What is Shaping the Market? - Norton Rose Fulbright ... · What is Shaping the Market? Keith Martin...
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New York • Washington • Los Angeles • Mexico City • São Paulo • Moscow • Warsaw • Istanbul • Dubai • Johannesburg • London What is Shaping the Market? Keith Martin [email protected] Infocast Projects & Money January 20, 2016
Transcript of What is Shaping the Market? - Norton Rose Fulbright ... · What is Shaping the Market? Keith Martin...
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What is Shaping the Market?
Keith [email protected]
Infocast Projects & MoneyJanuary 20, 2016
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Banks remain eager to lend. There is littleupward pressure on rates. North American dealvolume reached $56 billion in 2015, up 24% fromthe year before. Renewables were up 70%. Therewere 104 active banks, up 10% from2014. Another increase in number of banks isexpected in 2016.
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Construction debt is pricing as low as 1.5% to1.75% over LIBOR. Add 25 bps for term debt withstep ups over time. Most banks are lending forterms of under 10 years. DSCRs at P50 are 1.45xfor wind and 1.35x for solar. Back-levered debt isgenerally at a 50-bp to 100-bp premium to termdebt, depending on the tenor and shape of cashflows.
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Term loan B volume shrank again in 2015 to $3.3billion, down two thirds from 2013. Rates movedhigher. A strong BB credit is pricing at least at425 to 450 over LIBOR, compared to 350 bps overin 2014. Three term loan B deals were repriced orpulled from the market in the fall. The PandaHummel deal closed in late October at 600 bpsover with 4% OID, after early pricing talk of 550 to575. The turmoil reflected a broader retreat fromenergy stocks by the institutional market.
$250 million
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The project bond market is expected to remainsleepy this year, and will not pick up until thereare fears of a significant rate increase. There isone deal in the pipeline currently. There were sixdeals in 2015. Project bonds are long-term fixed-rate debt pricing at low 200 to low 300 bps overaverage-life treasuries.
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The number of tax equity investors continuesto increase. There are at least 35currently. Renewable energy tax equity was an$11.5 billion market in 2015, up from $10.1 billionthe year before. Yields have been trendingdown. Tax equity could be on the verge ofshifting back to a buyer's market for the first timesince 2007, at least for the larger sponsors.
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Yield cos will recover, but after repricing andswapping out shareholders from hedge funds thatwere looking for growth stocks to insurancecompanies and pensions funds that are satisfiedwith annuities. Conflict-of-interest litigation overthe prices at which sponsors dropped downassets into affiliated yield cos could hang oversome yield cos into 2016 and 2017.
David TepperEl Paso
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Litigation over the Clean Power Plan is a potentialinflection point this year. A majority of US statesare suing to block implementation of the plan. Aruling on a motion to stay implementation couldcome as early as late January or February. A USappeals court could rule on the merits by latesummer before states have to submitimplementation plans.
inevitability?
cap and trade
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An Oklahoma Corporation Commission decisionin December could be a sign that coal plantretirements will accelerate even without a CleanPower Plan. The commission rejected a requestby OG&E to spend $1.1 billion to retrofit anexisting coal-fired power plant to comply withfederal environmental laws. In 2015, 11,000 MWsof coal plants were retired out of more than400,000 MWs of total coal generating capacity.
38%
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The decision by Congress to extend expiring taxcredits for renewable energy through 2019 forwind and 2021 for solar -- with phase outs -- couldreduce the volume of new wind and solarconstruction in 2016, but bring lots of additionalinvestment ultimately into the sector. Congressmay revisit whether to allow more time for fuelcells and CHP projects.
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The IRS hopes to issue a notice in Marchextending its policy of not making developersprove continuous work on any project that iscompleted within two years after theconstruction-start deadline.
staggered presumptions?
rooftop solar
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It could be easier this year to tap foreign pensionfund money for projects. Foreign pension planswill now be able to invest in US "real property"without having to pay capital gains taxes uponexit.
FIRPTA
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Some people expect the Sunshine State toemerge as a leader in solar. However, a pro-solargroup appears to have thrown in the towel ongetting a proposal on the ballot this November toopen Florida to third-party ownership of rooftopsolar. The group is now focused on 2018 and onpersuading the state supreme court to deny aballot spot for a utility-backed proposal to writeexisting law into the state constitution.
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Net metering decisions are possible in 2016 in anumber of states. Solar rooftop companies wonin California in December in between losses inHawaii and Nevada. SolarCity and Sunrun arepulling out of Nevada. California still has toconsider time-of-use rates. The real question ishow the grandfather rules in each of thesedecisions works.
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A decision by FASB and the IASB will move$3 trillion in equipment lease liabilities tocompany balance sheets starting in 2019 forpublic companies and 2020 for privatecompanies. The move may limit future borrowingcapacity. The companies will have to plan how toavoid breaching banking covenants.
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Wall Street has pushed down share prices ofMLPs that own gas pipelines to increaseyields. Half are now above 9%, suggesting themarket believes current distribution levels areunsustainable. Many partnerships would rathershed assets than cut distributions. Some of theworst hit are MLPs with incentive distributionrights.
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The IRS is expected to issue a notice this springto make it less expensive for independentgenerators to contribute to the cost of networkupgrades to relieve grid congestion. Some windfarms in the Midwest are facing curtailments of upto 90% due to congestion.
energy storage
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The solar rooftop companies have begun hedgingtheir bets by offering long-term installment salecontracts as an alternative to solar leases orPPAs. The SolarCity MyPower securitization thismonth was a borrowing against 11,200installment note payment streams. Variouscompanies are looking ways to combine PACEfinancing with tax equity.
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Mexico is emerging potentially as an importantmarket. A new law in December sets renewableelectricity targets at 25% by 2018, 30% by 2021and 35% by 2025. Mexican installed capacity was25.3% renewable energy in 2015, but renewablesaccounted for only 18.2% of output.
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Several other bright spots in the US arecommunity solar, energy storage (but withquestions about the size of the market) andcommercial PPAs. In 2015, 3,160 MWs ofcommercial PPAs were signed, more than doublethe year before.
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The power market remains in the midst of majorrebalancing toward renewable energy. Globalclean energy investment was $329 billion in 2015,a record. It is expected to increase in 2016 ifChina can avoid a major recession. More peopleare employed today in the US solar sector thanare employed in oil and gas extraction.
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Wholesale power prices fell sharply in 2015. Solarprices are expected to drop below $40 a MWh inlower-cost regions. Wind prices are already closeto $20 a MWh in the Plains states. Cheaper andbetter wind turbines with higher load factors maylead to repowerings of existing windfarms. Average capacity factors for wind farmsbuilt in 2015 were 25% compared to 20% in 2008.
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What is Shaping the Market?
Keith [email protected]
