Global financial markets can leverage huge amounts of capital for investments with the right structure and risk/return metrics. Green Bonds and YieldCos are two such examples. Both have seen a huge acceleration of interest in 2014. We examine both new financial developments as two keys to driving successful technological growth toward a lower carbon global economy.
The last two months has also seen the successful American initial public offerings (IPO) of three of new listed equity vehicles (termed “YieldCos”) owning and operating renewable energy infrastructure assets. With average power purchase agreements spanning 18-20 years, the companies are being heavily sought by investors for their relatively high dividend yield plus solid growth. Combined with the two IPOs in 2013, the collective value of these five entities now exceeds US$20bn.
German State Development Bank KfW’s access in July 2014 to US$2bn of 5 year bonds at 0.375% annually for energy efficiency programs highlights the rapid emergence of the relatively new global green bond market. This transaction also highlights the compelling strategic logic of Australia’s Clean Energy Finance Corp to aggressively access global capital markets to fund the build out its portfolio of low carbon, long life strategic infrastructure investments for Australia.
YieldCos – Changing the paradigm
Over June 2014, SunEdison has listed TerraForm Power, Nextera Energy has listed Nextera Energy Partners LP and Abengoa SA of Spain listed Abengoa Yield on the New York Stock Exchange. These have leveraged off the doubling of NRG Yield since listing in 2013. Each of these US based initiatives are developed by traditional power generators and utilities making the transition to a low carbon future.
By comparison, Pattern Energy an independent operation backed by the Carlyle/Riverstone Group with holdings in the U.S., Canada and Chile is up a more subdued 47% since October 2013. These five companies have an average of more than 1GW each of renewable energy infrastructure assets, have a collective market capitalisation of US$15bn and enterprise values now exceeding US$20bn.
Abengoa Yield’s IPO credentials were considerably enhanced when KKR & Co, one of the world’s most successful private equity firms, took a one third stake for US$567m in June 2014 prior to IPO.
David Giordano, Managing Director of Blackrock Alternative Investment Group likewise sees significant scope for renewable assets to be held as infrastructure assets, stating: “This asset class is no longer a niche, specialty play”.
These vehicles have permanently lowered the cost of capital for renewable energy. Deutsche Bank’s Renewable Energy analyst Vish Shah noted in a recent report: “Enabling the Transition to Grid Parity Growth”, suggesting the YieldCo valuations being attained have lowered the cost of equity for renewable assets from over 10% to less than 5%.
The capital recycling nature of Yieldcos can leverage the existing knowledge, management expertise and asset base of global utilities. Rather than reaching saturation of assets developed in the renewables space, utilities can recycle their capital by selling off fully operational, technologically proven renewable assets and then reusing the proceeds to develop new renewable projects across the wind, solar and hydro sectors. Rather than retrenching their renewable development teams as AGL has done last week, utilities can continue to build out renewable energy projects without constraining their equity capital.
Five Yieldcos don’t make a trend. But with the enormous success of these first five entities, each of the world’s leading renewable energy firms are now either looking at their own opportunities to replicate these structures, or being grilled by their shareholders to do so.
Sunpower Corp (US) has yet to commit to a Yieldco IPO. However, in their interim results briefing last week, SunPower CFO Chuck Boynton said:
“We continue to see strong progress in the development of alternative financing structures for the industry, developments that are having a significant impact on how solar projects are developed, financed and sold. We believe employing these structures will significantly reduce the overall cost of capital for the industry and for SunPower specifically. It’s a great time to be a project developer, and we’ll benefit whether we decide to do a YieldCo or not.”
Sunpower aims to first build up a sufficient portfolio of wholly owned solar projects to reach critical mass prior to launching an IPO. With a development pipeline of 8 gigawatts (GW) of solar projects globally, this should not take too long. Previously Sunpower had to find financial partners to underwrite the project development and share the construction risk.
First Solar Inc. likewise highlighted in its first quarter results briefing it was watching the development of the Yieldco market with special interest. Again First Solar highlighted it would need to build up critical mass of projects prior to any such spin-off of its own YieldCo. With a project portfolio development pipeline of over 12 GW, building critical mass should not take more than six to twelve months, given the speed at which solar projects can be undertaken.
Iberdrola SA of Spain is one of the world’s top five global owners of renewable energy assets. With 9.9GW of hydro and 14.4GW of wind and solar projects operational globally, Iberdrola is a perfect candidate to launch a YieldCo to leverage its world leading position and recycle its capital. This would enable Iberdrola to leverage its global knowledge of renewable project development and to accelerate its enormous pipeline of potential renewable assets. With net debt of €26bn, the associated deleveraging and improved credit metrics would also be of significant appeal.
Over 2012-2014, Iberdrola has been selling of passive minority equity positions in its existing portfolio of renewable assets to superannuation funds’ infrastructure portfolios. When Iberdrola reported its interim results in July 2014, management stated they were watching the YieldCo development, but having listed their own renewables entity a decade previously to encounter little investor interest, they were not as yet pursuing a similar strategy now. Led by the global asset manager MFS Investment Management, shareholders responded by grilling Iberdrola on their inaction to-date, highlighting the huge opportunities for value enhancement.
Julien Dumoulin-Smith, the lead utilities analyst for UBS US highlighted that more mature Canadian listed renewable energy entities such as US$4bn Brookfield Renewable Energy Partners LP are trading on prospective enterprise value multiples of over 11 times and distribution yields of 5-6% pa. By comparison, the five US YieldCos are trading on a prospective enterprise value multiple averaging over 15 times. UBS sees significant potential for a global financial arbitrage and the internationalisation of more growth-oriented global YieldCo listed firms in the US and cites the potential for Acciona of Spain to list its 2.3GW of predominantly US renewable energy assets.
Green Bonds Market Development
The global financial markets need to be unlocked to accelerate the deployment of renewable energy and energy efficiency. The development of the Green Climate Bond market in the last few years is a key positive trend. Green Bonds saw a record level of new issuance in the first half of 2014 of US$20bn, putting this market on track for US$40bn in 2014 overall, and at the current rate of growth in excess of US$100bn of new issuance in 2015. After GDF Suez completed a €2.5 billion green issue in May, the German State development bank KfW completed its first green issue of €1.5bn, 5 year, AAA rated bonds paying 0.375% pa. Given KfW can provide medium term residential household finance for rooftop solar with storage using funding of an exceptionally low 0.375% pa, the return metrics for self-generation look considerably more robust – even with Germany’s low solar radiation.
Gunther Braunig, KfW’s executive board member in charge of capital markets said: “Our aim as a green bond issuer is to establish the same systematic dialogue with investors to get them engaged in climate protection finance. I am convinced that capital can provide very strong stimuli for sustainable development. The more capital market participants are committed to responsible investment, the bigger the effect.”
This follows Taiwanese solar cell manufacturer Neo Solar issuing a US$120m, 3 year convertible bond and DC Water (US) issuing US$350m of AA+ 100 year bonds at a 4.8% coupon, both in July 2014.
Given the right regulatory structures and policy certainty, capital markets can mobilise enormous capital flows to prospective areas of investor interest. The Institute of Energy Economics and Financial Analysis (IEEFA) considers renewable infrastructure assets to be one such opportunity. Colonial First State Asset Management’s launch of a target $500m renewable energy fund in July 2014 suggests Commbank agrees.
Tim Buckley is Director of Energy Finance Studies, Australasia, IEEFA