obtaininggq y gg equity and debt in challenging conditions · obtaininggq y gg equity and debt in...
TRANSCRIPT
BEIJ ING FRANKFURT HONG KONG LONDON LOS ANGELES MUNICH NE W YORK SINGAPORE TOKYO WASHINGTON, DC
Obtaining Equity and Debt in Challenging Conditionsg q y g gEd Feo, PartnerMilbank, Tweed, Hadley & McCloy LLP
California Community College SummitFinancing and Funding Renewable ProjectsOctober 5, 2009
About MilbankThirty Years in Renewable Energy Project FinanceLegal Advisor of the Year
– Ernst & Young and Euromoney Global Renewable Energy Awards 2008
Energy/Projects Award for Excellence– Chambers USA 2009 and Chambers USA 2007
Top Clean Energy Project FinanceTop Clean Energy Project Finance Legal Advisor to Arrangers for 2008
– New Energy Finance
“Milbank has a notable presence in the renewable and alternative energy sectors…. In a league of its
USA Energy Law Firm of the Year 2008
– ACQ Finance
gy gown.”
- Chambers USA, 2009
2
Overview
Project Finance for Renewable EnergyRenewable Energy
Status of the Financing Market
3
Project Finance for Renewable EnergyRenewable Energy Projects Benefit from Tax and Cash Based SubsidiesCash Based Subsidies
Investment Tax Credit
Production Tax Credit
MACRS
State Solar IncentivesState Solar Incentives
4
Project Finance for Renewable EnergyRE Industry Developed Financial Structures to Optimize Use of Tax Benefits
Power Purchase Agreement or LeaseLimit on Leases for Tax ExemptsSome Use of Pre-Pays
Project Co owns the RE Facility, and Sells Output from or Leases RE Facility
Customer Pays for Service without Capital Outlay
Project Co is Owned by a Taxpayer Capable of Using the Tax BenefitsBenefits
Results in a Lower kwh Price as Investor Realizes an After Tax ReturnEven Lower if Leveraged
5
Project Finance for Renewable EnergyFinancing Market Responded to the RE Model
Debt MarketDebt Market
Construction and Term Financing
Tax EquityMonetization of Tax Credits and DepreciationTax Owner but More Debt-Like ProductTypical Structures:
Disproportionate Allocation PartnershipL (Si l I t L d)Lease (Single Investor or Leveraged)Inverted Lease
6
Renewable Energy Project Finance Market
7
Source: New Energy Finance
Renewable Energy Project Finance Market
Effect of the Credit Crisis
• Debt Market Struggled with Failed Refinancingsg
• Tax Equity Market Constrained
• Volumes Way Down
• Prices and Terms Way up
8
Project Finance for Renewable EnergyARRA:
PTC for ITC electionPTC for ITC electionTreasury Grant in lieu of ITC if Commence Construction Before 12/31/10L i A il bl f PTCLeasing Available for PTCEliminate Reduction in ITC if Tax Exempt Financing isif Tax Exempt Financing is UsedExpanded CREBs
9
Project Finance for Renewable Energy
Expansion of DoE Loan GuaranteeExpansion of DoE Loan Guarantee Program$6 Billion for Credit Subsidy; Potential for $60 100 Billion inPotential for $60-100 Billion in ProjectsCommence construction by September 30 2011September 30, 2011Additional Regulatory HurdlesOnly “Innovative Technology” Thus Far
10
Project Finance Market-- Debt
Pre-Crisis, the Market in US Included 20 25 institutionsIncluded 20-25 institutions, mainly European BanksMinimal Vendor Financing Due to Tight SupplyProducts Included Equipment Supply, Construction, and pp y, ,Term LoansWide Selection of Sponsors as BorrowersBorrowers
11
Project Finance Market-- Debt
Pre-Crisis Terms (Bank)• Tenor of Loans to 17 Years• Finance of Hedges and Merchant “Tail”• Advance Rates of 80% or Higher on Construction• DSCR of 1.3 on Term Loan Sizing
I t t R t M i (LIBOR) E i t• Interest Rates Margins (LIBOR): Equipment Supply – 2.0%, Construction – 1.5%, Term – 1.25-2.25%
12
Project Finance Market-- Debt
Post-Crisis:A Dozen Banks, Pension Funds, Life CompaniesNumber of Lenders is IncreasingNo Underwritings (“Club” Deals)Deals)Banks Focus on Large SponsorsLimited Equipment Finance, But N C h G t FiNew Cash Grant Finance
More Vendor Financing
13
Project Finance Market-- Debt
Post-Crisis Terms (Non Vendor)• Tenor of Loans: 7 years;• Mandatory Creditworthy PPA;
