Q&A: Siemens’ Kirk Edelman
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Q&A: Siemens’ Kirk Edelman

Kirk Edelman, ceo of the project and structured finance energy business at Siemens Financial Services, leads its power and energy investing activities worldwide. He manages the activities of a global team that provides capital across the entire spectrum from debt to equity. He sat down with Senior Reporter Nicholas Stone to discuss the group’s activities, where he sees opportunities in the market and how key issues may play out.

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Kirk Edelman

Could you describe Siemens’ strategy for power project finance and how you see the company fitting into the sector? We’re one of the few financial services firms with a captive finance capability in the energy space. SFS is able to further derive certain benefits from its relationship with our corporate parent, Siemens AG, and its energy equipment and services business. As a result, our strategy is probably a little different than most. After working at SFS for some time now, I have come to really appreciate these differences. When we provide capital for transactions that have Siemens content or services, we call that "captive” business. On the other hand, we also do significant "non-captive" business, which has no Siemens content or services. Nonetheless, when you invest in the energy sector, almost anywhere you go there is potentially some sort of Siemens angle to it. In other words, some key stakeholder in the transaction is likely a customer of Siemens, or the project is using Siemens equipment or services. So it’s not too hard for us to find that type of hook in a deal.

Where are you seeing opportunities in the power space?

In recent times, there has been a lot of deal flow involving renewables. But now, with tight formation hydrocarbons reducing gas prices, you are seeing a lot more activity in the oil and gas space. Given time, I believe you will see a general migration back to fossil plants. That works well for us at Siemens, because we have a vested interest in the renewables space as well as the fossil space. For us, we are happy to play in either sector.

How can you take advantage of that? How do you adjust from focusing on investment in renewables to meet the demands of a changing market?

To be honest with you, it doesn’t take a whole lot of adjusting. We go where our relationships lead us. For example, if you have a developer that says, “We want to develop a plant where there is shale gas and we are contemplating a fossil based power station to take advantage of that play,” then we are able to accommodate that both from our equipment and service business as well as our financing business. So it is actually quite practical, and like most of us in the business, you have to go where the demand is. Specifically where the capital is required and where your customers need the financial support. SFS does that quite well.

Have you noticed any trends in how deals are getting done and pricing?

Generally speaking there is a lot of liquidity in the market. Things seem to have become even a little frothy in a short period of time. I suspect that will probably put downward pressure on margins. In our business, the margin fluctuation is there, but it doesn’t seem to be as extreme as you typically see in certain other businesses. For example, the general leverage lending business has margins that tend to fluctuate more than in the typical project finance world. But with all of this liquidity in the market, I am starting to see things shift a little bit beyond just margins. For quite some time people didn’t want to take underwriting risk and now it seems that we are gradually heading back to a market where the big players are willing to provide some level of underwriting capacity.

Is that bringing some banks into the market?

Yes, I think that is absolutely true. Some folks that were quiet, many European banks such as certain Spanish banks for example, suddenly seem to be playing a bigger role again. Obviously, the Japanese banks are out there in a very strong way as they have been for a while.

Are there names or entrants there that surprise you?

You have seen some shops pop up that weren’t in our space before and some new places, which have benefited from taking well known industry professionals and bringing them on board to establish the business. You have seen a group of those types of firms come into the market, like Associated Bank, OneWest Bank and a few others. So there are some new names that have popped up, but the people behind them are well known. And then there are some names that are well known, but may not have been in certain markets, that are popping up and grabbing big people, like Investec.

Who do you see as the strongest players and how does Siemens position itself with regards to that competition?

The strongest players are typically the ones that are putting the most capital to work right now. And, generally speaking, it is the Japanese banks as a group that seem to have the most capacity. How do we play in this market? We are kind of unique. SFS has been very active in years past when the market has been stagnant. Likewise, we can be very active when the market picks up. That’s because we are part of a very large corporate entity. That allows SFS to be a little more opportunistic than some stand alone financial services entities can be. So we tend to be active through economic cyles, through both the peaks and the valleys. We love it, because in a down market we can play a role when there is less capital competing for good transactions and in an up market when there are a lot more deals and more capital in the market, we can still be effective because we pick and choose our battles.

