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Got Bonds?

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

Fortnightly - June 2012

governing bank lending under Basel III could greatly impact European bank lending. Basel III is expected to be ratified by the end of this year and banks have begun lobbying heavily against the measures. While each country ultimately will set its own standards, D’Olier-Lees says Basel III could result in a double-whammy for prospective borrowers: higher funding costs and lower availability of long-term bank credit. If that happens, he says, capital market finance could become the more attractive option.

“I see a sea change in project finance funding due to the [future] high cost of project finance loans. European banks are already pulling back from the traditional long-tenor project finance loans,” he says. “I think the larger projects will go to the capital markets because the banks will have less money to lend. And directionally that already appears to be happening. We’ve seen a number of banks exploring capital market solutions, and when we ask them, ‘Why are you here?’ they say ‘Basel III.’ We also have more banks coming to us and saying they’re looking for a construction loan with a capital market takeout.”

Though it’s improved somewhat, the tax equity market still appears limited as well. With the DOE solar tax credit equal to 30 percent of the cost of new installations through 2016, developers traditionally have brought in partners seeking tax relief to take an equity position in the project. However, when the financial crisis hit in 2008, the number of tax equity investors all but evaporated.

As part of the federal government’s stimulus package, the Department of Treasury implemented the cash grant program, which provided renewable power developers a grant up to 30 percent of the cost of the project to attract investors. But the cash grant program expired in 2011, and while the number of potential tax equity candidates has grown, the number of renewable project developers seeking tax equity investors far outweighs supply.

“Right now there are more projects than tax equity investors, but that’s always been the case. In 2008 the tax equity market contracted significantly due to post-crisis losses. Some investors cut back and others dropped out completely,” says Marshal Salant, head of alternative energy finance at Citigroup. “The number of tax equity investors increased a bit over the past year or so, as previous players returned and a few new buyers emerged, but the dollar volume in 2011 was not all the way back to 2007 levels.”

Therefore, while the dollar amount of tax equity required by developers continued to grow, Salant says there was a significant supply-demand imbalance last year. And although he’s optimistic that a few new buyers will join the market and a number of existing participants will invest more, it still won’t be enough to offset the loss of the cash grants.

“The utility-scale projects—the mega solar projects for instance—can and will soak up a major portion of the tax equity dollars, and there is significant demand from distributed solar and rooftop developers too. And there are all the wind deals rushing in to close before the PTC expires,” Salant