Q&A: Daniel Brown, KeyBanc Capital Markets
In the last 12 months KeyBanc Capital Markets has financed projects developed by Recurrent Energy, Deepwater Wind, 8minutenergy Renewables, Samsung Renewable Energy, Renewable Energy Trust Capital and SunEdison, to name a few.
Daniel Brown, managing director, utilities, power and renewable energy, worked on many of those deals. Brown joined the Cleveland-based bank in 2008, after a two year stint as an engineer for Ontario Power Generation.
In the first part of this exclusive interview, PFR’s managing editor, Olivia Feld, speaks with Brown about Keybanc's appetite for deals, the state of the residential solar market and how low oil and gas prices are affecting the growth of renewables.
PFR: KeyBanc came third in PFR’s recent league table of the leading project finance lenders (PFR, 12/23). How do you maintain your spot near the top?
We’ve been working hard at building the brand and the practice since 2006, when we really got actively involved in the renewable energy space. I think our offerings are a little bit unique, in that other shops might have standalone investment banking and project finance arms that have some conversations, but are not fully integrated.
We are a relationship-focused investment bank that has access to project financing. We have grown the project financing practice organically within the group, which allows us to have conversations with our clients across the capital structure. That is something our clients find very valuable and contributes to our success. Clearly last year was a strong year for project financings, but we were also involved in equity raises and advisory work.
PFR: What kind of services do you offer clients? KeyBanc has done acquisition financing and traditional project finance. Have you ever invested in tax equity?
We’ve done everything except tax equity, although we have placed it in the past. Certainly we’ve done a lot of work in traditional project financing. We’ve been involved in equity raises for yield companies, we’ve been involved in high yield offerings and we’ve placed debt with institutional investors like insurance companies. Separate from the yieldcos, we were involved in the SunRun initial public offering and we are also involved in residential solar aggregation facilities. With the exception of tax equity, we can provide solutions across the capital structure, whether it’s traditional project financing, acquisition financing or access to mezzanine financing or equity providers.
PFR: How do you intend to deploy capital through the rest of this year?
Our playbook is open across all those options. I think it’s a function of what the market will be looking for this year. We are still very much open for business and we look forward to seeing where the volume will be coming from.
PFR: How would you describe renewable deal activity in light of the investment tax credit and production tax credit extensions at the end of last year?
I think 2015 was a record year for pretty much all providers of capital to the renewable energy industry. Everyone is excited about the PTC and ITC extension. Some of the deal flow that will be coming directly as a result will come in the second half of the year, just as a function of the life cycle of development for many of these renewable projects. There was a big focus by our clients to comply with what people thought the deadlines would be in 2015. Particularly in wind, there was a rush to get things ready for financing. There will be a little bit of a lag before that happens again, particularly when you talk about utility-scale project financing.
What we are beginning to see is much more conversation around solar distributed generation financing, whether it’s community solar projects or portfolios of commercial and industrial assets. It’s a little bit different from what we historically do, just because of the credit characteristics of some of the offtakers. But that is an area where I would expect to see much more activity for the balance of the year.
PFR: Do you have a minimum deal size or volume when you look to widen your pool of relationship sponsors?
We have done deals as small as $10 million in the past, but most importantly, I would say we are very focused on relationships. If there is an opportunity to do a $10 million transaction, but it does not offer any future business opportunities, that would likely not be of interest. But we are very flexible if we see a pathway to growing a relationship with the sponsor or if we have a sponsor with an existing relationship. In those cases, we can look at deals that might be smaller. We don’t really think about minimum deal size as a screening criteria; we consider everything in the context of the broader relationship.
PFR: How would you characterize the current state of the residential solar market?
I think the fundamentals behind the residential solar market are the same as they were last year and as a result, we’re bullish on that industry in general. That said, whenever you have newer industries, you’re always going to have little hiccups on the way.
If you were to ask us, our number one concern right now would be more around the legislation in Nevada and the precedent that may or may not be set, particularly the non-grandfathering aspects.
Many of the public companies are trying to find the sweet spot between having explosive growth and stable financials. They’re trying to figure out where they want to be along that spectrum. But we still think there are large opportunities for residential solar across the country and it seems, on a monthly basis, that new states are becoming economical for residential solar.
We are confident that in the long run, we will find a way to manage through some of the near-term issues that have come up. I think we put $600 million to work in the residential sector last year, so we are continuing to look there. The market needs to mature in terms of the number of banks that are involved, but we are still optimistic about the sector.
PFR: In terms of the bigger picture, how are sustained low oil and gas prices affecting the renewables space?
There are a couple of phenomena at play. It’s not a new situation that power prices are low and the economics of these projects can be impacted by low power purchase agreement prices, particularly depending on where you are in the country. What I would add is that there’s not a lot of load growth in the country as a whole. If you think about energy efficiency and moderate GDP growth, there just has not been a huge demand for power. That’s independent of generation type.
I would comment that gas prices are not increasing and you would expect that power prices would at least loosely follow the same path as gas prices. But technology costs are also falling, so I think that will help the sector.
For the long term, I see renewable growth being driven by robust renewable portfolio standards. I know there was a stay in the Clean Power Plan, but I think there is still a lot of momentum towards replacing older forms of generation with renewable technology. There will be some incentives aligned with continuing growth of renewables, but I am not necessarily optimistic on gas prices and load growth being drivers for renewable growth.
An additional source of growth would be a transition coming with PPAs, from your traditional utility offtakers to corporate PPAs for corporate responsibility reasons, in many cases. That can be a huge market and not necessarily correlated with power demand growth or gas prices.
PFR: Do you have any estimates for how big the corporate offtake market could be in the future?
I don’t know if I would have an estimate on size, but when you look at companies like Amazon and Walmart who are signing PPAs and being followed by many of their peers, I am very bullish that it can be a large market. Everything we hear from our clients implies that there are more of those conversations happening, perhaps even more than with traditional offtakers. We’re very excited about that being an engine for growth within the renewables market.
Check back next week for the second instalment of this Q&A, in which Brown discusses bank financing capacity for gas-fired projects in PJM and the how dislocation in the yieldco sector is affecting the M&A market for renewables.