Get ready for a wave of solar refinancing.
When you don’t have a crystal ball, data and certainties are a close second. Thanks to folks like kWh Analytics, SEIA, and Wood Mackenzie, we are well-equipped with both, and have our sights set on the imminent wave of refinancing about to hit the proverbial shores.
There are two primary drivers for refinances in the clean energy industry; expiring tax equity and rising interest rates.
Tax equity refers to dollars invested in third-party solar development projects that yield a tax benefit to the investor. According to Norton Rose Fulbright, typically, tax equity covers 35% of a solar project +/- 5%. These tax equity structures come with a 5-year horizon, meaning that after 6 or 7 years, they are no longer eligible for tax recapture, making it the optimal moment for refinancing.
And what happened approximately 6 years ago? The solar industry saw an uptick in project development. As Richard Matsui flagged last year – 14GW of solar, or 15% of today’s installed base, was developed in 2016. Matsui predicted a refinancing boom, and we think he’s spot on. Tax equity expiration drives the refinancing cycle, and now that the industry is more mature, more projects are ripe for refinancing.
Last year, Energetic Insurance supported Longroad Energy as they refinanced a C&I solar portfolio with a $24M term loan from Fifth Third Bank using EneRate Credit Cover. To learn more about this project, see this piece in Power Finance & Risk.
“The time was right for us to replace a more expensive and complex tax equity arrangement for a cheaper and simpler capital structure” said Tait Nielsen, VP of Project Finance at Longroad Energy.
Refinancing inevitably triggers a re-assessment of the original project, offtakers, and risks. A lot can happen over the course of 5-7 years; elections, macroeconomic shifts, and even global pandemics. It’s no surprise that the credit profiles of project offtakers can shift between project inception and tax equity expiration. Previously investment-grade offtakers might have become downgraded to sub-investment grade. This doesn’t mean these are bad energy project risks, it just means the underlying offtaker risk has changed, and should be taken into account when refinancing.
The second primary driver for refinances in the clean energy industry is rising interest rates. In case you have managed to avoid the news cycle – all eyes are on the Federal Reserve, and expectations are high that the Fed might raise interest rates in the near future. Rising interest rates mean a higher cost of capital, and no one likes added costs.
“Concerns about inflation abound. An interest rate hike is inevitable, and more than one hike is likely,” says Marko Papic, Partner and Chief Strategist at Clocktower Group. “We don’t know exactly when these hikes will happen, but we know that capital is likely to be more costly in the near-future, and won’t get less expensive any time soon.”
Forward-thinking developers are in a rush to refi, they see interest hikes coming, and don’t want to wait; they know that it is prudent to refinance now, rather than wait until later this year or next, when it will likely be more costly to do so.
Whether you are refinancing or financing for the first time, Energetic Insurance is here to help when project cash flows are exposed to weak underlying offtaker credit. Customers tell us that our policies typically help increase the advance rate or the loan to value, help sponsors get a lower cost of capital all in, improve loan sizing, and all of this ultimately improves levered IRR from the sponsor’s perspective.
With so many sponsors and developers looking to refinance, the opportunity for financiers is significant. For financiers actively looking to expand investments in renewable energy, our policies should help them improve cashflow projections, and enable them to consider support of portfolios that include non-investment grade risk. Harnessing our solutions might enable lenders to provide more competitive rates, helping them reel in deals and deploy more capital where it matters. If you are a financier reviewing projects with sub-IG offtakers, consider recommending to the developers you are working with to reach out to us.
Finally, regardless of interest rates, developers will need to refinance projects from time to time, for example, when:
There is a mini-perm structure or a warehouse facility, the loan will end at a certain point, and there is the expectation of refinancing
Projects are successfully aggregated. As developers pull together portfolios, they might have an initially high cost-of capital, however, as they hit a critical mass of projects, they should be able to get a lower all-in cost of capital
A raw deal was reached and developers are regretting terms and financing facilities they want to get out of
Developers want more cash from a larger loan amount
Projects have generated a lot of cash and developers have paid down the principal balance on their loan; refinancing enables them to seek a greater loan amount
The short story: if you are a solar project sponsor or developer, you should consider refinancing sooner than you think. If refinancing is 1-3 years in the future, consider refinancing today to take advantage of a lower interest rates and to avoid more expensive capital in the future.
Interested in learning more? Reach out to us here, or meet with us at the Solar + Wind Finance & Investment Summit next month.
This article does not constitute and is not intended by Energetic Insurance to constitute financial advice or a solicitation for any insurance business.