Sponsored by KeyBanc Capital Markets

Renewable energy is a fast-moving industry, driven by rapid technological progress and an ever-changing regulatory environment, but it remains an appealing target for institutional investors.


In the dynamic field of renewable technology, battery storage and smart grids are attracting attention as potentially game-changing innovations that would allow wind and solar power to compete with other sources of electricity in terms of both economics and flexibility, undermining the assumption that so-called “baseload” fossil fuel generation is required to mitigate against the intermittency of sunlight and wind.

Offshore wind is developing more slowly. While there are signs that this form of renewable energy is now viable in Europe without subsidies, it appears to be taking longer to achieve grid parity in the U.S.

These advances in renewable energy technology come amid a revolution in electricity procurement among non-utility companies in the U.S. Corporations are increasingly purchasing power directly from renewable projects—for both environmental and economic reasons—with knock-on effects for project finance.

Amid the rapid roll-out of renewables across the country, President Donald Trump has cast doubt over the industry by deciding to withdraw the U.S. from the historic Paris climate accord. Or has he? Some observers say the U.S. is on track to meet the targets set out in Paris even without the support of the federal government.

Against this backdrop, Power Finance & Risk assembled a panel comprising representatives of one of the most active investment banks in renewable energy finance, a major global insurance group and two international asset managers to discuss the latest trends in financing renewable energy projects.

Participants:

Andy Redinger, managing director and head of utilities, power and renewable energy at KeyBanc Capital Markets

Ric Abel, managing director in Prudential Capital Group’s Energy Finance Group

Paul Aronson, senior vice president, co-head infrastructure debt, at Voya Investment Management

Jeetu Balchandani, head of North America infrastructure debt at BlackRock

Richard Metcalf, editor of Power Finance & Risk, moderator

Power Finance & Risk          One of the features of the market at the moment is that there’s just so much capital available to invest in projects, and project finance seems particularly attractive to a lot of institutional investors. So my first question is whether renewable project investments compare favourably to other sectors in terms of risk and return, and whether that’s changed significantly over the last six or 12 months in a material way.

Andrew Redinger, KeyBanc Capital Markets                   From a very high-level I think the risk-return profile, whether it’s a utility company or a project financing, wind or solar, it’s always been perceived to be less risky, and I can make that statement because an A-rated industrial versus an A-rated utility have always traded differently. Utilities have always traded inside of industrials. So I think the market, in general, has always perceived the energy space, the power/renewable space, as less risky.

Over the last 18 months, I think what’s happened is—especially in the renewable space—the market has matured. It’s no longer a start-up, if you will. It’s gone through its maturation cycle, and I think it’s become a mainstream place to invest, and it’s attracted a lot of new players. We got in very early, back in ’08, ’09, and I look at the number of players then versus now, and it’s at least triple.

So in general, yes, the risk-return profile of the utility/power/renewable space makes it a very attractive place to put your capital, and it’s obviously attracted a lot of people into it. We’ve seen a compression on returns—I think both in debt and equity—in the last 12 months.

Ric Abel, Prudential Capital Group                        I would agree. A couple of observations I have are that in the renewable sector we have tended to see better and longer contracts. Most of the gas-fired power that we’ve seen recently has been under some sort of hedge and has tended to be contracted for a shorter period of time, so that’s tended to make people gravitate a little bit more to the renewable sector, just because of that.

There is a tremendous amount of capital, and so the competition is very fierce, but having a strong skill set to structure and execute on transactions is a winning formula.

Paul Aronson, Voya Investment Management      I can certainly echo that. Over the last several years, we had—in our organisation—longed for the days of the fully-contracted gas deals that we saw eight, ten years ago, and they weren’t there. The only things that we were seeing that were fully contracted were in the renewable space.

