Q&A: Mike Lorusso, CIT Energy
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Q&A: Mike Lorusso, CIT Energy

Mike Lorusso is managing director and group head of CIT Energy in New York. He sat down with Sara Rosner, PI’s managing editor, to discuss the lender’s growth strategy, financing merchant power and the changing landscape of project finance lenders. Check back next week for Lorusso’s take on tax equity structures and trends in project finance and asset-based M&A in 2013.

Mike Lorusso

Mike Lorusso

What is CIT’s strategy in power project finance and asset-based M&A? Where does it fit into the sector? Our role is to do three things: first, we are in an asset-building mode, so we will continue to put capital to work and book assets strategically. Second, as we are growing and increasing our business volume and improving our position in the marketplace, we’re looking to up-tier our role in deals and take a more active pursuit of lead and co-lead opportunities. Third is a strategy to expand our profitability and complement the asset-build with income from capital markets fees.

We see ourselves fitting into the bigger picture in the sector by working with sponsors to bring them value-added ideas and solutions, help them get their deals financed, their investments completed, new construction built and acquisitions done as well.



You talk about being in asset-building mode. What types of assets hit the sweet spot?

It’s a variety of things. Within the power space, we’re fuel source agnostic so we will do fossil fuel plants and renewables. There’s a predominance of gas-fired plants right now, which we’re fine with, as well as some acquisition financing going on with coal. We will cautiously look at coal as long as it makes commercial and environmental sense. We’ll pursue renewables, we’re fairly active in both wind and solar. Wind doesn’t seem to have much future growth opportunity due to the diminishing lack of support that it’s receiving. Solar is reasonably active right now and has a runway for the next several years.

We’re looking for diversity and we’re participating in all of those sectors. To a much lesser extent we’ll do biomass. But we see much less opportunities there that fit our sweet spot. Additionally, we shy away, as many lenders do, from unproven or non-commercial technologies.

Can you describe CIT’s activity in the past year?

We had significant new business in power last year. That includes a few leads in solar deals, a few co-lead transactions and we also bought some assets in the secondary market. We are truly in an asset-building mode. We’ll continue to do that and we’ll continue a multi-pronged approach to building assets by being strategic and selective. In addition to that, we’re looking to co-lead or lead deals. We’re willing to do underwritings and syndications for transactions when we feel that there’s a receptive market to do that.

Our focus is the U.S. and a little bit in Canada. It’s agnostic across all of the sub sectors within power. Also, what’s nice with us is we can do the full range of traditional, fully amortizing project finance-type structures through the range of term loan B type structures where a lot of traditional PF lenders don’t play. It’s a few guys, such as ourselves and a few of the institutional investors. We can work with the full range of structures there including the various senior debt roles within the renewable tax structures such as coming into a leveraged lease as debt or coming into a partnership flip structure. Whether it’s a back-levered deal or a levered deal, we can participate.

In terms of trying to move up-tier, what is that process like?

CIT has had a long history of success in the power project finance market. We’ve benefitted from an opportunity to step back into a senior role as our competition, primarily from the European banks, has withered a bit and left somewhat of a vacuum there for us to step into. We’re looking to use our balance sheet within reason and put assets on it, which has been well-received by the marketplace. We’ve always had a good reputation and a good history of being a smart lender, aggressive but selective, and our sponsor clients are very receptive to that. We built up our presence back in the marketplace and demonstrated success. We’ve proven to our clients that when we say we can do something, we’re able to execute on that and that’s important because execution risk is a huge question a lot of times in borrowers’ minds. We’ve allayed all of those concerns and proven ourselves and the reception has been very positive as a result of that.

How do you see this changing landscape of project finance lenders playing out in the next year?

I’ve been in this business longer than I would like to admit--I go back over 20 years--and there’s been a constant flow and evolution of lenders during that time and some lenders have been in and out several times now. That’s a continuum that we always see in this space. There’s a variety of new lenders entering, some lenders don’t exist anymore, certain countries have had starts and stops in this space, certain lenders have been active internationally, come to the U.S. market and try it for a while and then pull out. There has been a constant flow in that regard. As lenders leave, new lenders step up to fill the void.

There are several European lenders that either don’t exist anymore or have withdrawn from the market or withdrawn from the U.S. market but that gap is, to some extent, filled by other lenders and new lenders stepping up. There are several new U.S. lenders that have appeared. There are some European lenders that have just been on the sidelines and are now gradually getting back in and are selectively coming back in to the market. There seems to be that constant ebb and flow in the market and that change helps to keep a reasonably constant source of capital available for these transactions.

Who are the strongest players in project finance and why? What is CIT’s strategy with regard to the competition?

I look at the market in three levels of competition with, of course, some overlap. At the high end, there are the riskier transactions. At that level you have the higher priced, riskier deals that involve more structuring and complexity to mitigate those risks, but you get paid for it. There’s a small continuum of competition there.

Moving to the mid-level, you have less risky deals that still involve some effort in structuring and pricing is still very attractive. Probably two-thirds of the lenders play in this level. We’re involved and very active in that mid-level.

At the bottom end of the market, you have very plain vanilla, straight forward deals, heavily banked sponsors, major names, sponsoring those transactions. On that level, you get the piling-on effect of the lenders who are risk-averse. They’re willing to go out long-term and willing to take very low yields on the funding. We’re very selectively in this space because we find those deals to be underpriced and driven by relationships or lenders who are just looking to get other ancillary business and are not so concerned about the transaction in and of itself.

What are your thoughts on getting merchant deals financed in this market this year?

We’re certainly seeing growing momentum toward new merchant construction. That’s a function of developers responding to the evolving supply-demand imbalance in certain regions resulting from coal-fired retirements that have been announced. Additionally, there is the movement toward gas as the fuel of choice which is a reflection of the optionality value, as gas prices increase, that these plants provide in the future.

Those plants are being developed mainly in three markets. California, where there was an influx of new construction deals over the past two years that were a result of PPAs that the commission required utilities to enter into. That was last year’s generation of deals. Looking forward this year, there are merchant plants proposed primarily, if not exclusively, in ERCOT and PJM. We’ve certainly seen activity there. The lenders that are going to pursue those plants are in the middle to high-end of the categories I mentioned. Those lenders, which are probably much less than 50% of the universe of lenders, are most likely the ones who are going to pursue those plants. How those plants get done will require a combination of energy hedging and/or capacity payments and a low leverage resulting in low dollar-per-kW basis.

In PJM, its utilizing the capacity payments and getting some comfort as to where people expect, conservatively, those future prices to be. ERCOT is more challenging because it’s an energy market, not a capacity market. There’s a lot more reliance on the peak pricing and the spark spreads you can get there. So those deals are more difficult and that’s reflected in the price that Panda paid for their merchant deals in ERCOT last year. That was a sub-debt level of pricing that they paid to get those deals done.

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