Bankers are blaming a slow start to the year in U.S. renewables project finance on uncertainty around corporate tax reform, but activity could pick up once developers get their heads around the risks.
With control over both houses of Congress and the presidency, Republicans are mulling what could be a massive overhaul of the tax system, potentially including major corporate tax cuts.
In the long run, that could mean lower appetite for renewable financing deals among tax equity investors and, ultimately, fewer projects getting built, say deal watchers. But even in the near term, uncertainty appears to be restricting deal flow.
There was a flurry of closings immediately following the election of Donald Trump for deals that needed to be signed before year end.
Since December, however, a lull has set in as negotiations take place between sponsors and tax equity investors about how to proceed with deals that are in the works or have already been signed.
“It’s very quiet right now,” says a New York-based loan syndicate banker. “Renewables developers are working through tax issues with tax equity providers. I have no insight into how long that will take.”
The negotiations revolve around what will happen if a change to the tax code means that a tax equity investor in a partnership flip transaction hits its yield target too early or too late.
“If a deal needs to get done this year—and many do—we’ll find a way of dealing with those risks,” says a project finance attorney.
Whatever the solution is, one thing seems clear—the risk will be on the sponsor.
Another topic up for discussion is the point at which an investor can pull out of a deal with multiple fundings, as is the case in rooftop solar deals.
“At what point in the legislative process can the tax equity investor stop funding, if the economics would be changed too much by a proposed tax law?” says a second project finance lawyer.
The lack of activity certainly can’t be blamed on a lack of contracted projects, however. Although corporate power purchase agreement signings for 2016 came in lower than some had hoped, more than 2 GW of renewable projects did obtain such contracts, according to deal watchers. Meanwhile, utility companies have also been signing PPAs (PFR, 3/2).
“I’m cautiously optimistic it’ll start picking up soon,” says the first project finance attorney. “There are lots of good projects out there to be built.”