Our organisation was a bit more cautious about entering the renewable space, partially because we wanted to make sure that the technologies worked, and, as we know, they’ve changed and evolved dramatically over the last 10 or 15 years, certainly in solar and wind. The costs have come down dramatically, and one of the things that we historically did not like to see was effectively assets that couldn’t generate a feasible economic return without some kind of economic subsidy. A lot of that has gone away as well, but even with that said, there are still transactions that are worth looking at and evaluating from a debt perspective that are fully contracted with good offtakers, and part of that is driven by renewable portfolio standards. We haven’t talked, as yet, about hydro, but that’s something that’s also been out there, some with contracts, some without contracts, and again, all of this makes a lot of sense in the context of balanced fuel mixes for the utilities.

But, to come back to the initial point, I think the number of entrants into these transactions has been to the point where we sometimes wonder… We like the assets, and yet the relative differential in price between utility and renewable or project spreads has contracted significantly, and that’s driven by a lot of capital coming in.

Jeetu Balchandani, BlackRock       I’d add that one of the key trends we’ve seen over the last six to nine months has been more back-leverage transactions. We continue to see, from time to time, project debt at the ‘opco’ level, but more often than not, now, it’s back-leverage. And whereas there’s always been back-leverage provided up to the point of the traditional flip, in tax equity transactions we’re now seeing that investors are willing to go beyond that flip. Structuring a transaction to make sure that you have the appropriate protections in place for flip extensions and cash write-offs is a key consideration in that type of transaction.

So as we continue to evolve I think that tax equity continues to play a major part in financing renewable energy transactions, and, if anything, we’ve seen an acceleration in projects coming to market with these structures, and more developers and sponsors needing financing and creative structures to work around some of these tax equity points that need to be in place.

Power Finance & Risk          I think we’ll probably come back and talk quite a bit about tax equity, because it’s an interesting topic in light of what the U.S. administration is trying to achieve. Before we move on to that, though, I wanted to pick up, Paul, on what you said about there being just so many participants, so many investors looking to get involved. How many investors can be chasing one deal at a time, and are you seeing investors looking at these kinds of deals that are new in some way or haven’t been involved before?

Aronson, Voya          Yes, I think so. From our perspective—again, keep in mind it’s primarily investment grade, long-term, fixed-rate debt—the people that would play in the power and energy space in the private capital markets with any regularity, if you went back 15 years, was maybe a dozen. There was a transaction done last week that was not a renewable, that was a contracted gas-fired plant, and there were 26 investors in it; at least two or three that, frankly, I wasn’t even familiar with the names of their organisations. Some of that was foreign money that’s coming in to the space. It’s also trickled down to the point where it’s not simply the 10 largest life insurance companies that are out there. Obviously, BlackRock is an example of that too, but we’re also talking about a lot of people that we would consider mid-to-small-tier insurance companies, where arguably we sometimes wonder about the depth of the analysis that’s going in. There is excess spread out there relative to corporates, and at times it feels like 2007 in terms of people chasing yield.

Power Finance & Risk          Okay, so a lot of new investors coming in that perhaps some of us don’t recognise from working in this space in previous years. Another trend is that I guess if you’re trying to get involved in project finance, I’m hearing institutional investors are trying harder to compete with bank finance, and delayed-draw features are a part of that. It feels that institutional investors are able to get comfortable with a longer and longer delayed draw, although obviously there’s a premium associated with that. We see on the equity side as well, institutional investors buying development-stage assets in a way that they perhaps haven’t been seen to do in the recent past.

What’s driving that? Is it just the only way to get the target yield that you’re looking for? What’s driving institutional investors to try and look more at development-stage projects?

Redinger, KeyBanc Capital Markets          From our perspective, because we’re usually hired by developers to go talk to those institutional investors, the institutional investors that have come in and the ones that have been there before, it’s a search for yield. So I think as they get more and more comfortable with these asset classes, they feel more comfortable about taking a little bit more risk. As you get earlier and earlier in the development cycle, especially in solar, for the yield you can pick up, the additional risk that you’re taking is minimal.

When we started this back in ’08, ’09, it was thought that construction was the riskiest piece of the project. This has completely reversed itself. Construction is now considered to be very low risk, and I think this is the maturation of the marketplace, especially in renewables. From an equity perspective, it’s the same thing. I think the equity investors also, in looking for higher returns, are going earlier and earlier, because again, they’re becoming more and more comfortable with these assets classes, and realising the risk-adjusted returns on this perceived risk of getting involved prior to ‘final notice to proceed’ is not as much as maybe they once thought. So that’s what’s driving it, I think.

