Westmill Solar Capital Restructuring

The terms of the bond are currently being finalised, however we anticipate that the 12% interest will be paid annually, probably each year on 31st December.

The transferability of the Founders’ Bond is one of the final key issues that the board is currently considering.

In principle, we would like the bonds to be transferable, but there are some regulatory disadvantages in having co-operative securities that are freely transferable which we need to take into account. We will circulate more information on this to members in due course.

The Founders’ Bond is applicable to any member, although it will not apply to those who are exclusively a 2019 bond holder, as you must hold more than one share in order to be able to convert half of your shares to the Founders’ Bond.

The proposed term of the Founders’ Bond is 10 years.

In order to remain financially viable, Westmill Solar needs to have a proper balance of debt and equity. If members were to convert all of their shares to the Founders’ Bond, this would result in the co-operative having a very high proportion of debt to its members’ capital. This would be unlikely to be acceptable to LPPI or any replacement lender.

Members are able to request a capital withdrawal (of shares or bonds) at any time. All withdrawals require board approval and depend on the co-operative being in a financial position to release the capital but we aim to facilitate all requests received.

If you would like more information about capital withdrawal, please email us at info@westmillsolar.coop and we would be happy to assist you.

In short, yes; there will be lower interest payments on shares to reflect the interest payable on the Founders' Bond.

Moving forward, it is anticipated that there will be an 8% return on shares annually and 12% return on the Bond. The Founders’ Bond will allow members to receive an overall return which remains closer to the projections included in the original share document.

It will not be possible to purchase additional Founders’ Bond capital as this is a special, one-off arrangement for existing members. However we are planning to implement a new share offer, to expand our membership whilst giving existing members the chance to purchase additional shares. We will keep members informed with updated information regarding this opportunity in due course.

As well as receiving 12% annual interest, holders of the Founders’ Bond will receive 10% of the capital amount of the Bond each year, so that the full amount of the bond is repaid after 10 years.

Annual interest on the bond will only be paid on the outstanding capital amount so if, for example, members start with £100 of bonds, in year 2 they will only receive 12% interest on £90 and in year 3 a further 12% on £80. While this gradual repayment of capital more closely reflects the illustrated returns set out in the 2012 share offer document, it is very much a personal decision whether or not this is appropriate for you.

The terms of the Founders’ Bond are currently being finalised, however we anticipate that the Bonds would be treated the same way as shares, and therefore be transferred to the estate of the deceased.

For members who would like to ensure that the Bond is transferred to next of kin, in principle the board would like the Bonds to be transferable. However there are some regulatory disadvantages in having co-operative securities which are freely transferable, which need to be taken into account. We will circulate more information on this in due course.

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%.

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.

The board estimates that taking into account all interest and capital payments to date, and assuming 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 Bond as proposed increases the IRR to around 8.6%.

Given the terms of the 2012 share offer document and the responses to the members' questionnaire, the board believes that these 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.

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.

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.

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.

Having different classes of share capital with different rates of return is, in theory, possible in a co-operative. However, we understand that the action which was taken by the FCA against West Solent Solar Co-operative (which ultimately led to the FCA cancelling West Solent’s status as a co-operative society in 2021) was 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 also a key co-operative principle.

Increasing the diversity of our members, and the practical need to refresh our ageing current membership, is why the board has been investigating new capital structures. The board is also conscious that we need to meet the expectations of our current membership. Getting the right balance is difficult.

As a democratic co-operative, we cannot be focused 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 responses from members, 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 ensure that members 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 board appreciates that the proposals involve changes that some members may not support.

Although the profile of the returns will differ quite significantly from 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 to 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 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 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, whilst enabling Westmill Solar to attract new members.

The Founders’ Bond rate of return is fixed to provide more certainty for members compared to shares.

Share interest will change each year based on annual income of the Solar Farm, while the bond interest will remain constant. Additionally, as the Bond is considered to be a debt which Westmill Solar owe to the Bond holder, the Bon will be prioritised to be repaid over shares. The Bond interest will be fixed at 12% and we expect the share interest will track at 8%.

The Founders’ Bond is, in essence, a debt that the co-operative will owe to its members.

The Bond avoids creating a situation where there are different classes of member (which we believe does not sit comfortably with co-operative principles) and also ensures that existing and new members are treated equally going forwards.

At the same time, the Bond allows Westmill Solar to ensure that original shareholders are acknowledged for the additional risk they took in 2012 compared to new members joining the co-operative.

The Bond gives members an extra level of certainty for re-payment compared to shares. Whilst we do not expect our financial situation to change dramatically from its current state, bonds have priority re-payment over shares due to the bond being a debt.

Westmill Solar has not received any direct communication from the FCA but the board have been working hard to pre-empt a similar challenge to that experienced by West Solent Co-Operative (e.g. through the introduction of the Trading Dividend, the creation of the development reserve and facilitating the introduction of new members).

As a co-operative, Westmill Solar follows the co-operative principle to not sell shares above par value.

The FCA does not approve of members selling shares, and instead advises that shares should be paid back by the co-operative rather than via a secondary market.

We understand that the proposals add a level of complexity for members but this is partly why the ‘default’ position, if no action is taken, is that members will continue to hold the same number of shares as they currently hold, with a lower (but still attractive) rate of return.

If you choose to not change to the Founders' Bond, your share capital will continue to receive a target interest rate of 8%.