Q&A: Bill Sutherland, Manulife Financial – Part II
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Q&A: Bill Sutherland, Manulife Financial – Part II

BillSutherland, senior managing director of project finance at ManulifeFinancial Corp. in Toronto, spoke with Senior Reporter Holly Fletcher about the lifeco’s strategy for choosing deals,pricing and the Canadian landscape of project finance lenders in the second andfinal installment of this Q&A. “Everynow and then we’ll take on a challenge just to make life interesting. Werecently financed a portfolio of commercial rooftops, which we knew would takean inordinate amount of time and effort to complete,” Sutherland says.

PFR: In termsof what you like to see in projects, do you like them to be contracted or wouldyou ever consider a merchant or hedged project in say Alberta or even Texas ifyou come to the U.S.?

Sutherland: Anumber of years ago we were probably the first to finance merchant wind withfinancing arranged for one project in Alberta selling into the Alberta powerpool and a second on Prince Edward Island which wheeled power off islandthrough New Brunswick and into NE-Pool. Our strong preference is certainly for contractedprojects. Not to say we wouldn’t cons

 

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 Bill Sutherland

ider another merchant transaction in thefuture, but the debt would again be sized to require a very low break-evenmarket price to cover cost of operations and debt service. I would have to saythat it is not that likely that we’ll be doing many of those in the near future. PFR: Lending$1.3 billion in 2013 means you were pretty busy. That is quite a lot—when youare considering lending to projects, and you have so many options, are yougoing to turn to relationships first or are you going to evaluate project byproject and the merits of each?

Ithink all of the above. We have very strong relationships with a number ofdevelopers both prominent and lesser known and obviously try to meet theirneeds. We have developed considerable trust and are very comfortable with theircapabilities as developers and operators. It is natural that we would want todo additional business with them.

Everynow and then we’ll take on a challenge just to make life interesting. We recentlyfinanced a portfolio of commercial rooftops, which we knew would take aninordinate amount of time and effort to complete. We were comfortable with theparties on the other side and wanted to go through and gain the experience. Butwe are unlikely to chase many of those.

Imust admit that given our strong franchise, we do get to see most everything inthe Canadian market but unfortunately we can’t do it all, so we  have to pick and choose. As much as we’d liketo do more deals we have a very small team and we have only so many dollarsavailable to us to invest.

PFR: How muchdo you have to invest each year? Is it a quota of money invested?

Sutherland: The Canadian market has been very strong with alarge number of projects requiring financing. The Manulife team has beenrunning flat out for a number of years. All members of the team work very hard,invariably juggling multiple transactions at a time. I am concerned as towhether our current level of activity is sustainable. The number of transactionsthe team can handle is constrained by its small size and the fact that weoriginate and arrange the majority of our own transactions. We tend to getinvolved in projects at a very early stage and may be involved in a project fortwo or three years. A small team can handle only so many transactions in ayear. There has been no issue with available funds as Manulife considers ourloans to be very attractive investments.

PFR: Who doyou consider to be your peers and on the flip side who do you consider to beyour competitors?

Sutherland: I think it is fair to say that the Manulife teamis the most experienced in the country. We are very well known for ourtechnical knowledge, our structuring skills and our ability to syndicate. We arealso very well known for our ability to execute on the basis of the terms andconditions agreed in our term sheets when the mandate was given. Certainly,that’s not always the case within the market – where deals tend to evolve overtime and close on a basis somewhat different than the borrower expected.

Becauseof the strength of our franchise and our ability to source and execute, theother Canadian lifecos really look to us to put those deals together. Iwouldn’t say the other Canadian lifecos are competition. I would view them askey members of our syndicate.

TheCanadian lifeco market is very small. Manulife, Sun Life AssuranceCompany of Canada and Canada Life AssuranceCompany are the largest players. Smaller players would include IndustrialAlliance Insurance and Financial Services. We havebrought in Siemens Financial Services and, more recently, Caisse Desjardins and Caisse de Depot as well. The number of institutionallenders and capacity in Canada is very limited. It is this limited liquiditythat differentiates the Canadian from the U.S. market and allows us to do whatwe do.

TheU.S. market is characterized by a large number of lifecos and substantial institutionallender liquidity. The banks are the arrangers, often syndicating through bondstructures to the lifecos.

InCanada, the lack of institutional liquidity, our strong preference forarranging our own deals and our ability to lend on a long-term, fixed-ratebasis favor Canada being an institutional market. Although the U.S. market maybe a bank market, the Canadian market is predominantly an institutional market.That’s not to say that there aren’t banks doing deals here but by and large lifecosdominate the market.

PFR: Couldyou talk about what projects are in your pipeline for 2014—if you know yet?

Sutherland: We have a very deep pipeline already with anumber of mandates and credit approvals in place. Looking at my list, ourpipeline entering 2014 is about $1.4 billion and includes wind, solar and hydroprojects across Canada. Not all are mandated and not all will necessarilyclose, but is a good start to the year.

PFR: Oh wow,that estimate tops your 2013 figure.

Sutherland: That’swhy I say 2014 is going to be very strong year for us, although not all lendersare saying the same. A number have indicated that ‘things have already startingto turn down a bit’ and that they don’t know what the market will be like beyondmid-2014.

Weknow that our 2014 is looking very good but I think 2015 will be much weakerbecause the FIT program in Ontario will have been built out; B.C. has enoughcapacity for the present and Quebec will proceed on a slow and measured basis.Frankly, the other provinces probably have all they need. 

PFR: Couldyou talk about where pricing is right now?

Sutherland: Pricing will depend on the nature and quality ofthe project. We typically structure and size the debt to achieve a BBB mid-risk.Both wind and solar are generally priced at the average life Canada bond plus325 basis points and hydro projects at average life Canadas plus 250-280 bps. Forwind projects, we’re doing construction plus 20 years on a 20-year contract. Forsolar, it’s construction plus 19 years on 20-year contract. For hydro, we arelending construction plus 40 years against a 40-year contract.

PFR: Why’sthat? 

Sutherland: The reason is that Canadian lifecos have a greatneed for very long-dated assets and 40-year assets are very hard to come by. Competitionis more intense.

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