Abel, Prudential        I would agree with all of that. I would also add that one of the advantages of getting involved earlier is then you get to play a role in structuring the deal. You get an earlier review of contract structures and deal structure. We found that it actually, in some ways, helps de-risk the project because it’s a lot easier to have influence that’s worth something before it’s executed than in trying to go back and fix it in a consent agreement. The fact that you can just get it right going in is a big de-risk element to the transaction.

Balchandani, BlackRock      I think there’s a good healthy tension between the bank and bond market in financing renewable energy transactions. If you think about a long-term power purchase agreement, a 20-year PPA, that’s going to be very well-suited to a private placement-style execution. If a sponsor wants a construction loan and is thinking about turning over the asset, they’ll want that pre-payment flexibility and will likely go to the bank market.

We just saw a couple of transactions in the thermal market get done with bank-bond hybrids, so depending on the scale of the deal, I think that’s perhaps a very good solution for transactions which could have participants from both markets involved. As that scale and that model develops, I think all market participants are going to be a bit more comfortable with that. It’s going to become more of a model form, not something that has to be reinvented every time with market standard intercreditor agreements.

Redinger, KeyBanc Capital Markets          I know we’re going to talk about this later, but the piece in the capital stack that is still absolutely mispriced is tax equity. I just bring that up because the risk-return they’re getting is way out of market, but until there is more of a supply and demand balance with tax equity, they’re going to continue, basically, to earn a very much outsized return in that capital stack. I’m just jealous. I’d like to get some of that return.

Power Finance & Risk          Eventually they are going to phase out the subsidies that underpin tax equity. That’s the idea. I don't know if you can wait that long?

Redinger, KeyBanc Capital Markets          Well, it’s just three-and-a-half years.

Power Finance & Risk          Are you looking forward to that now?

Redinger, KeyBanc Capital Markets          Oh, absolutely. I’m absolutely looking forward to it.

Abel, Prudential        This is called the ‘dream come true’.

Power Finance & Risk          Ric, you mentioned that coming into a deal earlier gives you more control over the structure of the deal. Clearly, there’s never enough supply of this paper to meet the amount of demand. In terms of the kinds of deal structures that are out there, are there the right deals to match what institutional investors are looking for? Is there a wide range of different tenors, amortization structures, a mixture of bullet repayment and amortizing, other structures? If there is, as I suspect there is, quite a wide variety, how does that affect the market? Does it mean the institutional investors are able to pick and choose, or you’ll see some coming into some kinds of deals and not other deals? How does that work?

Abel, Prudential        Well, one of the things you’re seeing more is that there are companies with different missions. Some are there to develop and sell projects, others carry them to the commercial operations date, and then others want to be long-term asset holders. So all three of those are going to tend to drive a different business model or a different capital structure, a different need for flexibility in terms of funding. So it’s not quite cookie-cutter, and you do need a lot of creativity in order to get stuff done.

Redinger, KeyBanc Capital Markets          The rating agencies seem to be coming up to speed on this asset class as well. There’s a lot of institutional investors that need a rating, and the rating agencies historically have been a lot more conservative than the bank market in applying the ratings, but we have seen some movement lately in their methodology around what is an investment-grade rating. So, I think that’s a good thing. From my perspective, we like the earning assets on our books, but I think as the rating agencies get more and more up to speed on this asset class and maybe relax some of the haircuts they take on the models and some other things, the institutional market has the potential to be very competitive with the bank market, maybe not too far in the distant future.

Power Finance & Risk          We saw a report from Fitch Ratings in April that said that they could upgrade some solar projects as a result of a change in their ratings criteria, in particular because the solar projects had performed at a higher level than expected and had been able to cope well with operational stresses.

Redinger, KeyBanc Capital Markets          That’s right, and I think they’re starting to consider maybe taking some merchant tails into account, as well as some other things, maybe not applying such large haircuts to some of these projects that they’re looking to rate. As they get more up-to-speed, I think it’s going to help the institutional market compete with the bank market, and I do see movement along those lines.

