Around 5,000 people registered to listen to the outlook for the cost of capital in the tax equity and debt markets in mid-January this year.

Yields on 10-year and 30-year Treasuries are above 4% for the first time since 2007, up from only 1.9% a year ago. The futures markets show investors expect the federal funds rate to peak at 5.45% in September and then to dip to 5.33% by year end.

Meanwhile, inflation is moderating, but more slowly than the Federal Reserve hoped. The US inflation rate was 6.41% for the 12 months ending January 2023, down from 7.1% in November 2022, according to the latest data.

The Inflation Reduction Act has put major wind in the sails of the renewable energy market. The IRA has powerful incentives, not only to build new renewable energy projects, but also to do a host of other things, like produce clean hydrogen, sustainable aviation fuel and renewable natural gas, install large batteries and capture carbon emissions. Manufacturers of equipment like batteries and solar panels are making plans to move production to the United States. However, the US economy is still suffering from labor shortages.

The two largest tax equity investors and two veteran lenders talked about what to expect in the year ahead. The panelists are Jack Cargas, managing director and head of tax equity origination for Bank of America, Rubiao Song, managing director and head of energy investments for JPMorgan, Ralph Cho, co-head of power and infrastructure finance for the US, UK and EU for Investec, and Elizabeth Waters, managing director for project finance Americas at MUFG. The moderator is Keith Martin with Norton Rose Fulbright in Washington.

Tax Equity

MR. MARTIN: Rubiao Song, what was the tax equity volume in 2022?

MR. SONG: Total new commitments for tax equity in 2022 were about $18 billion, so roughly a 10% decrease from the 2021 level.

MR. MARTIN: The volume was $20 billion in 2021. Was the decrease due to labor shortages and supply-chain difficulties or to something else?

MR. SONG: Supply-chain and tariff issues continue to delay construction of new projects. Scarce battery supplies are also playing a role.

MR. MARTIN: How did the tax equity volume break down between wind and solar?

MR. SONG: It was about 60% wind and 40% solar. That is a reversal, for the reasons we just talked about, from what we saw in other recent years when the solar market share was increasing.

MR. MARTIN: Jack Cargas, what volume do you expect this year?

MR. CARGAS: We agree with Rubiao's view of about $18 billion for the year. The decrease was due not only to supply-chain and construction delays, but also to some sponsors who were looking forward to the new tax credits that became available in 2023. That may also have contributed to project delays.

We expect 2023 to be something of a swing year. We expect a 12- to 18-month gap between passage of the climate bill and the real impact on the market. There will also be a lot of backlog transactions from last year to work off this year. We expect to see $20 to $21 billion in 2023.

We are bullish in light of the climate bill, but the system is clogged. Calendars are already full. More sponsors are going to be hearing from their lawyers or bankers or third-party service providers that it will be difficult to get to their deals, unfortunately, for three, six or nine months. That will be a phenomenon in 2023.

MR. MARTIN: In the past, it seemed like as much as 85% of your tax capacity for the coming year had already been committed by mid-January. How does it look this year?

MR. CARGAS: At least 50% is already committed for the year.

MR. MARTIN: Rubiao Song, same number?

MR. SONG: We are probably a little below the 50% level. We have a lot of deals under negotiation right now. The 2023 pipeline looks pretty robust.

MR. MARTIN: The message is still the same as every year: Get in early to talk to tax equity investors.

Were there any new structures in 2022? A couple of years ago, the new structure was a mix of ITC and PTC assets, wind and solar, for example.

MR. CARGAS: We have mainly been seeing variations on the existing structures.

We have been seeing more mixing of projects, such as PTC wind with, now, PTC solar and ITC battery projects. During 2022, tax equity investors spent a lot of time converting solar transactions to PTCs. Such conversions are time consuming to sort out risk allocation and tax and accounting considerations. The market was not able to carry out every such conversion that was requested, for numerous reasons.

MR. MARTIN: People patch into this call hoping to learn what to assume tax equity will cost for their projects. What can you say about current pricing and where it is headed?

MR. SONG: Yields moved up during 2022. That reflected the underlying interest-rate movement as well as an imbalance between demand for, and the supply of, tax equity. That trend should continue into 2023. Wind and solar projects on land will have to compete with all of the new sectors, such as carbon capture, offshore wind, renewable natural gas, hydrogen and tax credits for manufacturing wind, solar and storage components.

