Courtesy of Clean Energy Finance Forum, a report on alternative market solutions that could energize renewable energy finance:
How can alternative financing solutions help expand clean energy through capital markets? Industry experts convened at this year’s Asset-Backed Securities (ABS) East conference in Miami on Sept. 20-23 to discuss these possibilities. Yieldcos, crowdfunding or peer-to-peer (p2p) markets, and property-assessed clean energy (PACE) financing could supplement the role of securitization and may deliver the capital the renewable energy industry demands.
John Joshi, head of capital markets at Plant and advisor to National Renewable Energy Laboratory, said, “We started doing these panels four years ago or more and were looked upon as the hippies. Now we have rock stars – Fortune 500 companies, Fortune 100 companies, and energy companies; it’s an amazing evolution.”
In reference to low-to-moderate-income consumers, Joshi said, “ABS has a chance to do tremendous good.”
Yieldcos
Currently, yieldcos may be a preferable financing alternative to securitization. Panelists noted that yieldcos could eliminate many of securitization’s challenges and attract lower costs of capital.
For example, SolarCity’s first and second securitizations saw yields of 4.8 and 4.6 percent, respectively, while yieldco investors can expect slightly lower dividend yields of 3-5 percent. According to Allan Riska, senior manager at SunEdison, investors find yieldcos appealing because this dividend is expected to grow.
A yieldco is a publicly traded company that is created for the purpose of owning assets that produce cash flow. Some yieldcos specifically focus on renewable energy assets. The income from these assets is generally distributed to the shareholders as dividends.
Yieldcos and securitization are fundamentally different. “Equity markets are more liquid than any fixed income market,” Sullivan said. “You will [have] different volatility, a different investor set, a different tax strategy and a different target market.” Sullivan said both options add value because they bring in capital that wouldn’t otherwise be tapped.
While yieldcos are structured as normal taxpaying corporations, yieldcos that own renewable resources can use the tax benefits associated with clean energy investment to avoid paying corporate-level taxes. These tax benefits, called net operating losses (NOLs), must be used and carried forward to deliver dividends.
Yieldcos do not eliminate all risks. Dividend growth is reliant upon a sufficient pipeline of assets and the associated NOLs. A yieldco partnered with a strong developer that can keep feeding the pipeline will mitigate that risk, said Dan Sullivan, principal at PriceWaterhouseCoopers.
“We have a lot of projects from the SunEdison pipeline that are going to go into the yieldco and grow that cash flow,” Riska said.
Interest rate risk is another major concern which is ultimately managed by investors. But these fears may be overstated. Andrew Giudici, senior director of the Structured Finance group at Kroll Bond Rating Agency (KBRA), said interest rates will rise over time but investor demand should keep rates relatively low compared to the broader market.
Riska said SunEdison is currently looking at how the equity from its yieldco, TerraForm Power, interacts with the cost of debt. This will allow SunEdison to optimize its cost of capital. Financing projects with debt at the leverage ratios they had before may not be optimal.
“We might be leaving money on the table. We might have securitization and yieldcos work in the same structure to optimize cost of capital for us,” Riska said. To do this, SunEdison would securitize at the project or fund level before the project goes into a yieldco.
Crowdfunding and P2P
Crowdfunding and p2p networks are also an emerging financing alternative. Clean Power Finance operates an online business-to-business platform that connects institutional investors and lenders with residential solar professionals who need solar finance products to grow their businesses.
Clean Power Finance is interested in any conduit that provides the cheapest cost of capital to pass through to homeowners and installers, said Kristain Hanelt, senior vice president of the company. He said that, for crowdfunding, even major platforms get most of their funding from banks and most are venture-backed. He said he has not seen costs of capital extremely dissimilar from those on Wall Street.
According to Dan McMahon, senior vice president of Hannon Armstrong, the problems with p2p are achieving scale and deploying small increments of capital efficiently. In some respects, he said, Hannon Armstrong and SunEdison are crowdfunding at around $14 to $20 a share because “the whole point of going public was to hit a broader investor base.”
“I just don’t know how you can service and manage such small investments from so many different people,” McMahon said.
PACE
In PACE financing, an assessment is placed on a property to install an energy efficiency project, which is paid for over a 15- to 20-year period.
Renovate America recently issued over $104 million in PACE-backed bonds, which were rated AA by KBRA. According to Giudici, the HERO transaction by Renovate America had an advance rate of 97 percent.The advance rate is the maximum percentage of the value of a collateral that a lender is willing to extend for a loan.
KBRA’s credit analysis of the HERO transaction proved it was impossible to break the deal, Giudici said.
KBRA found that, under a default scenario based on historical trends, a default will result in a temporary disruption of cash flows while the property owner is in foreclosure, but ultimately those payments will be made.
Giudici said a tax assessment for $2,000 would not drive a property foreclosure. Even if foreclosures by Fannie Mae and Freddie Mac occurred, credit supports like excess spread would absorb those losses. Additionally, many municipal districts do not allow homeowners to make partial payments on their tax roll assessments.
Excess spread is the difference between the interest rate received on the underlying collateral and the coupon rate paid to investors. The excess spread is usually deposited into a reserve account and serves as the first line of protection against losses for security holders.
According to Giudici, PACE is an attractive security structure conducive to ABS.
PACE steps away from many issues that solar securitization currently faces – including operational costs, tax equity, and credit enhancements – and is one of a multitude of options that will be around for a while, Sullivan said.
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