Since the novel coronavirus crashed into the US economy in March, the project finance market seems, for now at least, to have settled into a new groove. But while loan margins have widened versus the exuberant pre-pandemic days, some officials still suspect that the market—especially for renewable energy—may be overheated.

Take construction loans, for instance. In 2019, margins had been squeezed to well inside 100 bp over Libor. But the sudden eruption of a mysterious flu-like illness in China, where many solar panels are manufactured, reminded everyone that construction risk really does exist (PFR, 3/5).

“The world of under-1% margins is over for now,” said a syndicate banker who is trying to figure out where pricing will land for the most competitive, large deals in the coming weeks and months. “It could be 125, which is low, a little bit crazy. But we’ve also seen deals closing above 200.”

In the past week, 125 bp turned out to be the magic number on a construction loan for Kayne Anderson Capital Advisors’ debut as a solar project sponsor (PFR, 7/7).

But that $118.5 million deal was a manageable size. It may be tougher to circle a 125 bp margin on a larger deal requiring many hands on deck.

One sponsor likely to test that thesis soon is Invenergy, which is aiming to close financing this year for its almost 1.5 GW North Central wind complex in Oklahoma (PFR, 7/6).

And it’s not just on pricing that some market participants say the renewable energy market is as crazy as ever. Despite the surging popularity in some quarters of hedged solar in Texas, others remain skeptical, pointing to soaring basis risk.

“You’re like the greyhound chasing the plastic rabbit,” says one official at a renewable energy investor, referring to the $9,000/MWh price cap in Ercot. “They’re always about to have too-low reserve margins but then it turns out to be fine.”

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