As v.p. and head of project finance at Goldman Sachs, Jean-Pierre Boudrias has worked with Panda Power Funds on a succession of deals, most recently the term loan B backing the Hummel project (PFR, 10/26). Goldman was left lead on the deal, which was arranged in tandem with a term loan A, representing a new structure for the sponsor.
At Goldman, Boudrias has led financings for projects in North America in a variety of formats, including project bonds, term loan Bs, high yield bonds, mezzanine debt and equity, for sponsors such as Cheniere Energy, SunEdison and TerraForm Global.
Boudrias joined the New York-based investment bank in 2013, after nine years at Credit Suisse, where he advised and arranged financing for energy clients. Before that, Boudrias worked in the leveraged finance group at CIBC World Markets.
Boudrias sat down with PFR managing editor Olivia Feld in New York to discuss Goldman’s appetite for deals, the impact of recent market volatility on terms and pricing and the rush to get renewable financing sealed before the expiration of tax credits.
PFR: When you joined Goldman Sachs the bank was looking to arrange more traditional project finance debt along with institutional loans and bonds. How does that fit into the group’s current strategy and appetite?
BOUDRIAS: Our general approach at Goldman Sachs is really focused and centered around clients, so the goal has always been to bring something that is client centered. I want the definition of what we do to be that we raise capital for projects. We raise it in the bank market when it makes sense. We obviously arrange it in the institutional market. But we also arrange junior capital, so we’ve raised mezzanine, we’ve raised equity and we’ve sold projects. It’s a little more fulsome a mandate than, say, just someone who works at a competing bank where the only thing they do is arranging project finance debt, so it’s a little bit more broad and it really provides the full needs that a project may have.
PFR: How, in your time at Goldman Sachs and your wide experience working in project finance, have you seen your clients’ needs change?
BOUDRIAS: The 800-pound gorilla in our market in project finance are the banks. Historically, banks provided about three quarters of the debt financing for new construction projects, with the balance from other institutional sources in the project bond markets and other markets like term loan B and others.
Over time, all the big shifts, if one goes back, are about how much appetite there is in the bank market. In times like today, where there is a lot of appetite, and quite frankly not enough deals, what you see happening is banks dialing up risk a little bit, trying to branch out from their traditional areas, so they can actually put the dollars out to work. If anything, we don’t have the data for the last year or so, but my suspicion is if you were to look, banks have actually increased their market share in the last two years.
When you put yourself in the position of running a project finance group for an investment bank, sometimes we will be involved but most times we won’t. We’ve always had a focus on the 25% that historically has gone to institutional sources. With less of that happening, we’re probably doing more non-traditional capital raises as a result than we were doing three or four years ago.
PFR: Over the last few months PFR has reported on a significant number of large-scale projects being developed in PJM. Some of the bankers I’ve been speaking to are warning of an oversaturation of the market. Do you think all of these projects will get financed?
BOUDRIAS: I think it’s always important to take a step back. Whenever one develops a project, there are a number of areas that can act as a constraint on development. You need to get permits, you need to get the hedge, you need to get the equity and, lastly, you need to get the debt. Our sense is that the last part is likely not going to be a constraint.
The comment I made earlier about the banks looking for deals to do, if you had asked me three years ago, will all these banks do all these quasi-merchant deals — or partially contracted as someone recently termed them— in PJM, the answer would have been:Not really. It would be a little outside of their mandate. Now, you have 15 institutions that have been part of one or two of these financings to date. Our sense is, ultimately, the debt is not going to be the constraint. It’s going to be something else. It’s going to be either the availability of equity dollars or it’s going to be the availability of hedges.
PFR: Do you think there is enough appetite in the banks to raise debt financing for these projects?
BOUDRIAS: I think that’s right. Obviously, there’s been a number of projects. Every single time a new one comes, it doesn’t seem like they have that difficult a time getting the debt arranged.
PFR: Do you think there is more competition now in terms of securing hedge agreements and raising the equity needed? Why do you think that’s where the issues may lie for these projects?
BOUDRIAS: We’ve raised equity for some projects. The market, while there’s a number of participants — a lot more than, say, two years ago — it’s not a very deep market. If you look at who has been providing the equity for all these projects, a number of the usual players that would have provided capital have already been represented in these projects. How much appetite they have to put more dollars at risk is questionable in certain cases.
I think that there is going to be a little bit more of a constraint on the hedging side. There’s only a few market participants that will provide these long-term hedges. Obviously all these hedges, at least for financial institutions, consume a lot of credit. How much concentration exposure are people looking for? And some of the non-traditional, non-financial institutions, there is only so much risk they are willing to take for a market that has not been generally known to be super liquid.
