Andrew Redinger |
Andrew Redinger is managing director and group head of utility, power and renewable energy at KeyBanc Capital Markets. He sat down with Sara Rosner, PI’s managing editor, to discuss the lender’s strategy and what lies ahead for power project finance and M&A in North America.
PI: What is KeyBanc Capital Market’s strategy in the project finance sector?
Our focus is primarily on power and renewable energy including wind, solar and natural gas. We’ve looked at other technologies, but to date have only closed project deals involving those three. We will continue to consider other technologies outside of those, but may it be more difficult if it’s not mainstream.
In the project finance space, we provide both construction and permanent financing as well as advisory services for accessing the capital markets, tax-equity and acqusitions and divestures for those different technologies. We tend to use our balance sheet in situations where we can build long-term relationships. We wear a lot of hats and can provide access to a full suite of investment banking products beyond just our project finance capabilities. These include advisory services for equity, debt and tax equity, access to the capital markets and traditional lease and commercial banking services.
What’s unusual about KeyBanc Capital Markets is that we don’t necessarily have a standalone project finance group. I head up the utility, power and renewable energy group and our ability to execute on project finance opportunities is housed within that group. We look for project finance opportunities but also look toward the company’s other needs. If it’s just a one-off financing, we probably won’t get involved. We try to use our balance sheet where we can build long-term relationships that utilize all our products and services. We’re a relationship oriented project finance team.
PI: How has KeyBanc’s strategy evolved over the past couple of years and how will the bank operate in power project finance in the next 12 months?
We really started getting in to the project finance space in 2006, primarily in the wind space. We’ve had some fits and starts, similar to what the wind space has experienced. But we just completed our best year ever. KeyBanc likes the business and we’d like to continue to expand and grow our project finance capabilities going forward. For example, we’re doing more solar. It continues to be the place where we’re seeing a lot of activity. We’ll continue to do more solar and gas deals--we see an uptick in people looking to develop natural gas-fired plants. We’ve participated in a couple of natural gas-fired deals already, but we see that as an area for growth for us.
We’ll continue to look at and be opportunistic about other things that come up. For example, there’s a lot of gas infrastructure that needs to be built in this country as a result of all the shale gas. I fully expect that this is something we’ll consider going forward as that market continues to develop. Also, the military has issued an RFP to put generation and renewable resources in, on or around their bases. That’s mostly wind and solar but they’re also looking at some other technologies as well and we’d be open to financing those. We’re the type of firm that rolls their sleeves up and looks to put capital to work where there’s long-term relationship potential. We’ll dig in to opportunities where we see long-term value and growth. If you look historically, that’s what we’ve done.
PI: Given the uncertainty that had been surrounding the production tax credits, how do you see wind project financings playing out this year in terms of volume and execution?
Adding a one-year extension to the PTC doesn’t really do much in my opinion. It will help get more projects built in 2013-14 but it’s more of the same. The industry needs to find an alternative cheaper source of capital for its long-term sustainability.
There’s been a real drive recently to find a way to access to that capital. There’s a large and growing investor base that you see investing in yield cos., REITs and MLPs and other kinds of yield-oriented vehicles. The dividend yield on these vehicles is 5-6%, which is cheaper equity capital than anything available currently. The renewable sector needs to continue to work on finding a way to tap into this large attractive investor base. It will not solve all the problems because power prices are expected to continue to be low but it will provide the industry the long term visibility on the availability of attractively priced capital to allow continued investment in the sector.
PI: What do you see out there in terms of innovation in deal structure and tapping different types of financing resources?
The capital markets have largely been untapped for this asset class. These investors include traditional insurance companies, pension funds and money managers. There continues to be an opportunity to educate this investor universe on the benefits of long-term contracted assets, 20 plus years, with an investment grade revenue stream of BBB- or better that is non-cyclical in nature. These investors will typically provide capital with a longer tenor and be very competitive with traditional bank financing. Yield oriented equity investors are also beginning to look at this asset class that compares favorably to REIT’s and MLP’s in regards to the quality and reliability of the projected dividend stream. There is a big opportunity to educate this attractive and largely untapped investor universe in regards to contracted renewable generating assets.
PI: The landscape of project finance lenders has really changed. How will this cast continue to evolve in 2013?
One of the big questions we’ve always had to deal with internally is why aren’t there more U.S. banks pursuing this sector? Quite frankly, I don’t have a good answer. We’re starting to see more domestic banks taking an interest and investing the time to get educated, but it’s been a slow process. We expect this trend to continue with some acceleration in 2013. In regards to the European banks still active in North America project finance, we are anticipating them being very selective with a sweet spot of 7-10 years with some pricing pressure to the upside. We also expect Asian lenders to be active in the U.S. with an emphasis on smaller, longer tenured transactions.
PI: You mentioned REITs and MLPs. What’s in store for these concepts and other financing innovations?
The REIT and MLP ideas are really a proxy to finding a cheaper source of capital for contracted generating assets. Although I don’t see a change in legislation in the near future making generation assets REIT-able or MLP-able, there is a similar structure that provides the same benefits without any change in legislation. A yield co. is a C corp. that utilizes all the tax benefits attached to, and generated by, the assets (wind, solar, natural gas etc.) that are contributed to the C corp. This entity shelters the income stream produced from these contracted power sales. There are several publicly traded C corps. that are utilizing a similar structure currently and all trade very close to REIT’s and MLP’s in terms of yield and EV/EBITDA. There is a growing universe of yield oriented investors that we believe will find this asset class attractive and are expecting several developers to access capital through this structure in 2013.
PI: Is there any precedent for using this structure with generation assets?
Yes. There are several public companies, mostly listed on Toronto Stock Exchange, that have a very similar structure and own contracted hydro, wind, solar and natural gas generating assets. These firms trade very similarly to REIT’s and MLP’s with dividend yields in the 6% area with EV/EBITDA of 12-14 times.
PI: Why hasn’t this yield co. structure already been carried out in the U.S.?
There’s a couple of reasons, but we expect to see more in the U.S. in 2013. The Canadian market has a successful track record and is more comfortable with these yield co. structures. The listing requirements including costs are also more yield co. friendly than in the U.S. There are typically less regulatory hurdles, it’s cheaper and the Canadian market is more accepting of IPO’s below $200 million. There is also no empirical evidence that suggest you will trade better on the TSX vs in the U.S. The thinking has been: why take the execution risk here? Go to Canada, get your deal out and dual list later on in the U.S. That aside, I think you’ll see a couple larger yield co. IPOs list here in the U.S. given the very strong demand from both institutional and retail investors for long-term, reliable contracted revenue streams that have a dividend yield in the 6-7% area.
PI: When you talk about the midstream gas sector, what do you see out there for project financing in 2013?
We are continuing to see a significant amount of investment in the development of shale gas in several new and existing basins in the U.S. The infrastructure required to gather and transport that gas to market needs significant investment. We anticipate originating more midstream deals associated with this need in 2013. There is also an LNG story that’s going to be played out. We’ll be opportunistic as those projects get more developed.
PI: Will merchant continue to gain traction in the market in 2013?
PI: What’s on tap for M&A in North America in 2013?
I think there will be increased activity versus 2012 across the renewable space. A lot of capital has flowed into this area over the last several years and many sponsors/developers are at their investment ceilings or have been cut off from internal funding sources. Sponsors/developers are weighing the outlook of finding alternative and cheaper sources of capital to compete and earn a fair return versus monetizing their existing investment. Given the developing yield co. story, we believe that this will provide the smaller sponsors/developers, that are too small to access the public markets on their own, an attractive exit.
