Gregory Hutton, managing director and head of project finance for the Americas at Rabobank, sat down with PFR reporter Fotios Tsarouhis at the Dutch bank’s New York office to discuss financing strategies in the rapidly evolving U.S. renewables sector. In the second part of this exclusive interview, Hutton addresses Rabobank’s increased interest in community, commercial and industrial solar deals, the future of tax equity financings, the relative attractiveness of corporate versus utility offtakes and opportunities in biomass and hydro.
Check out the first part of the interview here.
PFR: What volume of wind developers do you believe will rush to secure turbine loans before the next step-down in the production tax credit?
I don’t see a big rush in the turbine loans at this point. There were also a number of different strategies to safe-harbor projects that developers pursued prior to the end of last year. They might have gone long on transformers or bought cable or other types of equipment. They only had to reach a 5% threshold, roughly, for projects. The turbine loans you saw last year, and, to my knowledge, there were only a couple, provided an advantage in that they allowed sponsors to preserve the full PTC value to allow them to be more competitive over the next two to three years. I think the majority of the large sponsors just did it on balance sheet or pursued other methods.
However they were safe-harbored, you’re starting to see the first safe-harbored projects reach the construction phase now. Because of these projects’ competitive position, it’s very attractive for utilities to purchase wind projects and bring them into the fleet and operate them. Developers that did safe-harbor projects are very active now in marketing those projects.
PFR: Considering many corporate offtakers, especially blue-chip firms, have been signing power purchase agreements for several years, how does a creditworthy corporate offtaker compare to a conventional utility?
It’s a different analysis. The reason everyone’s comfortable with utilities is that there’s a public utilities commission in that jurisdiction that regulates the utility and the utility will incorporate the power purchase contract into the rate base. The banks understand that, they’ve been financing that model for a long time. The first one of these corporate PPAs I worked on was in 2010. Google had signed a 20 or 25-year PPA and Google hadn’t been around for that long so the credit question was: “Google’s great, I use it all the time, but is this a sustainable model? What does the company look like in 20 years?” And I’m sure what we wrote in that credit application about what Google was doing in 2010 is different from what they’re doing now. But you had to have that confidence that it’s a creative, creditworthy company and now this is a real trend in our world and you have a good 20-year credit risk. That was the first big leap the banks had to make starting at that time, and this aspect of our market has only grown since then.
PFR: Are community solar financings and non-utility-scale solar deals, including C&I deals, taking up an increasingly large portion of your time and resources?
Our credit process allows us, I think, to be very constructive and collaborative with new structures. We have credit analysts that are solely dedicated to our group that are also specialists in renewables, so whenever we bring a deal to credit we’re not explaining what the ITC is, we’re getting past that and talking about one or two unique issues in a transaction. Because we’re focused on renewables we need to respond to the evolving market, diversify from the standard utility deals and look at more complicated financings like C&I portfolios. We are also beginning to see some community solar transactions in this context.
PFR: What markets are you looking at, with respect to community solar?
Minnesota is one of the markets we are familiar with, though we are talking to sponsors active in other jurisdictions as well. I think Minnesota is the most advanced, the most tested community solar market from a regulatory standpoint. Community solar is pretty new for banks. We like certain aspects of it—it’s simpler to diligence and build fewer ground-mount projects rather than hundreds of rooftops. It looks more like a single-asset financing, but, of course, you’ve got to get comfortable with the offtake structure and the replicability of contracts. Again, it’s no longer the standard utility offtaker. It could be what they call the MUSH [municipalities, universities, schools, hospitals] market or corporates. It’s a very different animal.
PFR: What states outside Minnesota have favorable and attractive structures for community solar?
The more advanced states are Colorado, Massachusetts, and South Carolina is developing. New York is at a pretty advanced stage—but that’s mostly residential-focused, which is not a market we participate in. Because we’re focused on renewables we’re following these markets and if there’s a very good portfolio of creditworthy offtakers and we’re comfortable that there’s a backlog of potential offtakers and it’s a well-structured deal and a strong regulatory structure, then we can pursue community solar.
PFR: How has C&I solar matured as an asset class?
We did our first C&I rooftop deals in 2014. Those were pretty straightforward, it was the big corporates—WalMart's, Target's, Kohl’s, those types of offtakers with the really large programs. I think that people thought that the market was going to grow a lot quicker than it did but the deals can be complex from a structuring and funding perspective.