That being said, we are not like a mainstream commercial bank-- we can afford to play in some spaces like the mezzanine market and the equity markets, that typical commercial banks won’t play in. However, we are a little different from a private equity firm, because we can also invest debt capital like a bank or institutional lender, yet also consider equity opportunities. It is the same for the mezzanine space. Moreover, we can lend short-term, long-term, fixed rate, floating rate. We have a lot of flexibility. We can do certain structures on the debt side, which involve subordination that banks typically shy away from. So, I think our biggest strength is our breadth and our flexibility and our ability to do transactions across a very wide spectrum of financial services. When we are approached with an investment opportunity, we view it as a capital opportunity. Whether that capital takes the form of debt, equity or something in between may not initially be known. It is our job to determine what is best for the project, for our customer and for SFS. That is what makes this job so interesting.

How do you think the merchant market will play out? What about the few merchant wind deals that have come to market?

When you look back to the past 25 years, there was a point in time in the project business where any sort of market risk was verboten. You just didn’t go there. And over time we’ve come to a point where the industry is willing to consider it. That’s just natural evolution. So today, a project with merchant exposure can attract financing but on a more conservative basis. Consequently, you are going to see certain deal structures that will provide some support should prices deteriorate and naturally these merchant deals will have more conservative. The industry has even started to embrace the use of synthetic power purchase agreement schemes, using hedges to try to mitigate the risk during the tenor of the debt, like you’ve seen in the Panda Power Funds’ deals. I think is a very innovative way to attract a broader group of potential lenders and even investors.

What do you see happening with the renewable market?

In North America, you are still seeing some deals, in Canada for example, which benefit from strong provincial feed-in tariff type structures. And those remain as strong and as attractive as they always have been. But you are also seeing people starting to get comfortable with the notion that certain tax advantages offered in the United States may eventually be phased out or even eliminated. Given time, the industry will adapt to these changes.

In terms of pricing and structures on those deals, what are the ways people are trying to cope with that?

Well, let’s assume they start phasing out tax credits and there are no more grants. Then I think you are going to see a lot less activity in the space, which probably goes without saying. But the deals that are going to get done are going to have to take into account the phasing out of those benefits. I think only stronger deals will get done and they will probably be done in a manner that is a little more conservative than you might have seen in the past, because you cannot monetize these tax benefit streams. So I think the industry will adapt, but it will likely limit the amount of deals that get financed.

What are the biggest issues facing the industry? Is trying to finance those renewable projects one of them?

If you look at where the push for renewable power originated, it came in large part from renewable portfolio standards that most states implemented to encourage utilities to source power from renewable sources. The states took different paths and some were more aggressive than others with their renewable goals. However after a period of time, there has been a degree of ratepayer pushback in certain states where rates have increased significantly to accommodate the RPS. Ratepayers appear to be saying, “Yes, we support renewable energy, but at the same time we can’t see our retail rates continuing to escalate. We need a balanced approach.” This reaction is probably a healthy dynamic. I do think you have to balance renewable energy and the economics in a way that people can get comfortable with it.

What should people be looking out for over the next few years?

The biggest thing, and it’s no surprise, is tight formation hydrocarbon, so-called shale gas and the associated natural gas liquids. Changes are happening very quickly. For example, instead of developing LNG re-gasification facilities, sponsors are now seeking to develop LNG export facilities. All of the capital that is needed to get those deals financed and the associated infrastructure financed and the necessary maritime assets financed, is creating exciting opportunities. As a result, I think there will be a lot of interesting transactions in the very near future. In fact, it has already started. What does that mean elsewhere? Access to increasing amounts of shale gas may lead to a variety of socio-economic and political effects and that is increasingly being discussed in the press. So I believe that this is going to have a significant impact in our industry in the near future and in turn will also impact the broader oil and gas space.

How is Siemens positioned to cope with that shift?

Siemens has an oil and gas business that is very active. We are somewhat uniquely qualified to take advantage of certain equipment and services needs in the sector. Everything from automation and controls, to rotating equipment, to emerging technologies that are going to actually make some of these trends happen more efficiently. SFS is also well positioned with respect to the trends in the energy sector. With our experienced staff and the resources provided by Siemens, SFS can effectively target these financial markets and opportunities. After spending much of my career at a variety of other financial services firms, I find SFS’s business model to be very exciting. I am confidant that SFS will continue to be a significant provider of capital in the energy markets as these markets grow and evolve as a result of the trends we have discussed. A lot of exciting things have happened at SFS in recent years, and we are definitely on the right path.

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