Special Report: Energy & Natural Resources
October 2018 | On Financier Worldwide Magazine
FW moderates a discussion on capital stacks for investment in the US renewable energy sector between Chris LeWand at FTI Consulting Inc., Brian Greene at Kirkland & Ellis LLP, Eli M. Katz at Latham & Watkins, and Lance Brasher at Skadden, Arps, Slate, Meagher & Flom LLP.
FW: Reflecting on the past 12-18 months, what do you consider to be the key investment trends that have defined the US renewable energy sector? How would you characterise the sector’s access to capital during this period, and what are the prevailing sources of this capital?
LeWand: Demand for project assets has been profound over the last 12-18 months, and the sector has experienced strong liquidity. Access to equity and debt capital remains favourable, while the tax equity market, which had stalled prior to the implementation of the tax reform, has recovered. Key trends include lower risk investors, such as pension funds, looking at the more mature end of the spectrum while those with higher risk-return profiles seek projects earlier in the development cycle. There is also a continued appetite for renewable energy platforms. Foreign players, especially from Europe, have become increasingly active in the sector. This has been partially driven by the low cost of capital and the relatively lower sector returns available in Europe. Another trend to watch is the increased interest from Big Oil in the renewables sector, with BP’s strategic partnership with Lightsource, Shell’s investment in Silicon Ranch and Exxon’s recently announced solar and wind request for proposal (RFP) in Texas.
Katz: The renewable energy sector in the US continues to attract waves of capital from both domestic and international capital providers. The industry is showing strength across almost all segments, including wind and solar, both utility scale distributed, as well as some new asset classes, such as energy storage and offshore wind. Many projects have moved away from the typical utility revenue contracts to corporate power purchase agreements (PPAs), all manner of commodity hedges and various insurance-like products that provide some certainty on power availability and price. Relatively clear guidelines from the Internal Revenue Service (IRS) on the tax credit step-downs have contributed enough investment certainty to allow projects to obtain development and financing capital. The project finance debt markets are heavily oversubscribed, pushing down yields for traditional project finance banks and a general loosening of deal terms. A range of new financing mechanisms, such as term loan B, mezzanine and leveraged loan style deals, securitisations, and equity and debt warehouse products continue to push the frontier as sponsors search for the optimal way to raise capital for assets in this maturing sector. The tax equity market remains well supplied with a number of new investors entering the market, a growing trend of tax equity syndicators filling financing gaps and many of the historical tax equity providers pushing hard to fill the investment quotas. Sponsors are enjoying one of the best capital raising environments in recent memory. The M&A market for US renewable energy remains robust, with a number of major platforms and assets trading hands. New market entrants continue to push the envelope on price and terms as they seek to gain a foothold in the market. Energy storage and offshore wind have begun to stir as the first wave of these projects approach the capital markets.
Brasher: We continue to see strong demand for renewable energy assets and large amounts of liquidity for construction, debt, tax equity, back-leverage and portfolio financings and acquisitions. We are seeing a willingness of sponsors, lenders, tax equity and investors to take on greater risk through a reliance on hedging for off-take contracts in applicable markets, rather than traditional utility PPAs and acceptance of shorter off-take contract terms. We also see more transactions being executed on a portfolio basis and sales of development project portfolios and project development platforms. The sources of capital are robust and represent both domestic and inbound sources from pension funds, insurance companies, infrastructure funds and others. We continue to see the formation of funds with increasingly direct access of investors to fund assets and non-traditional fee structures. A growing number of transactions are technology driven and focus on capitalising on trends for batteries, storage and electric vehicles. With recent RFPs, offshore wind is gaining momentum.
Greene: The renewable energy sector has remained remarkably resilient, despite uncertainty about the effects of tax reform and tariffs at the end of 2017. There are actually more tax participants in the market today than prior to the tax reform, although the percentage of tax equity in the capital stack for a typical deal is lower, due to the decreased value of tax benefits following the reduction in the corporate tax rate. There is fierce competition for deals among lenders, with spread continuing to tighten and more lenders willing to take merchant-tail risk. More institutional investors are entering into the renewable energy space due to the consistent and reliable terms of renewable energy projects, and such investors are showing increasing interest in early-stage development projects and pipelines.
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