In the second half of this exclusive interview, Jean-Pierre Boudrias, v.p. and head of project finance at Goldman Sachs, talks to PFR managing editor Olivia Feld about the investment bank's plans to finance more projects in Latin America and how contagion from the energy market is affecting pricing.
PFR: How have hedge agreements evolved?
Hedges have filled some of the gap versus the unavailability of power purchase agreements, but obviously there is a tradeoff, because the tenor is so much shorter for hedges than for traditional offtake agreements. Usually what it will mean is that there is going to be a lot more merchant risk that will either be borne by the transaction overall, so both debt and equity, or more often borne by the sponsors, relative to what a fully contracted transaction will look like with the help of an offtake.
PFR: Do you sense that sponsors are having difficulties getting those hedge agreements in place?
It really becomes an economic question: Will hedges provide the right economics to move a project forward or not? I’d say hedges are available. The question becomes how long they are available for. I think if you look at the universe of hedges we’ve seen in the power space, it’s generally been anywhere between three or four years for operating assets all the way up to seven or eight years for new construction and then sometimes — especially for Texas wind deals — you’ve seen 10-year hedges.
Other than in that specific set of circumstances, the decision for sponsors to move forward is more driven by what economics are available rather than the availability of hedges — at least what we’ve seen. That being said, given some of the recent activity in PJM, it is possible that some of the people that have been offering these hedges are going to be less active and will offer less because of the existing exposure they already have. That is entirely possible, but we haven’t seen it yet.
PFR: This year we’ve seen number of solar developers follow in SolarCity’s footsteps and either plan or issue securitizations. Goldman Sachs, I’ve been told, is chasing more of these deals. How many more ABS deals do you think we’re likely to see from solar developers this year?
As you know, we have a separate team that is pursuing these solar securitizations. Certainly, from our vantage point, there seems to be a little more momentum and market acceptance of really having tax-equity structurally ahead of ABS debt, so that’s probably a sign that ultimately we should see more transactions.
Also, independent of the ABS market, some of the trends that we’ve talked about in the broader commercial bank market where there is a little bit of lack of supply of projects verses all the dollars available, we have seen commercial banks provide these aggregation facilities that don’t necessarily have precise ABS takeout parameters around them, but function as almost permanent ABS funding, but in the commercial bank market.
PFR: Goldman recently announced it had hired John Greenwood to head up its Latin America finance efforts. How would you describe Goldman Sachs’ wider appetite in Latin America?
John’s hire reflects the firm’s belief that we will see more opportunities in the region. Historically we’ve been active, but certainly this is a sign that we would love to do a little bit more or a lot more in the region than we have done historically by adding specific project finance expertise to cover the region.
PFR: Are there any particular areas that you are looking to do more business in, or countries that hold opportunities for the bank?
We tend to focus on the investment grade countries in the region, and the idea is to go after the larger transactions, so that’s where most of the focus is.
PFR: The market has gone seemingly quiet on LNG export deals recently. Can you tell me what the near future might look like for LNG financing?
At the end of the day, the key issue is really offtakers. There have only been a few announcements of new contracts in the last year, and without offtake agreements these projects are not able to secure the necessary financing to move ahead.
The other factor is the fact that LNG in most of the world is indexed to oil, so as a result, in the current environment, it’s a little more challenging to get offtaker appetite, as opposed to a few years ago when LNG prices globally were higher than U.S. prices for export. The difference between the two is a lot less than it used to be, so it’s a little more challenging for offtakers to make the case. Until we see new offtake agreements being signed, our suspicion is that LNG projects are probably going to be a little bit slower to come to market.
PFR: How is the wider turmoil we’ve seen in the market affecting pricing on project finance loans?
Certainly on the traditional project finance loans I don’t think we’ve seen any impact really. That market tends to have its own forces that dictate it that are probably more driven by supply and demand on the one hand, and the cost of capital for banks on the other. As far as more institutional markets are concerned, it is difficult to parse how much has been broader market sentiment, and how much contagion from energy. But certainly there’s probably a mix of the two factors that have affected pricing and levels for what we’ve seen recently.
PFR: I am keen to get your sense on whether the yieldco downturn will continue for a while and the impact on the M&A market?
Only time will tell. Certainly if one looks back, renewable assets have generally been able to attract high-quality buyers in a variety of different market environments, so we certainly expect that to continue, but we really haven’t seen yet what the world looks like in the current environment for yieldcos, other than at the project level.
PFR: Finally, what is the bank’s appetite for investing in storage projects?
We haven’t seen anything come to us yet. At the end of the day, project finance is relatively simple. It’s really financing contracts and having the assets to fulfill the obligations under these contracts, so certainly if someone is able to put together a project that works that way in storage, obviously we would be interested, but we just haven’t seen it yet.
