Yieldcos may be the new darlings of wind investment, but are they all financially stable?
Richard Nourse, managing director at Greencoat Capital, raised this thorny question at our ‘Financing Wind’conference last week.
His view is there’s a big difference between how the US investment vehicles are structured, versus their European counterparts. This means that, crucially, any future instability in the US market could in turn have a potentially detrimental impact on Europe too.
So why the worry? Primarily because financial yieldco structures in place in the US are not carbon copies of those in Europe. They are very different. And the difference, Nourse believes, lies in the underlying way in which they are financed and underpinned.
To understand this, we first need to take a step back and review the wider market dynamics that are driving them.
Over the past 18 months, energy firms in North America have raised almost $2bn by spinning out yieldcos in initial public offerings. Businesses that have done so include Brookfield, NRG, Pattern Energy and TransAlta.
The idea is simple. Large energy firms set up separate companies to hold working wind farms with long-term power purchase deals. This creates a reliable income for the yieldco investors; and allows utilities and developers to recycle capital from their schemes.
That, according to Nourse, is where the US and UK structures start to differ. The drivers and financial benchmarks behind the growing multitude of European and US funds are fundamentally difference.
In real terms, that means yield accretion becomes the benchmark, rather than value accretion (ie. buying a project a fair value on a discounted cash flow basis and factoring in the cost of capital). This means you're going to get some pretty odd long-term results.
But that is what many of the US funds have been doing and, to cut a long piece of financial mathematics short, it means shareholders are in danger of paying far more than a project is actually worth.
In the US, all of this has resulted in some phenomenal short-term fund growth and some impressive dividends to boot. However, at some stage, that model simply has to an end because there will simply be no further projects worth purchasing.
What then? The fund has over valued its projects and has large financial gap to cover off.
In contrast, European funds have taken a far more low-risk approach. Many simply buy projects, clear any associated project finance and keep the asset firmly on the balance sheet, using a clear-cut debt-equity ratio to fund new purchases. Many also use the value accretion – as opposed to yield accretion – approach.
If more money is needed, this requires fresh fund raising from shareholders, in accordance with whatever limits the fund decides to operate. For Greencoat UK Wind, that’s 40%.
For now, as many investors get caught up in the initial excitement over listed funds, such details may seem trivial. We don't think they are, and neither does Nourse. If the way in which the long-term financial performance and viability of a project is measured is out of step with the reality of what it’s worth, it’s going to cause trouble.
We learnt this to our cost in the sub-prime debacle. Everyone wants to grow their investments —but they also want to sleep at night.
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