Full transcript below:
Katie: Welcome to "Energy Renewed," a podcast by ICF, a meeting of the minds on renewable energy where people come together to discuss ideas and synergies to propel the industry forward. I'm Katie Janik from ICF and the host of "Energy Renewed." ICF provides technical advisory services to lenders, investors, and project owners for renewable energy technologies and processes. In this podcast series, we will consider varying viewpoints ranging from policy topics to equipment components.
Hi there. In this episode, we are discussing the impact of COVID-19 on financing debt and equity investments for renewable energy projects. We are in an unprecedented situation and--as consultants, and generally within the industry--we are asking how is COVID impacting transactions? Today, we have Steve Becker from the ICF technical advisory team as well as representatives from U.S. Bank and CIT to speak about the current situation from the perspective of lenders and tax equity investors. Hi, Steve.
Katie: Do you want to introduce yourself?
Steve: Yes. Thank you. Steve Becker, I've been in the power industry as a consultant now for over 20 years. And during that time, I've been able to experience a number of ups and downs in the industry due to various events, including recessions and changes in technology, and so forth. In particular, I work in the transaction space and with developers and in some cases working with lenders from a bankruptcy standpoint as well.
But as a consultant, I've always been interested to see how it impacts the financial community, these various events and, you know, COVID is no different. We've had our own experiences in terms of changes that we've seen in terms of various aspects of our due diligence like project schedules and the O&M piece, and so forth and so. But what I'm really interested in is trying to understand more on the financial side. How COVID has impacted that. And so, with that said, we have two great guests today, Whitney Hampton, who's a senior project manager in the RETC Group at U.S. Bank Community Development Corporation, and Dan Miller who's managing director in CIT's Energy Group. Whitney, would you like to introduce yourself?
Whitney: Yeah, of course. First of all, I just want to say thank you, Steve and Katie, for having us on. I appreciate the opportunity to and share my experience. So as Steve said, my name is Whitney Hampton. I am a senior project manager in the Renewable Energy Group at U.S. Bank CDC. My job, as project manager, is an underwriter. I underwrite every element and close transactions. I've been closing deals for five-and-a-half years for the bank and every year seems to present its own sort of unique set of challenges. And I would say this year has been no exception. I've been very much in the trenches, just because I've had to deal with the complications that the COVID crisis has brought on firsthand. I would also say that my point of view tends to be more deal-specific for that reason. But I can also just speak to what we're seeing across our overall portfolio and across the market in general. Dan?
Dan: Hi, everyone, and thank you also to the ICF team for having me. I think this is a great idea and I'm excited to be included in the discussion. As far as my background goes, I've been financing renewable and traditional energy projects for a little over 12 years. And at CIT, I'm responsible for originating and structuring debt transactions for primarily large renewable energy projects that tend to be on the higher end of the complexity scale.
A lot of my clients that I cover seem to be at the forefront of this massive energy transition. So our team spends a lot of time in what we call the “lab designing structures” to address merchant risk, basis risk--low rated or not rated--off-take counterparties, as well as technologies like battery storage and all the fund revenue streams that come with that asset class. It's never really a dull moment and very exciting. But as far as the past five months have gone, CIT has been very active, leading fairly sizable transactions. So, I look forward to sharing the key takeaways from those experiences with you and your listeners.
How changes in lending affected prices
Steve: Well, thank you both. One of the things that we heard as consultants--very early on when COVID was just in the thick of it, in February and March--was that the pricing has changed from a lender standpoint. And not so much for existing projects that were already being worked on, but more from the standpoint of new projects that were coming down the line. Can you speak a little bit to that, Dan?
Dan: Yeah, for deals that needed to close in the March to May timeframe, we saw lenders within the syndicate needing material on [inaudible] pricing to get the deals done--as a lot of them were trying to determine what exactly their funding costs were and whether or not they were even open for business at the time. I would say that, while the pricing on the margin had increased, the overall cost of debt was probably the same or even potentially lower just because the LIBOR rate at the time had dropped so significantly. So, the sponsors definitely understood the situation and their economics were materially impacted.
