Capital Restructuring

Westmill Solar Capital Restructuring

Purpose

The capital restructuring is intended to:

• Ensure we have a strong capital base that reflects our intention to continue operations beyond 2036 and reinforces our status as a co-operative within the UK regulatory framework;

• Refresh our membership by enabling us to bring in new members who will receive a reasonable financial return, whilst respecting the terms of our 2012 share offer document and the expectations of members who joined Westmill Solar then; and

• Reduce future interest payments on our external lending and our exposure to high inflation / interest rates, as well as reducing the constraints in these loans on the development of Westmill Solar.

Summary

There are 6 steps in the capital restructuring as follows:

1. A targeted return of share capital to those members who desire a full or partial withdrawal
2. Refinancing our existing loan with Local Pensions Partnership Investments Limited (LPPI)
3. Splitting some of our remaining share capital into a ‘founders’ bond’
4. Providing a managed opportunity for members to transfer shares to the ‘next generation’
5. Repayment and refinancing of the 2019 bond – including ‘rollover’ option for existing bondholders
6. Fundraising offer of new bond and/or shares to existing and new members

We expect to implement the first five stages of the restructuring during 2024 with the final stage of fundraising taking place in the first half of 2025.

Frequently Asked Questions

Below are Frequently Asked Questions related to the Westmill Solar Refinancing proposals. If you have any additional questions, please email us at info@westmillsolar.coop.

Return of Share Capital

Why was a 'targeted' return of capital chosen?

Given the number and diversity of views expressed in the responses to the member questionnaire about capital withdrawals and future returns, the board felt that offering members the chance to choose how much capital they would like to withdraw and what proportion of shares they would like to convert to the founders’ bond was the appropriate approach to take.

As mentioned in the initial note on the proposals, based on the questionnaire responses we do not expect to receive total capital withdrawal requests greater than the 10% of share capital available so do not expect to have to spend significant resources prioritising these requests. However, we are aware of other situations where a similar targeted offer has been made and there are good examples we can follow to assist with this process, if need be.

Replacing the LPPI Loan

What are the ‘accelerated interest payments’ referred to? Why are they so large?

Summary:

The accelerated interest payments are amounts that would normally be paid later during the loan term but which are accelerated on an early repayment of part or all of the loan. Although these payments will impact our surpluses in 2024, the estimated £1.2 million discount agreed with LPPI is a substantial saving on what would normally be payable to them, and we also expect to refinance the LPPI loan with cheaper funding.

Further detail:

The accelerated interest payments arise because of the different ways in which Westmill Solar and LPPI calculate the interest and capital ‘split’ of our regular six-monthly loan repayments. Westmill Solar’s calculations assume the repayments in the early part of the loan incorporate a higher proportion of capital and a lower proportion of interest than LPPI’s calculations. This gives rise to a difference in the amount of the loan that is outstanding depending on which calculation is used – as noted each year in our annual report and accounts. However, during the latter part of the loan term the position gradually reverses and by the end of the loan the total amounts paid would be the same under both calculations. Consequently, the only situation where this difference of interpretation really matters is if some or all of the loan is prepaid (i.e. repaid earlier than expected) – when a balancing payment is required to ensure LPPI receive the full amount of the loan due. The amount owed to LPPI is also impacted by increases in the Retail Prices Index (RPI) in accordance with the terms of the loan agreement.

The previous prepayments of the LPPI loan in 2017 and 2019, as well as the prepayment made at the end of 2023, all included an ‘accelerated interest’ element. At the time of our initial discussions with LPPI last year, the board estimated that the accelerated interest payments on a full repayment of the loan at the end of 2024 would be over £2.6 million – and higher inflation rates would potentially increase this figure further.

To provide an incentive for the early repayment of the loan during 2024, LPPI agreed to reduce the amount payable by Westmill Solar by calculating the repayment amount based on the RPI figures from December 2021 and ignoring the (relatively substantial) increases in inflation over the past two years. Although the precise value of the discount can only be finally ascertained once 2024 RPI figures are known, we estimate it to be around £1.2 million, which is a very significant amount in the context of our loan – and not something that LPPI was under any obligation to offer.

Founders’ Bond Proposals

What is the proposed length of term of the founders’ bond?

The proposed term of the founders’ bond is 10 years from 31 December 2024.

