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Are you maximizing debt proceeds for projects with multiple sources of revenue?

Updated: May 1

On its face, renewable energy project finance should be very simple: projects sign a long-term power purchase agreement (“PPA”) selling electricity to an offtaker, and developers then borrow funds against that known, future revenue stream to build the project.

Simple, right? Sadly no. Financiers determine how much they are willing to lend based on the Cash Flow Available for Debt Service (“CFADS”) after a project has paid all relevant operating expenses and senior investors (such as tax equity). Financiers apply a Debt Service Coverage Ratio (“DSCR”) to determine the amount they are willing to advance against expected CFADS (often referred to as “Debt Sizing”).

This becomes a complicated exercise after giving effect to all the ways a project can generate revenue. Unfortunately, most financiers take a binary view, often significantly discounting any source of revenue that is unfamiliar or that does not fit within their “credit manual”. The result is lower CFADS (at least as far as the lender is concerned), and lower debt proceeds to the sponsor.

The most common example of this is how financiers often treat contracted PPA revenue from sub-investment grade or unrated offtakers. Project sponsors have seen financiers applying a discount of 80% or more to these cashflows, cratering the economics for sponsors. Take the following example inspired by a transaction Energetic Capital worked on recently:

Donnie Developer executed a fixed price PPA at $0.15/kWh with an unrated, midsized private manufacturer with a strong financial profile. The project will generate 2.37M kWh in year 1, resulting in over $350K in revenue.  The lender discounted revenue under this contract by 50% due to the lack of a credit rating. With revenue cut in half, the loan amount offered by the lender fell by more than 60%.

Donnie reached out to see if Energetic Capital was able to devise a more palatable financing solution. Energetic Capital’s ability to look at the offtaker risk in context of the entire project enabled Donnie to receive full credit on the offtaker PPA. Ultimately, Energetic Capital’s financing solution resulted in a significant bump in the developer’s levered rate of return, increasing from 10% to 14%.

Flavors of this scenario are playing out constantly across the C&I segment. Before you give up on financing projects yourself, reach out to see whether there is more value in your project than traditional financiers are willing to concede.

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