Abel, Prudential        Moody’s Investors Service did a pretty interesting study where they felt from a loss-default perspective that a project finance is kind of a Baa3 through the construction start-up, and then from year two out it’s more of an A3 default-loss ratio risk. There is definitely movement in the ratings.

Aronson, Voya          The only other thing I would add to that, though, is there are, obviously, a number of smaller types of projects that can still make sense in the institutional market that frankly don’t really make sense getting rated. A number of investors are certainly comfortable taking on that risk, as well. It’s pretty hard to justify, if you’ve only got a $100 million debt piece, to go out and get it rated by an agency at this juncture.

Abel, Prudential        I would agree with that, and Pru, certainly, is a buyer of non-rated paper.

Redinger, KeyBanc Capital Markets          If you’re able to buy non-rated paper because the bank market is so conservative in their leveraging up of these projects, especially the renewable space, I think if you have that bucket of non-rated capital, you’re in a great position. A lot of our clients are looking for that mezzanine piece, and people that have that bucket of capital, again, from a risk-return perspective, I think they’re in really good shape because I don’t see a massive amount of people—there’s still a lot, but there’s not a massive amount of people—chasing that bucket. I still think you can get a pretty decent risk-return if you have that type of capital in this market.

Balchandani, BlackRock      Yes, that’s a great point. If investors have that flexibility to go up or down the capital structure to find value where today it exists the most, I agree. I think I would say investment grade transactions are challenging at these levels, and we regularly see multiple times oversubscriptions. We’re seeing more value in high-yield and in mezz than I.G. at this time.

Having said that, I think investors are of the mindset that they have to put money out the door, and I think you’re definitely seeing some of that factor into the pricing, and you’re starting to see some of that factor into the terms that are being accepted in the market as well, such as the recent long delayed-draw transaction. So, I think we continue to have to be somewhat vigilant in making sure you’re looking at the right relative value. This asset class has, broadly speaking, a great characteristic of lower defaults, higher recoveries. I think finding the right relative value is often challenging.

Power Finance & Risk What sort of a range of pricing do you see for these kinds of deals?

Balchandani, BlackRock      Going by some recent transactions, anywhere from the mid-100s, 170 basis points on up, to 220 to 230 bps.

Aronson, Voya          But that’s at least 100, 150 tight to where it was three years ago, probably. Let’s call it 100 tight. But the odd transaction is around 300, probably. And I agree. That is a challenge. One of the problems that you have, though, especially with some of these on the investment grade side, is they’re getting—and it used to be that all these projects would be rated BBB- when they got a rating—we’re seeing a lot of projects, even going through construction, that have a triple-B slapped on them from the get-go, which is making people feel it’s okay to jump in. Part of that may be, as Ric was saying, that post-construction you really have an A- deal, and there’s probably an argument for that.

Power Finance & Risks Are the spreads you mentioned over Treasurys or over Libor?

Aronson, Voya          Over Treasurys.

Redinger, KeyBanc Capital Markets          On the average-life, right?

Aronson, Voya          Yes.

Power Finance & Risk          Well, we’ve talked a little bit about how the market has matured generally, especially renewables, and I think, Ric, you talked about how different sponsors have different business models, as well. My next question is how big of a difference the identity of the sponsor makes to the attractiveness of these deals for investors.

Abel, Prudential        The sponsor is the key to everything. Stuff happens. Good sponsors solve it, bad ones don’t. I think whomever is the sponsor is paramount to the new or the old loan credit. That’s where we start each of our credit reviews: who’s the sponsor?

Balchandani, BlackRock      I’m going to have a slightly different view. The sponsors, of course, are very important, but it also depends on the project technology, the structure, how much equity there is, and some of the in-house expertise we have. We have a Renewable Power Energy Group, we have in-house engineers, so I think we take the slightly different view that if we think the project has got the right technology, the right suppliers, the right contracts, and the right structure we could be supportive of the project, even if it’s a smaller developer.

