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Pattern Energy leads faint yieldco recovery

UNITED STATES: Pattern Energy's recent public offering of stock is a sign of recovery in the battered US yieldco market, although the sector still has some distance to go before it convinces investors of its long-term sustainability.

Pattern tapped equity markets in August to raise $270 million, selling 11.3 million of its Class A shares at $23.90 each. It expects to use at least part of the proceeds to fund the acquisition of projects from its parent company.

Pattern also announced an at-the-market (ATM) programme in May, saying that "from time to time" it will issue new shares worth up to $200 million, giving it the flexibility to raise capital as needed when market conditions are favourable.

The company is not the only yieldco venturing back into the public markets after a precipitous drop in share prices late last year. Prices were driven down by a combination of factors that included investor concerns about overly aggressive growth expectations, and the high-profile bankruptcies of Abengoa SA and SunEdison, which both sponsored their own yieldcos.

NRG Yield announced its own $150-million ATM programme in August. Nextera Energy partners issued $26 million of equity at the end of 2015 via its ATM, and also raised $287 million in a secondary offering in February.

The issuance of new equity reflects improving share prices in the sector. Pattern is back in the $24 range after trading as low as $15.41, while Nextera has come back from a 52-week low of $19.34 to trade in the $30 range. Neither company saw their stocks rise as quickly nor fall as hard as some.

'We've said that if Nextera can start reissuing equity, and if Pattern can follow them, that would be a very good indicator that the yieldco model is still functioning and can still work. It would take those two players to lead the market, and it looks like they're doing that," said Dan Shurey, senior associate at Bloomberg New Energy Finance.

"I think it shows there are still growth prospects for yieldco asset portfolios."

Yieldcos are at a critical point in their recovery, with the opportunity to move away from the aggressive growth that fed last year's bubble and chart a more stable, long-term path, as their European counterparts have done, said Shurey.

Steady does it

"If US yieldcos want to reinvent themselves as a much more boring, but safe, instrument, now would be the time" he said. "I'm not sure yet that they will."

Even as existing yieldcos start to regain their footing, few expect to see new companies enter the market any time soon. "I don't believe that anyone could pull off a serious IPO in the space as we sit today," said Ted Brandt, CEO of Marathon Capital, a financial advisory firm active in renewable-energy mergers and acquisitions.

As the market improves, it could once again attract companies looking for a way to access cheaper capital and compete against utility and financial investors to acquire projects, said Shurey, but not in the near term.

"I don't think the yieldco model has proved itself to be a long-term model yet. I think we still need to see a little bit more recovery before that can happen."

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