What are the financial implications to members of reducing the ‘target’ share interest rate to 8% and introducing the founders’ bond?

Summary:

The founders’ bond is intended to bridge the differing views of our existing members whilst also ensuring that Westmill Solar moves forward with a single class of share capital. While there is some reduction in the overall financial returns to existing members, the proposals mean that more of our future surpluses are available for the development of Westmill Solar (which appears to be what the majority of members desire) and we can issue shares to new members offering a return reflecting the current financial risks of Westmill Solar’s business and market norms.

Taking into account all payments to date, if Westmill Solar continued to make annual interest payments of 12p per share (the board’s ‘target’ in recent years) and all remaining capital was returned in 2036, the board estimates that members would receive an IRR of 9%. If the capital restructuring proposals are implemented, the estimated IRR for those members who do not convert any shares into the founders’ bond is around 8% (assuming future share interest payments of 8p per share) and for those who convert half of their shares into the founders’ bond, the estimated IRR is approximately 8.6%.

Further detail:

Taken simply, those members who convert half their share capital into a founders’ bond might expect to receive a ‘blended’ annual interest rate of 10% (on the basis of the proposed 12% interest rate on this bond and ongoing annual share interest payments of 8p per share).

The 2012 share offer document referenced an IRR (internal rate of return) for members over the 24-year term of the project of 11% on the illustrative base case and in the range of 9-11% for most of the assumptions set out in that document. IRR is different from the annual interest rate and, in particular, takes into account any return(s) of capital.

Your board estimates that taking into account all interest and capital payments to date and on the assumption that Westmill Solar continued to make annual share interest payments of 12p per share until 2036 when all remaining capital is returned, members’ IRR would be just under 9%. Reducing the annual share interest payments to 8p per share and not introducing a founders’ bond would reduce the IRR to 8%. For those members who convert half of their shares into the founders’ bond, the inclusion of the founders’ bond as proposed increases the IRR to around 8.6%.

Given the terms of the 2012 share offer document and the responses to December’s questionnaire, your board believes that these founders’ bond proposals offer an ongoing level of return that is appropriate for retaining Westmill Solar’s existing capital base. In the light of the interest rates available for the refinancing of the LPPI loan, we believe that the ongoing 8% share interest ‘target’ is also the appropriate level of return required to attract the new capital Westmill Solar requires.

Is the founders’ bond eligible to be an IF-ISA investment?

In short, no. We have been advised that the founders’ bond (unlike the 2019 bond or its proposed replacement) would be classified as a ‘connected investment’ within the prohibitions set out in the ISA regulations.

What are the differences between the founders’ bond and the existing share capital?

Summary:

Although there are legal differences between the bond and Westmill Solar’s existing share capital, the founders’ bond has been designed to provide some continuity for existing members whilst facilitating Westmill Solar’s future development.

Further detail:

It is not possible for a co-operative to offer different levels of return on a single class of shares so creating a bond is the most convenient method of reconciling the needs and expectations of existing and prospective new members.

The founders’ bond will technically constitute debt of Westmill Solar rather than equity. As such, interest payments due on the founders’ bond will take priority over share interest payments to members and, should Westmill Solar be wound up, holders of the founders’ bond will receive their capital before any share capital is returned.

Because the founders’ bond is debt rather than share capital, holders are not entitled to a say or vote at AGM’s and other member meetings. However, all founders’ bondholders will also remain members of Westmill Solar through their remaining share capital and because of the ‘one member, one vote’ principle, members’ voting entitlements will remain unchanged.

Why is the return to existing share holders unable to stay at 12%? Could there not be a different class of rate being offered to new members and current members seeking to invest more?

Having different classes of share capital with different rates of return is, in theory, possible in a co-operative but we understand that the action taken by the FCA against West Solent Solar Co-operative a few years ago (which ultimately led to the FCA cancelling West Solent’s status as a co-operative society in 2021) was initially triggered after West Solent had sought to change their rules to enable the payment of different levels of return on different classes of share. The directors are obviously keen to avoid a similar situation arising with Westmill Solar.

The board believes that having a bond rather than a different class of share should avoid this problem and that introducing the founders’ bond is the most appropriate way to respect the different situations and expectations of existing and prospective new members. Having a single class of share for existing and new members also means there is greater equality of treatment between members, which is a key co-operative principle.

