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United States

Brave new world for wind-power finance

UNITED STATES: European banks have long been the mainstay of US wind debt finance.

Durable deposits: Caithness Energy is using fixed-rate bonds to finance the 845MW Shepherd’s Flat project in Oregon
Durable deposits: Caithness Energy is using fixed-rate bonds to finance the 845MW Shepherd’s Flat project in Oregon

Last year, they dominated the list of lenders that provided nearly $5 billion to the sector, a figure that rises to $10 billion when solar and Canadian renewable-energy projects are included. However, sovereign debt issues in Europe and stricter banking regulations in the wake of the 2008 financial crisis have reduced European banks' ability to lend, and this has had a significant impact on the wind energy debt market in the US.

"You're seeing a drop-off in volume from the European banks," said Andrew Blevin, a renewable energy finance consultant, speaking at Infocast's Wind Power Finance and Investment Summit in San Diego in February. "Some have dropped out of the market altogether, others have shut up shop for a few months while they see how things pan out back home, and others are continuing to lend but with tighter terms. I'm not aware of anyone who is saying it's business as usual."

With industry expectations for new US wind installations this year varying from 8GW to as much as 12GW or 13GW, and with both the US solar and Canadian wind markets attracting investors, the question is whether there will be enough debt capital to go around.

Andrew Redinger, managing director of KeyBanc Capital Markets, one of the few US banks active in wind, is confident there will be. "I don't think there is going to be any crisis where there is not enough capital to finance projects," Redinger said at the February conference.

But one of the impacts of the new constraints on European banks is that the cost of borrowing has gone up. A year ago, according to Blevin, loans were available at 225-250 basis points above the rate at which banks can borrow funds. Today it is closer to 300. And while banks previously lent money for 15 to 18 years, this has declined to seven to ten years.

New players

While that may not be great news for developers, these changes should bring much-needed new capital to the sector. "The market is going to find balance," said Lance Markowitz, senior vice-president of the Union Bank of California. "As pricing moves back up, people who had left the market may come back in or new people may come in."

US banks are likely to be attracted by the higher lending rates, predicted Redinger, who heads KeyBanc's utility, power and renewable-energy group. "As European banks force the margins wider, it is becoming more attractive for US banks to get involved," he said. "We are trying to get more of our US counterparts involved in this space."

Life insurance companies are also eyeing the opportunity. Canada's Manulife Financial has been investing in wind on both sides of the border for more than a decade, but found itself squeezed out of the market in recent years by "extreme competition" from banks searching for market share. "We're seeing that change. We've seen bank pricing come up and we believe we're now probably competitive again," said Bill Sutherland, the company's senior managing director of project finance. "And it's not just Manulife. We will see more from the insurance companies. I think you will see a lot of capacity become available."

One advantage that insurance companies bring is that, unlike most banks in the market today, they want to lend money for the long term. Their presence is prompting new hybrid deals that combine shorter-term bank money with longer-term institutional debt, said Beth Waters, director of Bank of Tokyo-Mitsubishi UFJ's structured finance group for the Americas. "That is a recent trend, and we are going to see more of it."

Getting into bonds

Project developers are also starting to look to the broader capital markets to replace or supplement bank debt. Caithness Energy's 845MW Shepherds Flat wind project in Oregon is part-financed with $525 million in fixed-rate bonds, while Terra-Gen Power has used a $580.2 million bond issue to help fund 570MW of capacity at its Alta Wind Energy Center.

The pension funds, money managers and other groups that buy bonds are looking for opportunities in what are currently "white hot" markets and wind is a good fit, said Raymond Wood, a managing director at Credit Suisse. "There is ample interest and sophistication in the capital markets."

Martin Klepper, a partner at law firm Skadden, Arps, Slate, Meagher & Flom, expects the wind industry to increasingly take advantage of this interest. "We've had $2-3 billion of capital market financings for renewable energy over the last few years. I think when we come back a year from now, that number will be much, much greater," he told delegates at the conference in February.

Yieldco project owners

The wind industry is looking to tap the capital markets for more than just bond sales. One of the possibilities KeyBanc has been working on is the creation of corporations - generically referred to as Yieldcos - that would own operating wind-energy projects and pay dividends to individual and institutional investors that buy shares. Several variations on this ideas are under consideration, explained Redinger, and all would allow developers to tap into a "huge marketplace that this industry needs to access".

To date, the US wind industry has relied heavily on a relatively small pool of large so-called tax-equity investors that have been able to utilise the $0.022/kWh production tax credit (PTC) and other federal tax benefits that wind projects receive. But with the long-term future of the PTC uncertain, there is a need to broaden the industry's financing reach.

"We're facing a fork in the road. If we're looking at a financing environment where there is no PTC, I think it is 100% clear that things are going to move in the direction of the Yieldco," said Ian Blakely, a director at private equity firm Good Energies. "I think mobilising that kind of capital into this space is going to be big."

Even with a PTC in place, added Blakely, the presence of Yieldcos that can also make use of tax credits will introduce competitive tension into the market. "I think we're seeing with some projects today that a Yieldco is more interesting than bringing in tax equity at the returns tax equity is requiring," he said. "In the interest of diversification, I think you are going to see that mix and that pressure."

The number of tax equity players in the market took a precipitous drop in the wake of the financial crisis but is now rising again. Tax investors provided $3.5 billion worth of financing to wind projects in 2011 and about $2.5 billion to the solar industry, which combined is more than the previous high of $5.2 billion invested in wind during the heady pre-meltdown days of 2007. "We're as busy as we've ever been right now, so I expect this year to be as large as last year if not greater," said John Eber, managing director of energy investments at JP Morgan Capital.

However, one thing developers need to keep in mind, according to Martin Pasqualini, managing director at CP Energy Group, is that like the bank market, there has been "a flight to quality" when it comes to the projects tax equity investors are willing to support. "If you haven't identified a particular risk in your project, that is a really bad place to be," he warned.

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