Redinger, KeyBanc Capital Markets          I would say you’re both correct. We probably won’t start a relationship with a sponsor unless they have the wherewithal and they have the track record. But Jeetu’s point is the money goes in first; the equity all goes in first. So I don’t care how big the sponsor is, good money won’t follow bad money, irrespective of the sponsor’s size. They’re both right.

Aronson, Voya          I agree somewhat, except we will always want to see a project that ‘Ric Abel & Richard Metcalf Enterprises’ can operate, because that in and of itself makes it a project that we like. Having said that, as Ric Abel said, things do happen over time, and if you’re lending on a 20-year basis, it’s likely that your sponsor may change over that time.

We usually allow sponsors to be changed if they have a certain expertise and net worth. That being said, partnering on the front end with someone who you have a lot of faith and comfort in, who tends to look at things perhaps in the same way that a long-term debt investor would, in other words, not worried about trying to pull out $200 million over the course of the next two years in an equity distribution, if that’s the wrong thing to do for the long-term value of the project. Sometimes some of the sponsors tend to be a lot more focused on producing short-term returns, and that’s something that we would be wary of, as well.

Power Finance & Risk          Another topic that is of interest is on the technology side. Renewable energy is a fast-evolving area of technology, and a key element of it at the moment is the introduction of battery storage, which would potentially solve the world’s energy problems if you combine that with renewable energy. We’ve seen portfolios of renewables which have an element of battery storage in it getting financed, and I think we’re starting to see standalone battery storage getting financed. I don't know whether that’s in the institutional debt market. How do you view the addition of battery storage projects to renewables deals?

Abel, Prudential        We did a 40 MW standalone battery storage project in 2015, and so we definitely think that it’s part of the future. We think there will be a lot of it done in California, and there’s certainly a lot of discussion going on in Texas and New York. PJM Interconnection got inundated with more storage than they thought they’d get. It’s here, and it’s going to develop, and it’s going to become more and more creative. I think it’s an important area to be focused on.

Redinger, KeyBanc Capital Markets          I would concur. We have done some battery storage deals ourselves, but it’s always been enhanced in some form or fashion. What’s happening is, we’re getting experience with the battery storage right now, and as time passes, we’re going to get more and more comfortable with doing that on a standalone basis with no enhancements. So within the next 12 to 18 months, I suspect if the market is moving that quickly, I think we’ll end up doing a battery storage deal on a standalone basis.

Power Finance & Risk          There’s been a bit of a slowdown in wind project financing this year. How do you see wind project financing activity developing in the coming months and years?

Redinger, KeyBanc Capital Markets          I think we’re at the point where everyone wants to get their projects completed. I think there’s something like 20 GW of turbines that have been qualified for the production tax credit. So I know there’s going to be at least 20 GW, or otherwise, someone’s going to be long a lot of turbines. Then, if you look at what’s going on in the offshore market, there’s almost 5 GW of requests for proposals from five different states, so although it has slowed down, I think given the number of turbines that need to find homes and what’s going on in the offshore space, I think you’ll see a pickup here going forward.

Power Finance & Risk          How do investors feel about offshore wind? Does it differ significantly from financing onshore wind?

Balchandani, BlackRock      For sure. I think it’s almost its own asset class, so one has to get comfortable with it. BlackRock has financed offshore wind, both in debt and equity, so we are familiar with the additional complexities of investing in offshore wind farms. I think what it took us is our internal team — I mentioned our internal engineers —to review the exact assumptions in each project to come up with what we thought was the right level of operations and maintenance and capital expenditure in those transactions, not just believing what a sponsor says, or even what an independent engineer says, and having our own independent view on that.

So that’s what it took us, and, of course, having the in-house expertise on the investment side helped to get us comfortable. We think it is a significant part of the renewable energy future, both in Europe and in the US, so definitely expect to see more transactions coming from that space.

Aronson, Voya          The majority of our power and energy portfolio has been in North America, and we have not done anything offshore. We’ve looked at a couple of things, and I agree. I can’t tell you we have an opinion one way or another on the right amount of extra sensitivity that you would have with respect to the complexity of doing an offshore project. We haven’t reached a conclusion on that at this point.