I agree with widening the demographic of the co-operative, but I do not think this should reduce benefits of current members. How does the Founders' Bond help with this?

This (and the practical need to refresh our ageing current membership), is why the board has been investigating new capital structures with the goal of enabling a more open membership whilst meeting the expectations of our current membership. Getting the right balance is difficult. As a democratic co-operative we cannot be focussed primarily on financial returns (which is something that has concerned the FCA in respect of energy co-operatives) and we should be led by what members want.

Based on the questionnaire responses, most existing members appear happy to reduce the returns they receive to enable Westmill Solar as an organisation to ‘do more’. Assuming a majority of members were in favour of this, we could just reduce the levels of interest we pay everybody – but reducing them to levels appropriate to attract new members would, the board feels, unfairly prejudice those who would prefer Westmill Solar to stick more closely to the strategy and returns set out in the 2012 share offer document. The founders’ bond is the best solution we have identified to bridge these divergent views and (depending on what individual members choose to do) to receive a financial return which is closer to the levels referenced in the 2012 share offer document (an IRR of 8.6% compared to the 9% that an ongoing interest level of 12p per share would provide).

The terms of the Founders' Bond seem very different than the original shareholder document, why is this?

The board appreciates that the proposals involve changes that some members may be reluctant to support but this consultation process is intended to address concerns so that the final proposals are properly considered and refined and reflect the widest possible consensus.  

Although the profile of the returns will differ quite significantly from the graph set out in the 2012 offer document, the impact on the overall IRR (which the board feels is a more appropriate comparison) is less dramatic. This is partly because we paid higher levels of interest than anticipated in the early years of the project and also because we have, so far, returned less capital to members than anticipated in the 2012 share offer document (approximately 30% rather than 45%).

The capital restructuring proposals do involve some reduction of return for existing members and there are a number of reasons for this.

Firstly, Westmill Solar’s status as a co-operative depends on our ability to demonstrate that we do not carry on business to make profits mainly for the payment of interest or dividends (section 2(3) of the Co-operatives and Community Benefit Societies Act 2014). Many of our initiatives in recent years (increasing community funding, the creation of the development reserve etc) have helped reinforce our co-operative credentials in this respect and the current proposals are a continuation of this general approach.

Secondly, we want to address the practical (and regulatory) need to bring in new members but our current capital structure effectively prevents this. Offering a new class of share capital with a different return is not straightforward and we can’t bring in new members offering the same returns as currently paid, partly because it is clearly not the minimum level of return required to attract new capital (another legal requirement) but also because those members who joined in 2012 can justifiably expect some additional return because of the additional risk they took at that time.

Thirdly, as a democratic co-operative we should be led by what our members want. It appears from the questionnaire responses that the majority of existing members are prepared to reduce the level of returns they receive (in many cases quite substantially) to enable Westmill Solar to ‘do more’. However, the board believes that simply reducing the interest rate payable does not sufficiently accommodate those, like you, who would prefer Westmill Solar to stick more closely to the strategy and pattern of returns set out in the 2012 share offer document.

The founders’ bond is the best solution we have identified to reconcile these differing viewpoints as well as enabling Westmill Solar to attract new members.

New Share Offer

What will the money from the new share offer fund?

Most of the new money raised is expected to be used for ongoing development of the Westmill site.  Various options are currently being investigated and preliminary plans will be shared with members over the next couple of months and, once finalised, will form the basis of the public offer documentation next year.

The new structure is also intended to facilitate the issue of shares on an ‘ad hoc’ basis, allowing us to bring in new members more regularly (even if there is no immediate need for additional funding) which should help keep our membership refreshed on an ongoing basis.

Is there external pressure to gain new members with a threat to the co-operative status if this is not addressed?

We are not aware of any specific pressure or focus about bringing in new members. However, having an ‘open’ co-operative which new members can join (ideally on a frequent basis and without the need for lengthy offer documents) is a fundamental co-operative principle and our current capital structure effectively prevents this.

Member Capital Survey Report

Many thanks to the members who completed the Member Capital Survey in December 2023, this valuable feedback was used to inform the board’s proposals. We have digested all the feedback and a summary of the responses can be found by clicking the button below.

Member Capital Survey Report

Solar Refinancing Zoom Presentation

Capital Refinance Presentation

Please click the button below to download the presentation slides.

Download Presentation Slides