The recent Silicon Valley Bank (SVB) banking crisis offers a cautionary tale for solar companies and other enterprises that rely on a complex financial system to originate, develop and deliver renewable energy projects. SVB was a $200 billion bank that failed in a matter of days, cutting off scores of companies — many in the renewable energy industry — from their deposits, lines of credit and other supplies of capital.
Several companies anxiously wondered whether their businesses built over many years would collapse. Fortunately, a plan orchestrated by the U.S. Dept. of the Treasury, the Federal Reserve and the FDIC, in coordination with state regulatory authorities, quelled the immediate risks, guaranteed deposits and restored banking order.
Still, there are lessons for solar companies to heed in the wake of the SVB crisis. The industry is capital- and labor-intensive. Bringing projects together requires considerable lead times before the first panels are even installed, from prospecting and designing projects to site control and permitting efforts.
These activities and the follow-on project development require an array of capital, including developer equity, supplier credit, working capital facilities, bridge/construction funding, tax equity and long-term debt financing. Sourcing these requirements from various capital providers further complicates financing efforts.
To successfully build a capital program, solar companies need to align themselves with financing partners that understand the delicate relationships that must exist among these capital facilities. Financing partners also need to understand the lifecycle of project development, the interplay between sources of capital and the “chain of custody” of available collateral to comfort the multiple capital providers as projects evolve along their development paths.
Solar companies often fall into the trap of promising funding facilities, only to have their businesses mired in terms and conditions that prove unworkable with on-the-ground operational realities. This leads to broken covenants, events of default and funding that gets frozen in its tracks — imperiling projects in development and the overall business.
Performing due diligence on potential financing partners, particularly depository institutions, is necessary. Companies should ask:
- What is the lender or investor’s experience in the solar industry?
- What companies and projects have they financed?
- Is this industry of particular importance to the institution? How so? Get client references and put in the time to reach out to companies with an active and ongoing funding relationship with these capital sources.
- What is the lender or investor’s experience with troubled credits in the industry? What went wrong and what was their approach to resolving the matter?
Not everyone can be a bank analyst, but an inspection of filings with the Securities and Exchange Commission, such as 10-K forms (annual financial statements and accompanying commentary), can often help explain a bank’s risk exposure and how it is managed. Review filings each quarter on an ongoing basis, not just when commencing a relationship, and look for changes.
Additionally, companies should search for articles in the financial press and reports produced by rating agencies. Speak to individuals at the banks you partner with — not just the relationship manager, but those in risk-management functions.
These next steps could be seen as excessive concerns with risk, particularly for a bank’s customers, but the questions must be asked:
- If the financial institution suffers an impairment to its capital base from its investment portfolio, a shock rise in charge-offs from its loan portfolio or a surprise flight of cheap deposits (which, with today’s technology, can be executed in seconds with a smartphone) that need to be replaced with more expensive funds, what impact might these events have on the lender’s lending profile?
- What industries might get pared back from a lending perspective?
- Suppose the lender is new to the solar industry and lacks a deep record. Might these clients be the first to suffer from credit facilities that will be trimmed?
The role of green banks
Due to their investment mandate and mission, green banks may offer solar companies tailored financing products or services. Green banks are more focused on a particular sector or sectors than regular commercial banks, so they are more likely to be comfortable underwriting solar companies. They understand the current trends affecting the solar industry, the policy environment and how it affects the feasibility of solar projects and the intricacies of solar projects — from cash flows to transaction structuring.
Green banks are likely more comfortable than commercial banks in transaction structures involving tax equity investors. Tax equity partnerships where an entity with a tax liability forms a partnership with an entity without a tax liability to monetize a solar investment tax credit and thereby make the ownership of a solar project financially viable have been around for over a decade. However, they are complex and nuanced structures, often requiring significant transaction costs and a steep learning curve, which may be unenticing to commercial lenders.
Depending on the cost and source of their capital, some green banks may be willing to offer deal terms that commercial banks cannot. For example, green banks may offer debt with 15- to 20-year terms with fixed interest rates rather than over a floating benchmark with the requirement to enter into interest rate swaps to result in more fixed debt service arrangements.
Green banks such as Connecticut Green Bank — the first state green bank in the nation — aim to leverage private sector capital, which may mean taking a subordinated position in the capital stack for a transaction and allowing the private sector partner(s) to participate in a role suited to their risk profile. It could also mean the green bank makes equity investments or provides debt guarantees to help a project prove its viability so private sector finance providers can feel comfortable contributing capital.
However, green banks are not depository institutions and are not “full-service” financial partners. Consequently, working capital facilities, for instance, are the mainstay of community and commercial banks nationwide — often benefiting from well-established federal Small Business Administration loan guarantee programs.
Positioning companies for success
To maximize options and access the best partners, solar companies should position themselves to be as attractive as possible for lenders and investors. Demonstrate to existing and prospective capital providers that the enterprise is well-managed and of moderate-to-low risk, and position the company as a “model borrower” in total compliance with terms and conditions under existing arrangements across the board and on top of performance metrics (operating and financial).
The difficult recent market conditions present additional challenges for solar companies that make sourcing capital more daunting. Higher interest rates and material costs for projects may make some projects financially unattractive or translate into lower returns for solar companies to the extent these costs can’t be recovered from customers, such as higher rates charged under power purchase agreements. Potential benefits that could offset some of these cost impacts are the expanded tax credits under the Inflation Reduction Act.
Solar companies should prioritize relationships with capital providers and equipment suppliers. Attaining some level of priority status from lenders and suppliers will be critical for solar companies to retain access to the funds and materials needed to complete projects and sustain ongoing business operations. The solar companies that are well-managed, have a solid view of their pipeline and understand the capital and equipment requirements over time will be in the best position to explain their anticipated demands to suppliers and line up funds from lenders and investors to ensure projects continue to be developed without interruption and on time.