Jonathan Lindenberg |
In the second installment of this Q&A, Jonathan Lindenberg, head of project finance in the Americas at Bank of Tokyo Mitsubishi-UFJ discusses liquefied natural gas project landscape, prospects for renewables and potential challenges in project finance. Senior Reporter Nicholas Stone sat down with Lindenberg at the bank’s office in New York.
PI: Japanese banks have been able to offer longer tenors to clients. Do you see that continuing? JL: I believe it is an advantage. It is a function of our long-term stable funding source and our strong capital base. Our ability to offer longer tenors in a bank loan format is something that we will be able to keep offering in the future in bank loan formats for good projects. I will say that we will never look exclusively at that market. It makes more sense to assess the options. Sometimes it may make sense to tap the long-term, investment-grade project bond market. We are also a big player in that market and it has been more significant in recent years than in prior years. That is something that our clients can look at as an alternative to a long-term bank financing.
PI: How do you see LNG export facility development playing out?
JL: I think several more liquefaction projects will be built in the U.S. We are a major player—possibly the major player. There is some rationing of export licenses that the Department of Energy has discussed publicly, and I don’t think that the supply of licenses is unlimited. The transactions themselves are typically very large, and often facilities that are completed at a single site are expanded into multiple trains. The volume of finance that is going to be needed for the LNG business is going to be very large. So that means clients need to look at multiple sources of financing; banks, bonds and agencies. And they need to do that innovatively. That is where we come in. That is the perfect business for us.
PI: What about the ones in British Columbia? Are you watching those?
JL: Yes. We are keeping an eye on those and hope to be involved. Some will access the project market and it is likely some will not.
PI: Jumping over to the renewable market now, it has been a bit of a shaky time for regulatory and political reasons. How does your pipeline look and how do you see the market playing out?
JL: Believe it or not, our most significant source of new business is still the renewable market. Renewables just lend themselves well to project finance. They typically involve long-term, contractual off-take. With tax regulations changing and some tax benefits expiring at the end of this year for wind projects, we do expect to see less activity in the U.S. Many of our clients are focused on solar transactions or wind transactions in Canada and Latin America so we are still seeing significant flow from those types of projects and regions. Our Canadian renewable business is quite significant. The activity is bolstered by feed-in tariffs and by a tremendous amount of development activity throughout the provinces.
We very much want to use our capabilities in the tax equity market to benefit our clients and to help ensure that the flow of activity continues, particularly around solar. It is likely that sometime in the future there may be extensions of production tax credits and investment tax credits. It is also quite possible, as everyone has discussed, that the MLP market or the REIT market will become a factor in the renewable business. I am not sure how near-term any of that is, but we think there is a place for renewables in the future.
PI: There have been a slew of new PPAs for wind as utilities seem to be on the hunt for the last subsidized wind projects. Do you expect those financings to boom in the next year?
JL: Well, if you are not in construction by the end of this year, you won’t qualify. There are safe harbor provisions to qualify for starting construction, so I do expect a rush to get projects to a stage where they can qualify for benefits and access financing that is tax advantaged. Also, major strategic players who don’t have a reliance on the tax equity market are doing all they can to put their facilities in the ground. I do think the next 12 months or so will see a big push, but perhaps fall off after that.
PI: What about renewables and term loan Bs? Why haven’t seen a whole lot of those?
JL: I think it is certainly possible. Often renewables, because they benefit from contractual off-take, they can access very low cost sources of funding without the B loan market. So I think the vast majority of them have accessed the investment grade bank and bond markets. If we get into merchant wind or hedged wind transactions, I think the institutional loan market could be a source of financing for those.
PI: Have you seen many new players entering the tax equity market? How is the capacity looking there?
JL: There are some new entrants, but not significant numbers. The market has capacity to do a number of transactions, but it is also a bit constrained. Our role there is to use our tax capacity and use our ability to access additional investors to look for those who can work alongside us in a transaction that we structure, either as a club, which tends to be the case these days, or more of an arranged situation. We are heavily focused on trying to expand the investor universe, trying to attract new players to that market. And there are a few.
PI: How long does it take to educate a new tax equity player?
JL: Well, it takes one deal. There is a fair amount of legal, engineering and financial due diligence that we undertake with certain investors. Many of the players that are the most prominent players already have significant experience, but the new players, maybe they have spent six months to a year before making their first investment.