Power Finance & Risk          Another topic that I wrote quite a bit about last year was the increase in non-utility corporates directly procuring power from renewables projects, both to meet the environmental targets that they’ve set themselves, which are often very ambitious, and also just to have a long-term idea of how much that power is going to cost over a long timeframe. How has that affected project financings in this area for institutional investors?

Redinger, KeyBanc Capital Markets          I would say it has provided some support to the contracted market, where those long-term PPAs would not have been present necessarily with the traditional utility PPAs, and the differences between the two are now starting to, I think, be well understood by investors.

One of the things one has to always keep in mind is corporates can be cyclical. Utilities do have that backstop of having a public utilities commission approval and a much more stable capital structure. Having said that, we don’t see a tremendous amount of long-term utility PPAs in the market. I think corporate PPAs filled a void in the market.

Balchandani, BlackRock      Are you pricing it differently though, the corporate versus the utility PPA?

Redinger, KeyBanc Capital Markets          I would say it depends on the corporate, but the ones that I’ve worked on personally in the past, we have not, given the high credit quality nature of those corporates.

Power Finance & Risk          Does the structure of the PPA have any impact at all, whether it’s a virtual PPA or a physical uptake?

Abel, Prudential        One of the things that you see is they’re shorter term, a lot of the corporates, ten or 15 years, and then it puts quite a bit of pressure on the overall economics. You have to be willing to take some level of a merchant tail.

Those deals tend to be price-driven first, terms second. I think it makes things a little bit perverse, where they’re unwilling to move on the price, and there’s a trade-off between risk and return. You can get very competitively bid PPAs, and I think there have been some disappointments in the corporate market where certain things haven’t gotten executed because ultimately they wound up with a PPA that wasn’t financeable.

Power Finance & Risk          Let’s move on now to the regulatory outlook for renewables generally. There’s a lot of concern about what the federal government is going to do with regards to energy policy on renewables and also tax reform, and the Paris Agreement, of course, generating a lot of headlines. Do you think, in terms of financing renewables, whether it’s deals that have already been done or the project pipeline, that people should be concerned about everything that has happened since the election in November?

Redinger, KeyBanc Capital Markets          I would say I don’t think that backing out of the Paris Agreement in the short-term or maybe in the long-term is going to have any impact whatsoever on individual states’ renewables policies here in the U.S.

I think with regards to the tax, there’s some noise around negotiating a tax equity deal right now between the senior debt and the tax equity. There’s the noise that’s always been there, and there’s a little bit more noise now because of expected declines in corporate tax rates. But it’s solvable. The tax incentives are already being phased out. Given all the press and all the noise around this, I don’t think it really is going to have much of an impact whatsoever.

Balchandani, BlackRock      I agree that there is not much impact on the current deal flow that’s already going to happen. The tax rate and the potential reform has caused uncertainty, and I think that has increased a little bit of that tension between sponsor, lender, and tax equity. Who’s going to take this risk? I think it’s fallen to the sponsor, because the lenders are saying it’s not my problem, tax equity is saying it’s not my problem, so the sponsor gets to bear that. Now, whether something happens to the tax rate or not doesn’t really matter, but uncertainty has been built into any financing that needs to get done now.

So, there is that noise, you’re right. That noise has increased. In terms of future pipeline, it’s really hard to predict what happens beyond this year or next year. Two, three, four years out there could be an impact if there is a lower tax rate or something else comes out on the regulatory front. Having said that, I was going to agree that this is pretty much driven by state renewable portfolio standards. It’s great that the federal government has these tax incentives in place, but had it not been for the RPS I think we would not have seen this level of generation.

Aronson, Voya          Yes, I completely agree with that latter point. In terms of certain things that are in process, it’s not going to change. On balance, we don’t ever specifically look to invest in transactions that are renewable for the sake of being able to trumpet the fact that we are good citizens. But there are many investors that like to have that as another, ‘Gee, I can check the box’, if it makes sense economically. And utilities still want it, the general population still seems to want it, so I don’t think that you’re going to see an absolute stop in the advancing of renewable transactions. As we’ve talked about, the capital costs, the actual economic costs, regardless of tax implications, are today much more competitive than they have been historically.

