Editor’s Note: This article is the third in a bi-monthly series that Solar Power World plans to publish on U.S. solar financing to help our readers understand the current states of play in the U.S. solar financing markets. We’d like to thank Robert Sternthal, president of Reznick Capital Markets Securities, for working with us to produce this series.
By Robert Sternthal
At Solar Power International in Orlando, I had the good fortune to moderate a panel of some of the leading experts in the solar market representing the following companies —Washington Gas, SunEdison, Clean Power Finance, Martifer Solar and New Energy Finance. Among the many issues we discussed, one where we found varied opinions on was securitization. So prior to discussing it, let’s define what it is.
As one of the panelists smartly pointed out, securitization means debt. Securitization is the issuance of bonds as a replacement for other potential debt you can use to lever transactions, either at the project or corporate level. The bonds typically have a longer tenor or lower interest rates, are of larger size or otherwise offer some additional advantage to the typical bank market. These bonds are also typically rated, whether publically or privately, to ensure that insurance companies, banks and other long-term investors can own them with lower capital requirements than if they issued the debt directly.
As Chris Bailey from SunEdison rightly stated, when we talk about securitization, we should also include private placements, which are privately placed bonds backed by either portfolios of deals or large single-asset deals like Mid-American’s Topaz issuance.
So my question to the panelists, to which I seem to have an extremely opposite answer from them, was “Will securitization make a material difference in the market?”
My answer was — and is — a resounding NO.
Why not? If bondholders will accept longer tenors, lower-interest rates and more construction risks, why won’t securitization change the game for the solar industry in the United States?
Here are a few reasons why I don’t believe securitization is a game-changer:
- Rating agencies aren’t yet prepared to rate portfolios of deals and, if they are, they will start with residential products prior to moving on to portfolios of commercial systems.
- Fixed costs of securitization are expensive and are currently hard to overcome.
- If the Bond issuances are limited to less than $1 billion per asset-class annually, investors will continue to charge a premium because of a lack of liquidity of the bonds in the secondary market.
- Investment banks need to warehouse the debt prior to issuance and the market needs to exist before they will demonstrate such interest.
- Few sponsors have the balance sheet, track record and wherewithal to become acceptable issuers.
- Mixing securitization with any sort of tax-equity financing will prove difficult.
Accordingly, for 90% of the solar market, securitization is but a mythological entity. Yes, it will exist. Yes, it will be magical for companies like SolarCity that may be able to avail themselves of it. But, for your average (or even better than average developer, sponsor, panel manufacturer or long-term owners), securitization is irrelevant.
As a consequence, I encourage our clients and those other developers in the market to continue to focus on the more conventional forms of financing, many of which are becoming even more commonplace and increasing in scope and scale, while the largest of sponsors figure out how to open up the securitization market for everyone.
Sternthal is president of Reznick Capital Markets Securities and has extensive experience in financing renewable energy transactions, whether they are in the wind, solar or biomass sectors. Working alongside Reznick Group and Reznick Think Energy, Reznick Capital Markets Securities offers one of the most comprehensive financial advisory platforms in the industry.