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Got Bonds?

MidAmerican’s Topaz solar financing proves that bond investors have an appetite for green investments.

Fortnightly - June 2012

Agua Caliente PV project in Yuma County, Ariz.—of which MidAmerican recently bought a 49 percent stake—received a partial loan guarantee in August 2011. And a number of comparatively small solar PV projects reportedly have secured private bond financing deals in recent years.

“Renewable energy projects aren’t new to bond financing. We’ve looked at U.S. wind and biomass projects, and some PV projects outside the U.S., as well as the renewable projects recently executed with loan guarantees provided by (the FIPP),” says Cynthia Howells, director of global infrastructure and project finance at Fitch, which rated the Topaz bonds at BBB- and will soon release a special report on solar technologies.

How the expiration of the loan guarantees will affect renewable financing remains to be seen. Other challenges include a limited number of tax equity investors; the expiration of the Treasury cash grant program; and the impending expiration of the wind energy production tax credit (PTC) at the end of 2012. However, solar PV projects still can benefit from the federal investment tax credit until 2016.

“Financing solar projects really caught on through the [loan guarantee] program. Will the bond market be open to more solar PV projects going forward? It depends on the deal,” Howells says. “Even with the investment tax credit in place until 2016, you still need to finance 70 to 80 percent of the project. So yes, it could be bond financing, especially if the European banks continue to pull back from project finance lending.”

Banking on Tax Equity

European banks, which as recently as a year ago dominated the U.S. project finance market, have substantially curtailed their lending due to Europe’s ongoing fiscal problems and proposed measures under Basel III—the Basel Committee on Banking Supervision’s proposed new global standards for bank liquidity and capital adequacy.

Though Asian banks—particularly Japanese banks—have begun to fill some of the void, experts say the bank finance market is still anything but robust. It remains to be seen whether European project finance lending ever will return to previous levels.

Until recently, European banks generally had a greater acceptance of new technology and the related construction risks, and typically offered U.S. renewable developers competitive, long-tenor loans at favorable rates. Further, bank loans also come without a bond issue’s carrying costs. Because a bond issue kicks in at the financial closing, the developer must pay interest on the entire loan during the construction period, explains Trevor D’Olier-Lees, a credit analyst with Standard & Poor’s, which rated the Topaz bonds BBB-. 

“The construction period is relatively short, usually from one to two years, but you’re paying maximum interest during that time. With a bank loan, instead of borrowing the full amount up front, you draw it down gradually and only pay interest on what you draw down,” D’Olier-Lees explains. “We’ve seen deals where had it been a bond issue, we might have rated it BB or BB+. But the banks were okay with the risk level and the developer ended up with a better internal rate of return.”

More importantly, D’Olier-Lees says the potential for stricter regulations