I would say going forward, while the market is starting to stabilize quite a bit, there's still some pricing overhang due to higher bank funding costs and capital allocation constraints at some of the banks. But I would say that, relative to pre-COVID levels, the pricing is anywhere increasing from 25 [inaudible] to 100 [inaudible] based on what we call the Big 3: the sponsor, the complexity of the transaction, and the size of the transaction. Since most of the deals we work on are at the higher end of the complexity scale, the importance of the sponsor and the size of the transaction will really dictate, you know, where within that 25 to 100 [inaudible] range that transaction will ultimately price.
Steve: And from a due diligence standpoint, as a consult, it's changed quite a bit for us in terms of our areas of focus. We have much more focus on. Certain aspects of the contracts of project schedules, knowing where equipment is coming from, and force majeure provisions and force majeure notices--which is something that we've experienced much more as consultants when we're looking at these transactions. But I wonder how that's impacted the lenders and their area of focus. Whitney, would you like to start?
Whitney: Sure. Yeah, so I would echo all of that. I would say we spent a great deal of time sifting through those various contract provisions or force majeure provisions and of all the various deadline dates. In doing so, I think they probably had to cast a bit wider net than we have in the past just to capture some of those events and circumstances that are sort of new to the situation. So, for example, I had to keep myself apprised of various state mandates and stock construction orders and things like that. And I think about how those things are impacting program requirements and my projects timelines and things of that nature.
And then, of course, like you mentioned, we've also been facing potential supply chain issues. One of the first questions that I'm asking my partners now is, “where's your equipment and where is it coming from if it's not already on U.S. soil?” And it's not just the equipment itself but it's also the components that are used in making that equipment. Because even those things are causing delays. And that, of course, was a much bigger issue in the beginning when all of this was first unfolding, and things have loosened up quite a bit. But in the beginning, it was very interesting to see that our sponsors were having to make some very tough choices on outdoor equipment, and where it was coming from and what they were selecting for the projects.
And it definitely was a complicating factor just in terms of IE reports because every time they have to change that, it has to filter throughout the entire deal. So, it made things interesting. And then, of course, I would also just say that we are sorting through all the various buffers and construction deadlines and making sure that we're not pushing up against PPA cliff dates or debt maturity dates. And then where necessary and where it is [inaudible], we are asking partners to go back and renegotiate those deadlines if possible. So again, necessitating some tougher conversations but I would say I think we're finding our way through it.
Potential scheduling delays on each end of construction
Steve: Thanks. And Dan, how about you? What's your experience been?
Dan: Yeah, I definitely share the same experiences as Whitney, from that perspective. The only point I would add is that, during construction, our primary focus has really been on the tax equity sunset date. Just because that date doesn’t typically benefit from some of the force majeure relief, the PPAs do. So, on every deal, we're having the independent engineer run a two-month delay scenario on both the equipment side as well as the installation side of the equation to ensure that there's an adequate cushion to that date. If there is an adequate buffer to that date, then we're fine with pursuing. Otherwise, we'll typically have to more formally transfer that risk to the sponsor whether it's including additional defaults tied to milestones or needing additional credit support in one shape or form.
That's definitely a case-by-case basis because the deals that we're doing now--assuming it takes a year to build some of these large projects and the tax equity investor wants to fund their investment in 2021--those CODs or placement service dates are happening in the June 2021 timeframe. So, there's a sufficient buffer to absorb any probate delays. But where this could be pretty impactful going forward is some of the late Q3, early Q4 transactions. If a tax equity investor is extremely intent on utilizing 2021 tax capacity and it takes a year for those projects get built, we're definitely going to need to provide even greater scrutiny to the construction schedule than done previously. And so, having very diligent IEs like ICF that are willing to dig into the nitty-gritty of the schedule has been in and frankly will continue to be critical in getting all these deals done.
Steve: One thing that we've experienced--or the one thing that I thought in the beginning or I've heard in the beginning from some of the owners of assets, renewable assets specifically--is that they plan on hanging on to their assets a little bit longer as they thought that the market was not good enough. Maybe the buyer pool was not as robust as it used to be. So, I'm wondering how it has impacted the future pipeline of assets that are coming for transactions for debt and tax equity. Whitney?