I think we figured out a way to move them through the financing process in a pretty efficient way, but I don’t think we would ever want to only focus on C&I because it is time-consuming. It’s interesting because the rationales for the financings are more sponsor-based. At the outset, when we close the loan, the diligence is much more focused on the sponsor, and sitting with them and understanding their processes for how they choose, permit and develop sites.
They nominate a group of projects that are going to go into the committed facility and we complete high-level diligence at that time, but the real project-by-project diligence is completed at the funding stage so there’s a flow of systems into the facility as they reach the appropriate stage. The first ones we did were aggregation loans to term loans—aggregating completed projects, sort of like a construction loan that builds up to term conversion. When the projects were completed and dropped in, tax equity funded and our loans funded and that became part of the aggregation loan, which built up until conversion to a term loan. And then the next level of difficulty we started doing last year was a construction loan to finance construction and bridge the tax equity investment of the projects. Once complete, the projects transfer into the aggregation loan and term loan.
PFR: What percentage of Rabobank’s current deals does non-utility solar make up?
It is a relatively small percentage of our portfolio because the transactions tend to be smaller. As for new deals, out of, say 20 deals we’re looking at now, it’s maybe two or three and those are mostly repeat deals with sponsors we have worked with before.
PFR: At that rate would non-utility-scale deals be able to make up for a lack of utility-scale deals in the long-term?
Well, in terms of hours spent doing them, yes. They tend to be smaller and fairly fluid and they do take time to structure, but I don’t think it could fully make up for having a good flow of utility-scale projects.
PFR: How serious is Rabobank about solar storage financings?
We’re at the same stage as a lot of other players. We’re learning and talking to the technology providers, developers, independent engineers and legal advisers. It’s another one of those situations that may not be developed enough for everybody in the market right now but we’re trying to get our heads around it.
There are behind-the-meter applications with good hosts, with fixed-price service contracts that we would be open to and to which we could apply structuring principles from our C&I background. We also see solar-plus-storage deals where the storage component is incorporated into the PPA and it’s easier to understand the performance metrics as well as stand-alone storage projects where they have a utility-type contract. We’ve looked at a few opportunities but haven’t found any that are just right yet.
PFR: What impact will the influx of capital from new Korean, Japanese and Australian entrants have on project financings in the U.S. and what role can we expect these institutions to play?
I’ve seen increased Korean investment and some Australian banks as well. The Japanese banks we’ve seen for years.
We are working on a broad array of types of deals, including larger syndicated transactions. We see new banks in those types of deals. We also have some of these complex, bilateral or smaller club deals where we don’t see them as active. In these transactions, we see the banks that have been in the market for a long time and have structuring expertise from their familiarity with the renewables market. Tax equity nuances, back-leverage, tax law change and these sorts of dynamics in the market are probably a little daunting for a bank from outside the U.S. market coming in and looking at their first deal. I see these investors taking tickets in more straightforward deals in the market.
I would also add, to these new entrants, regional banks in the U.S. Maybe a little more sophisticated because they or the principals at these banks have been in the market for a while and have some sense of the dynamics. We see that particularly in the solar sector—when you get to the distributed solar sector you have regional developers working with regional banks who have been serving those developers as their corporate banks. These regional banks are also getting into project finance as their developer clients grow and so that’s an interesting dynamic as well.
PFR: Are regional banks focused on debt and tax equity investment as it relates to state-level credits?
You have seen that, particularly in North Carolina, but that’s faded away as that state tax credit has expired. The regional banks’ participation in P.F. is driven by the relationships those banks have developed with regional developers. But what we’ve seen is that when the capabilities and deal appetite of those banks are limited when the developer begins amassing larger portfolios. The sponsors then require something beyond a construction loan backed by personal guarantees from the principals of a company. These sponsors will then come to the bank market for more traditional, non-recourse financing.
PFR: Rabobank finances solar, wind and biomass projects. How much of that is biomass? Is there any interest in financing hydro assets?
We just haven’t seen too many deals because the long asset life of hydro fits better with longer-term investors in the institutional and debt capital markets. Large hydro we probably wouldn’t be involved in anyway. We would look at small run-of-river deal if it made sense.
We have a few biomass projects in our portfolio. Those tend to be larger than 100 MW and those look a lot like conventional power plants in terms of construction and technology and have more complex structures than wind and solar projects due to the need for a stable feedstock supply.
