|
Bill Sutherland |
Bill Sutherland, senior managing director of project finance at Manulife Financial Corp. in Toronto, spoke with Senior Reporter Holly Fletcher about what the lifeco likes to see in projects in the second and final installment. In the first, Sutherland touched on 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.
Part II
PFR: In terms of what you like to see in projects, do you like them to be contracted or would you ever consider a merchant or hedged project in say Alberta or even Texas if you come to the U.S.?
Sutherland: A number of years ago we were probably the first to finance merchant wind with financing arranged for one project in Alberta selling into the Alberta power pool and a second on Prince Edward Island which wheeled power off island through New Brunswick and into NE-Pool. Our strong preference is certainly for contracted projects. Not to say we wouldn’t consider another merchant transaction in the future, but the debt would again be sized to require a very low break-even market price to cover cost of operations and debt service. I would have to say that it is not that likely that we’ll be doing many of those in the near future.
PFR: Lending $1.3 billion in 2013 means you were pretty busy. That is quite a lot—when you are considering lending to projects, and you have so many options, are you going to turn to relationships first or are you going to evaluate project by project and the merits of each?
Sutherland: I think all of the above. We have very strong relationships with a number of developers both prominent and lesser known and obviously try to meet their needs. We have developed considerable trust and are very comfortable with their capabilities as developers and operators. It is natural that we would want to do additional business with them.
Every now and then we’ll take on a challenge just to make life interesting. We recently financed a portfolio of commercial rooftops, which we knew would take an inordinate amount of time and effort to complete. We were comfortable with the parties on the other side and wanted to go through and gain the experience. But we are unlikely to chase many of those.
I must admit that given our strong franchise, we do get to see most everything in the Canadian market but unfortunately we can’t do it all, so we have to pick and choose. As much as we’d like to do more deals we have a very small team and we have only so many dollars available to us to invest.
PFR: How much do you have to invest each year? Is it a quota of money invested?
Sutherland: The Canadian market has been very strong with a large number of projects requiring financing. The Manulife team has been running flat out for a number of years. All members of the team work very hard, invariably juggling multiple transactions at a time. I am concerned as to whether our current level of activity is sustainable. The number of transactions the team can handle is constrained by its small size and the fact that we originate and arrange the majority of our own transactions. We tend to get involved in projects at a very early stage and may be involved in a project for two or three years. A small team can handle only so many transactions in a year. There has been no issue with available funds as Manulife considers our loans to be very attractive investments.
PFR: Who do you consider to be your peers and on the flip side who do you consider to be your competitors?
Sutherland: I think it is fair to say that the Manulife team is the most experienced in the country. We are very well known for our technical knowledge, our structuring skills and our ability to syndicate. We are also very well known for our ability to execute on the basis of the terms and conditions agreed in our term sheets when the mandate was given. Certainly, that’s not always the case within the market – where deals tend to evolve over time and close on a basis somewhat different than the borrower expected.
Because of the strength of our franchise and our ability to source and execute, the other Canadian lifecos really look to us to put those deals together. I wouldn’t say the other Canadian lifecos are competition. I would view them as key members of our syndicate.
The Canadian lifeco market is very small. Manulife, Sun Life Assurance Company of Canada and Canada Life Assurance Company are the largest players. Smaller players would include Industrial Alliance Insurance and Financial Services. We have brought in Siemens Financial Services and, more recently, Caisse Desjardins and Caisse de Depot as well. The number of institutional lenders and capacity in Canada is very limited. It is this limited liquidity that differentiates the Canadian from the U.S. market and allows us to do what we do.
The U.S. market is characterized by a large number of lifecos and substantial institutional lender liquidity. The banks are the arrangers, often syndicating through bond structures to the lifecos.
In Canada, the lack of institutional liquidity, our strong preference for arranging our own deals and our ability to lend on a long-term, fixed-rate basis favor Canada being an institutional market. Although the U.S. market may be a bank market, the Canadian market is predominantly an institutional market. That’s not to say that there aren’t banks doing deals here but by and large lifecos dominate the market.
PFR: Could you talk about what projects are in your pipeline for 2014—if you know yet?
Sutherland: We have a very deep pipeline already with a number of mandates and credit approvals in place. Looking at my list, our pipeline entering 2014 is about $1.4 billion and includes wind, solar and hydro projects across Canada. Not all are mandated and not all will necessarily close, but is a good start to the year.
PFR: Oh wow, that estimate tops your 2013 figure.
Sutherland: That’s why I say 2014 is going to be very strong year for us, although not all lenders are saying the same. A number have indicated that ‘things have already starting to turn down a bit’ and that they don’t know what the market will be like beyond mid-2014.
We know that our 2014 is looking very good but I think 2015 will be much weaker because the FIT program in Ontario will have been built out; B.C. has enough capacity for the present and Quebec will proceed on a slow and measured basis. Frankly, the other provinces probably have all they need.
PFR: Could you talk about where pricing is right now?
Sutherland: Pricing will depend on the nature and quality of the project. We typically structure and size the debt to achieve a BBB mid-risk. Both wind and solar are generally priced at the average life Canada bond plus 325 basis points and hydro projects at average life Canadas plus 250-280 bps. For wind projects, we’re doing construction plus 20 years on a 20-year contract. For solar, it’s construction plus 19 years on 20-year contract. For hydro, we are lending construction plus 40 years against a 40-year contract.
PFR: Why’s that?
Sutherland: The reason is that Canadian lifecos have a great need for very long-dated assets and 40-year assets are very hard to come by. Competition is more intense.
