Bill Sutherland, senior managing director of project finance at Manulife Financial Corp. in Toronto, spoke with Senior Reporter Holly Fletcher about why the Canadian renewables market—a hotbed of project finance deals in recent years—is expected to cool and where the shop plans to spend its dollars in 2015.
Manulife Financial took on Sutherland’s group in 2002 and merged with John Hancock in 2003. Today Sutherland’s team in Toronto finances Canadian projects and global wind projects while John Hancock Financial Services separately finances U.S. power facilities.
PFR: Tell me about where you and your team see the most opportunity right now.
Sutherland: The Manulife team is very small having only recently grown to eight members. Despite our small size, we’ve long been the leading arranger and provider of debt finance to the Canadian independent power market. For a number of years, we’ve been an important player in the U.S. wind power market.
Our focus in recent years has been Canada due to the large number of opportunities available to us here and to the strength of our franchise north of the border. We have been less active in the U.S. market due to the production tax credit and resultant structures favoring unleveraged tax equity. Manulife is a senior debt provider. We do not invest in tax equity. The high level of activity in Canada has allowed us to focus on the Canadian market, however we see the level of activity in Canada waning over the next year-and-a-half and plan a return to the U.S. market.
Since the team was formed, we’ve arranged approximately $6 billion in financing, predominantly for renewable energy projects, wind, hydro and solar although we have arranged financing for, and invested in, conventional generation. Of this, $1.3 billion was arranged for 11 projects in 2013 alone. We are a very large player in the Canadian market. Although we are very well known within the industry, our accomplishments fly under the radar because we don’t advertise or promote ourselves in the press. We’ve generally been pretty silent about what we’re doing.
PFR: How would you characterize the current market in Canada? You mentioned it could be waning the next year-and-a-half. What’s behind that?
Sutherland: The market has been extremely strong for a number of years now. Substantial capacity has been built and I think we’ve reached the saturation point. We really don’t need large additions to capacity in the three major markets; Ontario, Quebec and B.C. B.C. in its recent resource plan indicated they have enough capacity to see them through for a number of years and there seems to be little interest in adding new capacity outside of Site C, which BC Hydro would like to build itself. Site C is a very large hydro project on the Peace River.
Quebec will probably continue issuing RFPs for wind power although at a measured pace. We haven’t seen hydro RFPs for quite some time. A manufacturing base has been built up within the province to supply the wind industry and a certain minimum level of wind development is required to maintain this base. I don’t think we will see the same high level of development experienced within the province in the past.
PFR: Ontario has been a bustling for a few years. What’s the outlook there?
Sutherland: of competitive RFPs led to a large number of renewable and clean energy projects being built. More recently, the province passed the Green Energy Act and introduced the much lauded feed-in-tariff program. I don’t think the Ontario Power Authority or Energy Ministry ever contemplated the capacity that was offered in response to the FIT. An inordinate amount of capacity has been built in a very short period of time and the gold rush must come to an end. I personally don’t believe wind is a good fit in Ontario yet considerable additional capacity is currently under construction. Solar is certainly a better fit, however, it’s very, very expensive. I mean multiples of the cost of conventional power.
Our own pipeline is exceedingly strong at the moment. We will have a very good 2014 however I see the level of activity dropping off before the end of the year - 2015 is a big question mark. I think in Manulife’s favor is the fact that this gold rush has attracted a lot of attention from domestic and foreign banks - particularly the Japanese banks - and as the level of activity starts to wane, those banks may find the Canadian market less interesting. At least we’re hoping that’s the case and that our level of activity will remain high as the banks withdraw to pursue opportunities elsewhere.
PFR: If in 2015 you start financing wind deals in the U.S. market, would you still be looking to do the tenor deals that are the bread and butter for you guys?
Sutherland: Manulife is a long-term fixed-rate lender. Our life insurance and wealth management liabilities are very long dated and we are required to match the duration of our assets (investments) against those liabilities. We have little requirement for shorter term, floating rate loans and seek to invest on a long-term fixed-rate basis. What is not always appreciated, lifecos are rewarded for term whereas banks are penalized. We get to release reserves whereas banks are required to increase the level of reserves held against loans with term. We are a natural lender to the independent power industry because developers want to lock in interest rates and are looking for amortization periods equal to the long tenor of their contracts.
PFR: Would the Toronto team do those wind deals?
Sutherland: The Toronto team is responsible for wind power globally and would manage all wind projects in the U.S. All other generation technologies including solar would be handled by the John Hancock team in Boston
PFR: I think that could be really interesting for sponsors in the U.S. Invenergy is trying to do a private placement of bonds to finance a wind project so that, plus the addition of Manulife, could really change how projects are financed here.
Sutherland: I think it is important to differentiate the Manulife PF team from other lifecos. It is assumed lifecos invest in projects through bond structures. We are different. We compete for financing mandates and structure a transaction in the same way a bank would, except we lend long-term on a fixed-rate basis against U.S. Treasuries rather than on a floating rate basis with swaps to fix.
We don’t like bonds because they tend to be very loose in covenant structure and are generally administered by uninterested parties. We prefer to arrange or co-arrange our own investments for a number of reasons, including the development of direct relationships with developers which allows a better understanding of client’s needs. We get to know them. We get to know the project. We are better able to follow the progress of construction and better monitor long-term operation. We are able to select and direct our preferred counsel and consultants. We can structure to meet the needs of lenders rather than invest in transactions structured to meet the needs of intermediaries intent on winning financing mandates to earn fees and not holding any of the investment for their own account. We’re going to be there for the very long-term; we want to make sure the transaction is structured right to meet our needs. Most bond transactions don’t meet our needs very well.
PFR: How will tax equity affect your lending activities?
Tax equity has been an issue for us in the past and is one factor in our focusing on the Canadian market in recent years. Tax equity may be equity for tax purposes but it is debt like in all other respects and the providers of tax equity resist senior debt anywhere within the capital structure. We strongly believe the industry would be much better served by renewable portfolio standards than PTCs. Obviously, we are hoping the PTC is not extended – but that is out of our hands.
We’ve been working on projects in the U.S. where the developers are able to utilize PTCs themselves or are in a position to dictate the capital structure. The attraction to developers is that leveraged projects invariably provide higher returns. That said, we will be precluded from most opportunities until the PTC falls away.
Check back next week for Sutherland’s take on the Manulife’s project finance strategy for the next few years and deal pricing in the second installment of this Q&A.