Momentum in the pipeline
Whitney: I would say as a project manager, I have not felt that at all. I'm as busy as ever. I'm happy to report that at least for us, we really aren't seeing any indications of that or any indications of our pipeline slowing down. We actually have a really robust pipeline at the moment, and we may even have some opportunity to increase it later this year. I would also say that we're still seeing a lot of syndication activity, which is great. So, U.S. Bank holds about 50% and then we syndicated about 50%. And some of our syndicated investors, especially in the beginning, kind of slowed down a little bit. But as far as I'm aware, none of them have stepped away from the table, which is, of course, great for us because that opens up more capacity for us.
This is probably a good segue to Dan, but I would say that the issue I've seen more is as partner access to debt. We're just seeing lending institutions that are either pausing or slowing down their targets or they're just more hesitant to extend credit or commitments. But for us, I don't think that we've seen the volume of deal change and I don't expect it to. But I think that we'll probably just see things slip into 2021.
Dan: It's funny, because the sponsors typically tell us that they're waiting to sign up tax equity to get going. Hopefully, ICF can go into further detail on their COVID-19 developer edition and can settle this debate once and for all. But all kidding aside, we were already seeing a fairly sizable Q3, Q4 pipeline pre-COVID. So, some of the deals that were delayed as a result of COVID--and spilling into Q3, Q4 from Q1, Q2--should make for a pretty interesting fall and holiday season, to be honest.
And on top of that, most of these projects getting developed are not straightforward or layup type deals. They all have been pretty high with the complexity characteristics I was mentioning before. So, while there are likely 50 or so consistently active banks in the project finance market, only 10 or so are willing to do the work associated with understanding the risks these new-age transactions present. On the one hand, this is great news for banks like CIT who are very experienced in analyzing pricing and structuring around these new-age profiles. The pace of this massive energy transition may be slowed if banks don't really roll up their sleeves because there'll be a sizeable void over the next year as these projects continue to get more complex and interesting. It'd be interesting to see if the pace of the education of banks coming in to support them can meet that or not.
Katie: It's interesting that you mentioned these new-age assets and that Steve mentioned owners wanting to hold on to the assets for a little bit longer. Because some of the key takeaways from the episode that we have from the developer standpoint is innovation, adaptation, rolling with it, right, really adapting to what's happening in the current situation in the market and being flexible.
Steve: Yeah, great. It's great to hear that the pipeline is still as robust as it was before. I guess with time being relatively short, are there any closing statements? Whitney, do you want to start?
Not all challenges lead to COVID
Whitney: I would just say, I think we can all agree that the industry is very challenging right now for a number of reasons. Not just because of COVID, but I think the industry is actually weathering the COVID storm itself quite well. It certainly adds a layer of complexity to our transactions and, of course, we're asking more of our partners from an underwriting side, but my experience thus far has been that sponsors and third parties are proving themselves to be very flexible and resilient. And my hope and my thought are that they will continue to do so.
Dan: Yeah, I would just add that pre-COVID-19, I felt like we were getting into a groove with a lot of the traditional project finance banks that were used to simply [inaudible]…there was a transition that we were going through and it was important to really roll up their sleeves and do the work associated with the new assets and support their clients. I think COVID-19 has obviously put a damper on some of the progress that we're making then--and in the March and April timeframe.
I was nervous that we would never get back to where we were prior to COVID-19 but it seems like definitely getting a lot of calls from reverse inquiries from banks saying, "We're open for business. We still have the same budgets that we had previously, so what do you have to show us?" And so, I think that we've missed five months of opportunity to continue to progress towards making progress on the energy transition. But that doesn't mean that we can't overcome that time with a lot of hard work. So, from that perspective, I'm optimistic on the future for these types of assets.
Steve: Well, thank you, really appreciate having both of you today. It was very enlightening and it’s always interesting to see how resilient the power markets are--and seem to be--as well here given this current event.
Katie: Yes. Thank you for being here today. I'm happy we were able to do this.
Dan: Great. Thank you so much for having us again.
Whitney: Yeah, thank you both.