Redinger, KeyBanc Capital Markets          Listen, on the tax equity front there are tax investors. What risks are they taking if they’re not taking tax risk? And let’s be fair, they’re getting 400 basis points over anybody else’s cost of capital in the capital stack. If they’re not taking tax risk, what risks are they taking?

Power Finance & Risk          Well, isn’t it true that they’re basically just providing some capital that’s absolutely necessary to make these projects economic?

Aronson, Voya          So are we.

Redinger, KeyBanc Capital Markets          I’m taking risk. What risk are they taking without taking tax risk?

Balchandani, BlackRock      Structure? And certainly, it’s also been some of the basis of risk, and I think in certain sectors within renewables I think sponsors got a little bit ahead of themselves in trying to maximise those benefits. Looking back, are they maybe taking some of that risk? But I think that’s a well-trodden path now.

Redinger, KeyBanc Capital Markets Well, remember, they’re getting a sponsor guarantee for that, as well. They’re not taking that blindly; they’re also making a sponsor guarantee that.

Power Finance & Risk          So rather than it being a risk/reward thing, it’s more of a supply/demand thing. As you’ve said, there’s plenty of capital for the debt, but there’s a limit to the amount of tax equity, and that economic relationship is what’s driving those transactions rather than a risk/reward relationship. Ric, anything to add on tax equity or on the regulatory outlook for renewables?

Abel, Prudential        I think what’s been expressed captures it. The amount of de-risking that goes into a transaction for tax equity is very high. They’re taking execution risk like we all are. A lot of deals fall apart because you’re not able to come to terms, but once the deal is done you’d have to pretty much have a total blow-up for the deal to fall apart.

Power Finance & Risk          This is also something that’s been touched on briefly—Paul, I think you mentioned it earlier—an influx of capital from around the world. You mentioned a much broader pool of investors coming into these deals with some that you may not recognise, and some international investors. Japan, South Korea and Israel are some of the countries that I’ve heard these investors are coming from. I imagine the effect of that is to just intensify, exacerbate in a way, the existing situation. Is that right?

Aronson, Voya          Yes, that’s right. It’s also in the fixed income markets, in general, that there are a lot of foreign investors that over the last several years are—as you’ve seen people domiciled in North America—looking for opportunities to increase yield. As you’ve seen low rates around the world, everyone is searching for yield, and North America is certainly a place that seems to have a reasonable degree of political, and frankly, relative economic stability.

Balchandani, BlackRock      I would very much echo that. I think that from our perspective, we are seeing more international investors that are looking to invest broadly across borders. So we’re seeing that flow take place. A lot of it is coming into the North American market. Some of it is going to the emerging markets, and, frankly, there’s some U.S. capital that’s going into Europe and Australia and other places.

So I think everyone is taking much more of a global view of the asset class and that freer-flowing capital is adding to more efficient execution for the sponsors.

Power Finance & Risk          Do placement agents play a role in bringing these international investors in?

Redinger, KeyBanc Capital Markets          We certainly try to. I think the aggressiveness of the capital in the institutional marketplace means that not only are we trying to compete to win business from these developers who have the means to hire a bank to do the placement, but also the capital providers are going direct. So, we’re competing not only with other banks to win the mandate but we’re competing with the capital providers who are going direct in offering very, very attractive deals if they do the deal all with them. So, we’re competing on both fronts.

Power Finance & Risk          So, you’re competing with Prudential as well?

Redinger, KeyBanc Capital Markets          Yes. We sometimes place bonds with Ric and Ric sometimes goes direct. It’s just the way it works. It’s a very, very competitive environment. It’s a very good environment if you happen to be looking for capital.

Abel, Prudential        On the equity side, I think we’ve seen an even larger influx of Japanese, Korean, Asian investors. Certainly Canadian pension funds are very heavily invested at the risk part of the capital structure. So it’s not just in investment grade, it’s across the entire capital structure. There’s no shortage of capital anywhere other than in tax equity.

Power Finance & Risk          There seems to be consensus on that. Andy, has the role of a placement agent in these deals developed in any other way or changed in any other way in the past year or so? Is it a fairly established one?