PFR: Goldman Sachs is known as one of the go-to investment banks for term loan Bs, and your latest for Panda Power Funds is said to be quite innovative. How do you think these loan structures have evolved?
What’s interesting is, if you look back at the first construction transaction done in the institutional market — the Astoria plant in Queens in 2004 — and others since, these are just bank deals that have been packaged for institutional investors. The structures are roughly the same, the terms are very similar, at least to the actual infrastructure of the transaction. If you look over time, the terms have not varied all that much. They have been very similar, there have been tweaks around the edges, certain things that have moved to be more investor friendly and less investor friendly over time, but the overall structure has remained relatively similar.
What we did with Hummel was introduce a term loan A/term loan B structure. It’s obviously not the first time that’s been tried, but I think the difference was, early on we identified to our client that the ability to tap into the appetite in the bank market could be interesting and could reduce the overall cost of going in and pursuing the financing. The one we did previously for them, Panda Stonewall, was entirely done in the institutional market, and this time we felt it was worth trying. It probably ended up saving quite a bit to our client in terms of overall financing costs.
PFR: Last week, Talen Energy pulled its term loan B citing difficult market conditions. Invenergy also modified its recent term loan B offering. What do you think is behind the difficult conditions, and how they are affecting deal flow?
BOUDRIAS: I won’t comment on these transactions directly; we’re not involved in them, so I don’t know. Essentially what I would say is that we’ve seen volatility in markets since August, and I think difficult market conditions are just a continuation of what we’ve seen happening in the world since August. Ultimately, these are capital markets. In capital markets things go up, things go down, and investor appetite will ebb and flow with larger macro trends, not necessarily specific to a transaction or a sector. If appetite for risk goes down globally, it’s going to happen in the institutional market as well.
PFR: But as a bank arranging these term loans, are you concerned about what impact the volatility will have on your deal flow?
BOUDRIAS: Fundamentally, when you think about how far ahead we think about some of these projects— we were talking about Hummel last spring — markets were in a different place than they are now. Ultimately, what you try to do as an arranger, is try to position your transaction so that it’s ready to go and access favorable markets. You don’t always have the choice, but that is certainly the goal.
PFR: With that in mind, do you think you will be a little bit quieter in terms of launching new deals right now?
BOUDRIAS: The answer is that it depends. Some deals are able to go, some deals have the luxury of being able to wait. Those that have the luxury to wait will wait and those that can go now will go shortly.
PFR: Goldman Sachs backed a $1 billion warehouse for SunEdison. How do you see these warehouses being further utilized?
BOUDRIAS: Our colleagues in the infrastructure funds made that commitment. I think we expect to see a little more of warehouses. It obviously addresses a very specific need. A lot of the other yieldcos don’t have that need, because the function of the warehouse is effectively provided by the sponsor. NextEra Energy Resources doesn’t need one and NRG Energy probably doesn’t need one. But for developers who are more pure developers, warehouses are useful and I think you probably are going to see a few more.
PFR: You touched upon the wider growth of the renewable market. How do you see the expiry of the PTC and the ITC step down impacting renewables deal flow in the U.S.?
BOUDRIAS: Historically, if you look at the year when there was no PTC, installations went way down. We expect you are probably going to see that. That being said, I think developers are doing more work to prequalify certain pieces of equipment to be able to take advantage or extend the window on PTC eligible projects. I think it’s going to take a little bit longer for the number of projects to dry out. But it certainly will have an impact. Every single time that the PTC has not been renewed, installations in the U.S. have gone down.
PFR: We’re currently in the PTC safe harbor period. What I’ve been told by people in the market is that there will be an upturn in activity before there is a downturn, and then there might be a rush before the end of this year to get financing in place for projects so that they can qualify for the PTC. Is that something you expect to see?
BOUDRIAS: We’ve heard rumblings, but sometimes people are just trying to rush projects to market when they’re not really ready, so time will tell if it will really happen. That being said, a lot of that activity happens in the bank market before we ever see it. So I suspect that my colleagues that work at commercial banks will see a lot more of that than we have. We’ve seen bits and pieces, but it’s clear that some of the people who have spoken to us are just trying to rush projects to market. We may not be able to get there, just because the projects were not necessarily ready other than them trying to rush them.
On the ITC, we still have a year before the step down. If they want to go commercial in 2016, they should be starting construction right about now. I think on the large-scale projects, there’s probably not as much tailwind as we will see for the ones that can go faster — which are distributed generation and residential. We predict a pretty big year in 2016 for those projects for people that are trying to get ahead of the stepdown in ITC in 2017.
Check back next week for the second installment of this Q&A.