M h t Fino Merchant Finance• Lower Advance Rates• DSCR of 1 45 on Term Sizing• DSCR of 1.45 on Term Sizing• Interest Rate Margins (LIBOR):
Construction and Term – 3 to 5%; Fixed Rates of 10%
14
Project Finance Market-- Debt
Post-Crisis Terms (Vendor)• Loans to Finance Purchase of
Equipment, and More• Short Tenor• Interest Rates (all in): 10% (or
Buried in Equipment Price)Buried in Equipment Price)
15
Project Finance Market--Tax Equity
Pre- Crisis:18 Investors$6 billion in VolumeAll Wind Deals Done as Partnerships; Solar Deals a Mix of Partnerships and LeasesPartnerships and LeasesAfter-Tax Unleveraged IRR as low as 5.65%
16
Project Finance Market--Tax Equity
Post Crisis:Post Crisis:Limited Financial Institution Participants
JP Morgan, Union Bank, Wells Fargo, NY Life, US g , , g , ,Bank, State Street, Citi
Multiple Structures: Lease, Inverted Lease, P t hi / d / G tPartnership w/ and w/o Grant
No Clearly Dominant ApproachAfter Tax Unleveraged IRR 8 10% and HigherAfter-Tax Unleveraged IRR 8-10%, and Higher
17
Project Finance Market--Tax Equity
Post Crisis:Greater Utility Participation
Direct OwnershippTax EquityRates of Return Comparable to Market
18
Project Finance for Renewable Energy
Conclusions:Reduced Volume of Finance Since SeptemberNumber of Participants Sharply Reduced But Now I iIncreasingTreasury Grant Has Been Significant AdditionPricing and Terms are Unfavorable to Projects, butPricing and Terms are Unfavorable to Projects, but ModeratingIncreased Costs of Capital Being Offset by Lower Equipment Costs and Vendor FinancingEquipment Costs and Vendor Financing
19
Questions?
20
About the SpeakerEd Feo is a partner in the international law firm of Milbank, Tweed, Hadley & McCloy LLP. He co-chairs the Firm's project finance and energy group, and heads the Firm’s alternative energy practice. He also is a former member of the Firm’s three person global Executive Committee, a position he held for eight years.
Mr Feo has been named in the California Lawyer magazine as an “Attorney of the Year” in the EnergyMr. Feo has been named in the California Lawyer magazine as an Attorney of the Year in the Energy category and by The American Lawyer as a “Deal Maker of the Year.” He is ranked in the “Band 1” tier of Lawyers in Chambers USA and highly recommended for banking and finance by PLC Which Lawyer? Mr. Feo was listed in Lawdragon’s “Leading Dealmakers” for 2007 and in their ranking of top 500 lawyers nationally in 2008. He was listed in The Best Lawyers in America in 2008, his tenth consecutive year of inclusion on the prestigious survey of America’s best lawyers. He was named as one of the Top 100 Lawyers in California by The Daily Journal in 2006, 2007, 2008 and 2009, and he was the only attorney to be named one of the “Five Most Influential People in Renewable Energy” in 2008 by Institutional Investor.
Mr. Feo is a well known speaker at renewable energy conferences, including at the American Wind Energy Association annual conference, the European Wind Energy Association annual conference, the gy , p gy ,National Renewable Energy Laboratory Growth Forum, Solar Power International, the American Council on Renewable Energy annual conference, the Geothermal Resources Council, the World Renewable Energy Conference, the Renewable Energy Finance Forum, and numerous other industry events. He is also a frequent writer on renewable energy topics, including as a columnist for North American Clean Energy and as a contributor to Reuter’s/PFI Clean Energy Finance. He is on the board
Ed Feo601 South Figueroa StreetLos Angeles, CA 90017
+1-213-892-4417of editors of The Journal of Structured Finance.
Mr. Feo graduated with a B.A. and J.D. from UCLA, and was elected to Phi Beta Kappa, the Board of Editors of the UCLA Law Review and Order of the Coif. He is a member of the Board of Governors of the Aquarium of the Pacific, the Dean’s Board of Advisors at the UCLA School of Law and and the Board of Directors of the Pacific Coast Sailing Foundation.
21
22