In the second part of this exclusive interview, PFR’s managing editor, Olivia Feld, speaks with Keybanc Capital Markets' Daniel Brown about bank market capacity for gas-fired debt in PJM Inteconnection, why he thinks the yieldco market is only facing a temporary setback, and what that means for asset valuations.
In the last 12 months KeyBanc Capital Markets has financed projects developed by Recurrent Energy, Deepwater Wind, 8minutenergy Renewables, Samsung Renewable Energy, Renewable Energy Trust Capital, SunEdison and most recently Macquarie Infrastructure Partners III and Siemens Financial Services (PFR, 4/6), to name a few.
Brown, who is managing director, utilities, power and renewable energy, at Keybanc, worked on many of those deals. He joined the Cleveland-based bank in 2008, after a two year stint as an engineer for Ontario Power Generation.
PFR: I know your focus is on the renewable space, but KeyBanc has also invested in multiple gas-fired assets. How would you describe the state of the gas-fired market, in particular in PJM where there’s perhaps an oversaturation?
From the financing side in PJM, there have been lots of PJM plants financed over the last few years. I think it’s beginning to become a question of how much capacity there is in the bank market to continue to finance assets. That will be an interesting trend that we will be keenly following in 2016, especially since we are a more recent entrant into that market compared to some of our peers and we are not necessarily feeling the capacity issue. But I do sense that it is a wider concern in the market.
Obviously, there are a lot of coal-fired plants that people are projecting may be retired within PJM, so that would lead you to think that there is a lot of opportunity for gas plants to be built and why some developers are still bullish on that sector. We’ll see how the financing markets are equipped to deal with it.
PFR: In terms of KeyBanc’s appetite for gas-fired assets, is the bank looking for opportunities in that space or are you entirely focused now on renewables?
We are always open to new business opportunities across the spectrum. I think in the PJM market for gas, given the right relationship, we would consider continuing to invest. We closed on a deal for Panda last year, have closed on a gas deal this year and are actively evaluating others.
PFR: You touched upon the yield company model and the yieldco market. There seems to be a split in opinion between those who say the downturn is a temporary setback and others who say that the bubble has burst. What you think the future is for the yieldco?
We would be firmly in the temporary setback camp. The assets are still the same as they were a year ago. I think people have readjusted and will continue to readjust what they believe appropriate growth expectations are for this asset class. Fundamentally, these are still long-term contracted assets that fit very well in a publicly traded vehicle. I think you can look at the trading history of the yieldcos and see that since June of last year, they are tracking the master limited partnership sector. I don’t see as many existential questions about the MLP sector as I do for the yieldco sector, which may be fair given the relative history of the two, but it does make me think this is not an existential issue for yieldcos. So we are still long-term bullish about the sector. We realize that there are short-term issues that have to be worked out, but I am confident they will be and this will still be one of several financing tools that developers and companies have in their toolbox for accessing capital.
PFR: So you are fairly confident that they will still be around in five years?
Yes.
PFR: Touching the M&A space, how has the temporary setback in yieldcos impacted M&A activity and evaluation of assets?
This is where there has been a large impact. A year ago, maybe even six months ago, yieldcos were focused on growth and everybody was trying to have lofty growth expectations because the market was rewarding you for lofty growth expectations. This is not currently the case. Yieldcos are focused on being able to appropriately finance their organic pipeline and are thinking about M&A as a secondary or tertiary growth opportunity.
People are no longer necessarily viewing yieldcos as the first call for M&A opportunities. We’re seeing a shift from yieldcos being the first buyers to infrastructure funds being good buyers. We’re seeing utilities coming into the sector in a big way as well. In aggregate, this is causing some revaluation of asset pricing in the M&A sector.
I think there were some developers who misinterpreted what the true cost of equity of yieldcos were, and developed projects aggressively based on that. Those projects and assets have to work themselves through the market. But certainly that is where we see the largest impact of what we’ll call the yieldco dislocation. Everyone looked at them as the logical buyers and the first call; now people are having to make additional calls to other funds, which may have higher costs of capital than the yieldcos were thought to have.
PFR: Last year KeyBanc was one of the arrangers for the first ever offshore wind farm in the U.S. Do you think it is likely that there will be more offshore wind project finance deals launched in the coming year?
What last year proved is that there is financing available for offshore wind projects in this country. Obviously there has been a lot done in Europe, but it’s proved that offshore wind can be financed here as well. I think the viability of projects is probably a function of specific state incentives and power prices and other things we have already discussed. But what we can say with certainty is that financing is available for offshore projects and to the extent that any of those projects materialize, we would be happy to help finance them.
PFR: Moving onto what we’re seeing with pricing and the cost of capital, how would you describe competition between lenders as pricing moves upwards?
I would say that pricing is going up. I think everybody’s cost of funds is increasing and that manifests itself in two ways. The first is that spreads are increasing and the second is that it’s easier to get seven-year mini-perm deals done, as opposed to even 10-year mini perms. Certainly there is a smaller universe of people looking to do fully amortizing 18-year projects at the same price as they would for a seven-year transaction. A counterpoint is that there is less deal flow so far to date than what we saw in 2015, but our view is that if you take a look at a project today versus what it was a year ago, we’re seeing 25 to 50 basis points in incremental pricing.
PFR: What are your projections for how that will escalate?
Certainly that is the way we see things now and that would be my forecast for the balance of the year.
