allows corporates conducting an M&A to lock in the cost of an acquisition in the purchase currency (and therefore guarantee its internal rate of return). Unlike using an FX forward to fix costs (which would have to be unwound if the deal failed), a deal contingent FX hedge has no payment upfront and offers the ability to lock in a forward rate. A small spread is added to pay for the hedge but this is only applied if the M&A is successful and the hedge is used. If it fails, the hedge disappears and there’s no fee.

A bright outlook

Despite the challenges of overcapacity in the Japanese solar market, it continues to offer considerable opportunities. X-Elio will further expand its Japanese portfolio, which currently includes secured tariff projects with a total installed capacity of 219 MW that are either currently under construction or in development.

“We continue to be committed to the Japan market through our existing assets under development,” says Barredo at X-Elio. “It is one of our key regions worldwide and our aim is to keep being a reference in the market.”

As the market evolves, further M&A activity in the Japanese renewables market is likely. Companies or institutional investors altering their footprint in Japan need to consider not just the dynamics of the market but how any deal is financed and risks are mitigated. Obtaining advice from a bank with an on-the-ground presence and long experience of the solar, utilities and infrastructure sectors in Japan is essential. And, as the X-Elio transaction demonstrates, it can prove valuable to work with a bank that has the capacity to cost effectively manage any risks between the signing and closing of the transaction.


    Gonzalo Zurita

    Gonzalo Zurita

    Managing Director, Iberia Country Groups

    Maria Ana Richter

    Maria Ana Richter

    Managing Director, Risk Solutions Group, EMEA

    Alex Wotton

    Alex Wotton

    Managing Director, Co-Head of Greentech Industrials and Infrastructure in EMEA


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