PI: We recently reported that Liberty Interactive Corp. made a tax equity investment. We heard a few years ago that Kraft was looking into it. How do you see that market evolving?
JL: Google is also active. We have noticed a trend that companies that have high taxable income, who don’t have other ways to shelter that income, who may have taken a ‘green’ pledge, who have either high electricity usage or their customers do, are often candidates or might be candidates for tax equity investing. We certainly are scouring the U.S. market for those players.
PI: So you guys are actively approaching those potential investors?
JL: Yes. We are having dialogue. Understanding their preferences. Looking for new angles for our clients.
PI: It seems that some of the small regional banks that were looking at tax equity a couple of years ago were there because the low-income residential housing market had slumped and the returns they used to get had dried up or were not as attractive and tax equity was the way to go. Are those players still interested or have other areas resurged?
JL: The one significant alternate investment class for tax advantage investing is the low-income market. So you tend to find players who have a strong preference for one or the other. And it tends to be regional banks who believe that low-income housing investments give them a nice after tax return plus has a benefit that is more localized and community-oriented and a public service. Banks that tend to be more broad or global and less regionalized and have a significant energy practice, tend to be investors in tax equity in tax advantaged power investments. We do both, because we are both a regional bank and a global bank.
PI: What do you think the biggest issues are facing the project finance industry moving forward?
JL: The project finance market is one that has always had cycles that result in one particular investor class or another having appetite, or not, for transactions. We have certainly had crises over the years that included the fallout post-Lehman Brothers, the European banking market challenges, the Enron situation or the crisis that followed the financing of merchant power the first time around. Those types of things are just inherent in our business. I do think the market has gotten a little more experienced and sophisticated with the possible risks and the likelihood of systemic fallout from one of those type events is less likely. I think the issue that we will continue to face is: can we find sufficient capacity for projects? If there are investors who may not be available for the asset class because of a particular issue, can we then continue to adapt and find sufficient capacity to fund the infrastructure and power needs of the market? So far, so good, but sometimes there is a bit of an adjustment period to such events.
PI: What do you think the next big challenge will be then?
JL: I hope nothing. I think we are at a stage in the project markets—I have been doing this for almost 30 years now—where the bulk of the investors that are practitioners in this business have a significant level of experience. They are structuring things largely prudently. Maybe there are small degrees of risk around the edges, maybe some of the transactions completed are a bit off from a risk-return standpoint, but I don’t think that the broad, systemic risks that could give rise to poor asset quality in our business are expected. By and large what’s been done in recent times has been pretty rational. And that extends to businesses that are higher risk, like the merchant power business, where hedging has been used to a large degree. People have been careful about which markets to invest in. Capacity payments are also a mitigating factor to some of the structures. The levels of leverage are more rational than perhaps they were in the past. I think it is with that level of experience and understanding that the market has become a more risk-averse and sensible. I don’t see systemic risk in the structuring; it is going to come from some major world event like a bankruptcy or a deepening of an existing crisis like the European banking crisis.
PI: For the power and energy industry is it regulatory concerns? Or is it a demand issue?
JL: The fundamental issues are supply and demand driven. The availability of power purchase agreements lends itself towards the broadest possible number of financial solutions for a project. We have a gas environment where costs are low and availability of gas is plentiful, but I’m not sure the power demand is there to warrant huge volumes of new projects. Since power demand has the greatest correlation with economic growth, we hope and expect that something changes for the positive in the future.
PI: Will that lack of demand force a bank like yours to explore things like energy efficiency in terms of project finance or distributed generation to put your capital to work?
JL: Yes. I think we are always willing to look in innovative and new areas. That could be in the form of arranging tax-motivated investments or it could be in the form or debt. Certainly we are looking at transmission, alternate fuels, alternate renewables, distributed generation—we are looking at all the types of things that our clients are looking at. For us, what is really replacing the expected volume fall off in renewables, which has been one of the largest asset classes in the Americas for power, has been shale gas-related infrastructure projects, like LNG investment, pipelines related to the projects and to new-build chemical and petro-chemical projects, which we are seeing in the Americas for a the first time in a long while. This gas revolution is causing significant volume in the project markets.
