Q&A: Josh Goldstein, Recurrent Energy — Part I
Recurrent Energy had a blockbuster 2015, closing seven project finance deals and securing over $3 billion for its development pipeline. The Canadian Solar subsidiary is now in the midst of building out 1 GW of utility scale solar projects in the U.S.
The San Francisco-based sponsor was rewarded for its hard work, picking up project finance borrower of 2015 at the Power Finance & Risk Deals and Firms of the Year Awards in May. Josh Goldstein, senior v.p., finance & capital markets, scooped the sponsor finance official of the year award (PFR, 5/19).
In the first part of this exclusive interview, PFR’s managing editor, Olivia Feld, speaks with Goldstein about the project finance landscape for solar, an increased pool of investors and the impact of the deflated yield company market.
PFR: Can you walk me through last year and how much Recurrent raised in the capital markets?
Recurrent had a big year financing and breaking ground on 1.2 GW of projects. We raised $3.1 billion. That amount was comprised of capital from tax equity and J.V. [joint venture] partners, as well as lenders that provided construction debt, bridge loans against equity and tax equity commitments and project-level letters of credit.
I think the tremendous 2015 was the culmination of a lot of a lot of work, not only on these projects but also the building up of our reputation and track record over many years. We were able to raise capital from top tier counterparties that have become great partners because our team offers high-quality assets to the market. When our broader team interacts with our financing partners, it’s clear that we have a talented group that will solve unforeseen issues that inevitably arise in greenfield projects from time to time.
The team has the reputation for not only executing but being creative and having good projects, which allows the finance team to add value by optimizing the capital structure because virtually every type of capital structure is available to us.
PFR: It’s been a big year for Recurrent, but also for the wider solar industry. How would you describe the market conditions for utility-scale solar in the U.S. right now?
Capital market conditions are definitely robust. Reputable sponsors of high-quality projects have access to different types of financing across the capital structure. We’re seeing continued interest from many types of investors who are looking to deploy capital. Those would include banks, insurance companies, pensions, infrastructure funds, IPPs [independent power producers] and utilities and even sovereign wealth funds.
PFR: Has that pool of potential investors changed at all in the last 12 months?
We’re hearing about more pensions with the capabilities to do direct investments and I think the pool of interested parties in each category is likely much larger.
PFR: There seem to be many more pension funds coming into play. I imagine that part of the trend is due to funds chasing yield in such a low interest-rate environment. Going back to Recurrent, could you talk me through Recurrent’s financing pipeline for the rest of this year?
We’re commissioning seven projects that comprise the 1.2 GW that I mentioned earlier. They’re all connected to the grid and still being commissioned. We’re very focused on cleanly executing those across construction, asset management and finance where we have several closings associated with the financing commitments that we announced last year. Additionally, Recurrent is very focused on power marketing and progressing projects at all stages of development across our pipeline.
PFR: You closed a record number of transactions at the end of last year. Do you anticipate launching any new greenfield project finance deals during the remainder of this year?
We may be coming to market toward the end of the year, but it really depends on the timing of our next late-stage development asset.
PFR: Going back to February of last year—obviously it was a very different market landscape then—Recurrent publicly stated that it was considering launching a yield company. Fast forward 18 months and that has not occurred. Could you talk me through Recurrent’s thinking with the yieldco market? Is that a plan that the company has fully abandoned for now?
The yieldco market has obviously been challenged, but, as I mentioned before, there is a lot of capital coming into the sector. Over the last seven years I’ve seen the cheapest form of equity change a few times and yieldcos, those vehicles, may have been the cheapest source of equity for certain types of projects for a while.
However, the appetite for equity investments in high-quality utility-scale solar now appears to significantly outstrip the volume of projects coming to market. As a result, there are many ways to tap reasonably priced pools of capital that have become more competitive. As far as Canadian Solar and the yieldco is concerned, management commented on the yieldco on the most recent earnings call, so I would refer you to those comments.
PFR: You have been at Recurrent for seven plus years now, during which time the company has been owned Hudson Clean Energy Partners, Sharp and now Canadian Solar, as you mentioned. How would you describe how the business model has changed at the company over those various ownerships?
The transformation of capital markets has been very significant as there has been much greater acceptance of solar. The real shift occurred probably four or five years ago when investors started getting really comfortable with the technology, and now we’re seeing just great enthusiasm for solar as a viable part of the generation stack and also an attractive sector to deploy capital.
The broad interest in the capital markets allows us to be strategic and use different financing structures and optimize based on capital market conditions at the time we’re bringing a project to market as well as the project specifics.
As you mentioned before, I think solar financings have and should continue to benefit from macro trends. Interest rates and spreads are compressed and there are not many asset classes providing investors with reasonable and steady returns that are basically uncorrelated with other asset types.
PFR: The company seems to be focused exclusively on greenfield projects. There are a lot of renewable assets in the market and there has been a lot of M&A activity so far this year. Do you anticipate any acquisitions by Recurrent in the near future?
We’ve always focused on greenfield development and we have the capabilities to do everything from early-stage siting through construction, financing and asset management. That said, we have acquired several projects in the past. They’ve mostly been at earlier stages where we can utilize our expertise to add value in some way and we continue to look at M&A opportunities, especially in the states where the solar market is just starting to gain traction.
PFR: Can you give me an idea of the states which have been identified?
We’re focusing on the U.S. broadly, and probably would refrain from commenting on specific states at this time.
PFR: Last September when you spoke with PFR you talked about aggressive pricing on project finance loans. How would you describe trends in pricing and the competition between lenders so far this year?
We have not been very active in the debt market since we closed our financings last year. However, my sense is that pricing has held steady and continues to be very aggressive. Perhaps it has increased slightly from the bottom but probably not more than about an eighth of a percent.
PFR: Toward the end of last year, during the close of the multiple deals you worked on, the market shifted. I’m going to take you back to the winter of last year and ask: What do you think were the driving forces?
I’m not sure that the market shifted at that time. The pricing on all our projects held and we were able to close at the levels we had negotiated earlier in the deal with all lenders, and that was consistent across all seven projects.
Check back next week for the second installment of this Q&A, in which Goldstein discusses the state of the tax equity market, the company's plans in Texas and further afield.