By Alistair Rattray, director at UK law firm Burges Salmon
As the UK moves towards net zero by 2050, with many businesses having ambitions of being carbon neutral well before then, the transition from conventional petrol and diesel vehicles is becoming increasingly relevant for operators of fleets of vehicles, whether they lease or own such fleet.
For the most part, the funding options available in the consumer-facing market are no different to those traditionally used for ICE vehicles – although a number of EV-specific salary sacrifice schemes are available, hire purchase, PCP and other types of personal finance remain the most common source of finance. Whilst traditional models of financing assets remain relevant for commercial funding of EV, the growth of ESG lending (or “sustainable finance”) has paved the way for less vanilla funding models. In the last 12 months we have seen increasing numbers of non-traditional funding structures.
Many companies will be familiar with leasing, where the funder owns the vehicle and leases it to the operator. However, we are increasingly seeing traditional loans being used to fund fleet acquisitions, where a funder will make a loan available to the company to purchase, outright, the relevant vehicles. In return for doing so, the funder will typically require “security” to be granted in its favour – typically in the form of a debenture comprising a floating charge over the relevant vehicles.
Since the first sustainable loan was originated in 2014, the use of green and sustainable loans has grown exponentially. These types of loan offer borrowers incentives for using the loan for “green” purposes or meeting agreed ESG targets respectively. Traditionally, these types of loan haven’t been used for financing of vehicles, in particular when based on a leasing structure.
However, in Q1 2024 FirstGroup plc entered into a £150million “green” asset finance facility for the funding of up to 1,000 electric buses. In one of the first loans of its kind, the transaction incorporated green loan principles into a syndicated hire purchase facility with Lloyds, NatWest and Bank of America to fund the acquisition of the bus “husks”. What made the transaction innovative, however, was that FirstGroup funded the batteries and the husk of the buses separately. In November 2023, FirstGroup partnered with Hitachi in a 50-50 joint venture to acquisition, deploy and manage the batteries to be used within the EV buses with separate debt funding from MUFG, SMBC and NatWest with Hitachi providing “battery and charging management services” (including smart charging software and on-site zero carbon power generation).
Although largely unique to the specific structure adopted by FirstGroup, we do anticipate similarly innovative structures will become more commonplace as businesses face the challenges of refreshing vehicle fleets on the basis most efficient for their balance sheet. As funders and businesses continue to embrace ESG funding, and the market continues to develop, we expect that alternative funding options will become prevalent.