Redinger, KeyBanc Capital Markets          Well, I think it has changed a little bit because the competition for these institutional markets is just doing another bank deal or a hybrid deal or some form or fashion of the two. So I think what’s changed is we may be teaming up more with someone like Ric to go do a deal, provide a hybrid proposal, but we’re also providing a purely private proposal and a purely bank proposal, so we’re covering the whole gamut. What’s different is we’re teaming up with one particular institution to go pitch a specific hybrid deal, but then we’ll also pitch a bank-only and a marketed placement deal as well. We tend to be working with the institutional investors more than we had in the past or where we would just get hired and then go talk to everybody to try to get the best deal.

Abel, Prudential        We’re actually more friendly than some people think we are.

Power Finance & Risk          Do the private debt teams in banks also ever frustrate their commercial bank colleagues by taking some of their market away from them?

Redinger, KeyBanc Capital Markets          No. From our perspective, I’m indifferent. We work as one team, whether we do a bank deal or a bond deal, I’m indifferent. We don’t think of it that way, where we have silos. We’re just one team that tries to get the best deal.

Power Finance & Risk          Does that depend on how the bank is structured and set up?

Redinger, KeyBanc Capital Markets          Yes, in some banks. I think the larger you are, as you get bigger and bigger, you get more siloed. I think that may be an issue with some bigger banks, but given our size, we look to build long-term relationships and do the best thing for the client irrespective of the product.

Power Finance & Risk          The socially responsible, environmentally friendly aspect of financing renewables is obviously there, and I want to know how important it is to your institutions that you’re doing that. Presumably these deals don’t get any kind of pricing advantage because of that, but I wondered whether you’d agree.

Aronson, Voya          Realistically on the margin they probably do get a slight pricing advantage because there is this unsaid or unspoken desire to make it look as if you’re investing in green bonds. When I’ve been asked the question by placement agents, I’ve always taken the approach that we’re not going to pay a premium to buy a green bond. It has to stand on its own. Having said that, the market has shown that when you have something that makes a lot of sense on its own, it might tend to get bid a little bit more aggressively because of that added feature or benefit. It’s really hard to quantify how much that is or should be because it’s a much less tangible benefit, other than it makes a lot of people feel good. But it is something that we are obviously somewhat cognizant of as we build-out the overall portfolio, the same way that if our entire portfolio was constructed of coal assets, we would probably view them in a fairly negative way from our clients’ perspective.

Abel, Prudential        From Prudential’s point of view, it’s interesting to look at. I’ve been at Pru 28 years. When I started in ’89, probably 40% of our project portfolio was coal. By the late 90s, 40% of it was gas. By ’07 or ’08, 40% of it was wind, and I would say two years from now, 40% of it might be solar. We look at economics first, second, and third, and that’s what drives it. The market opportunity has more than anything led to that shift in concentration.

Balchandani, BlackRock      It is a very important consideration. We hear about it more and more from our investors, and they are paying increasingly more attention to it, and also to measuring the impact of each and every transaction.

Having said that, though, we have not seen that translate into any kind of price discount for these transactions, and I think, at least for the time being, we haven’t heard of anyone even contemplating that at this stage. So, to Ric’s point, economics are number one. These are transactions which are good from a corporate social responsibility standpoint, as well as from measuring the impact. That does get measured and does get passed on, and investors like that and they want to be able to report on it. At some point in the future, perhaps we might see that factor into price.

Redinger, KeyBanc Capital Markets          From our perspective, we get a lot of questions at our senior management level from equity investors about what we’re doing for sustainability. So, we are actually looking right now at issuing a green bond. I do agree that there’s no pricing advantage right now, but as more and more companies like ourselves look to access that market, I do think there will be, going forward down the road, a pricing advantage as it gains in popularity. So I do think it’s a developing market. I expect some pricing advantage down the road.

Aronson, Voya          It is all about economics, but we talked about the fact that on the renewables side, spreads have crashed in tremendously. Realistically, my guess is over the last three to five years, spreads on coal opportunities have widened dramatically. And so, how much of it is that intangible? It’s a combination.

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