Tax equity investors are being even more selective than before. Some projects will not be able to attract tax equity. Some sponsors will have to settle on electing ITC even if claiming PTCs looks better on paper in order to attract tax equity. They may also have to settle on doing tax credit transfer deals where tax credits are sold directly to another company for cash.

MR. MARTIN: The word on the street is that there are fewer PTC tax equity dollars. Is that correct?

MR. CARGAS: I would not say that. We think that there are a number of tax equity investors who prefer PTCs to ITCs because PTCs do not place as large a claim on scarce tax capacity in a single year.

MR. MARTIN: Congress authorized straight sales of renewable energy tax credits starting this year. Rubiao just mentioned that. Will Bank of America be a direct purchaser of tax credits or will it stick solely to traditional tax equity?

MR. CARGAS: We expect to be a purchaser in some cases, and we expect to be a seller in other cases. Bank of America wants to be relevant in this evolving market. As the market as a whole is tax-equity constrained, these transferability trades are going to take center stage. This is probably the most talked-about provision in the climate bill, at least in our shop.

MR. MARTIN: Same answer for JP Morgan? Will you also buy and sell tax credits?

MR. SONG: Yes.

MR. MARTIN: How do you expect the tax-credit-sale market to develop? You heard Jack Cargas say that it will probably be 12 to 18 months before the Inflation Reduction Act is felt fully in the market. Do you think it will take that long for a tax-credit-sale market to develop fully?

MR. SONG: It will take some time. One should not underestimate what it takes to get corporate investors into this space. The education process can be long. It is also in the best interest of the industry to ensure that new investors understand the unique risks and rewards associated with tax credit investing.

MR. MARTIN: Do you have any sense for how broad the interest will be among corporations as tax-credit buyers?

MR. CARGAS: The 12 to 18 months was meant as the digestion period for all of the provisions of the climate bill. We think the transferability market will develop more quickly than that.

There is a lot of activity by banks, including Bank of America, in generating interest from potential tax-credit buyers. We are hearing some interest. It is not as robust as we would like, but we are going to keep working on it. Interest should grow once the Treasury issues implementing guidance.

MR. MARTIN: Tax credits are expected to trade at a discount to full value. Where do you think they are trading as the market opens? Do the discounts vary by type of tax credit?

MR. SONG: There have been price quotes, but you can't talk about the price without context. Using bonds as an analogy, you have to look at the asset backing the bond and the counterparty who is the credit. I believe the discount is going to be large for tax credit transfers because there will be enormous sponsor demand for long-term commitments while the ability of tax-credit buyers to make long-term commitments will be limited.

MR. MARTIN: Does that suggest there will be more appetite among tax-credit buyers for ITCs? Or will they buy PTCs year-by-year without committing to 10 years of them?

MR. SONG: The latter.

MR. MARTIN: I don't think I got an answer to my question about the discount. At what discount do you think tax credits are trading as the market opens?

MR. SONG: It depends on whether it is a current-year credit or it will require a long-term commitment. It depends on the projects themselves, the sponsors' creditworthiness and the demand-and-supply situation for a given year.

MR. MARTIN: Which suggests that the price should increase over time as more buyers come into the market.

MR. SONG: Not necessarily. Some of the new sectors — such as carbon capture, hydrogen and domestic manufacturing — will qualify for direct pay for the first five years and switch to tax credit sales, adding to the supply of tax credits available for sale five years from now.

MR. MARTIN: So no discount numbers. How easy will direct sales be to transact? Will the transactions rely on form documents that people can simply sign on the dotted line?

MR. CARGAS: They should be straightforward. These documents ought to be more easily produced and signed than complicated structured asset financings. A lot depends on whether the legal profession can resist the instinct always to "improve" or tweak the documents.

MR. MARTIN: What we have seen in the past is these markets start with just a couple forms of documents that everybody adopts, and then, over time, as more people come in, you get document proliferation.

How much interest do you foresee in newer kinds of tax credits? I am talking about not just direct purchases of tax credits, but also traditional tax-equity investment. You have section 48C tax credits for building new factories, section 45X credits for manufacturing wind, solar, and battery equipment, section 45V credits for making clean hydrogen, section 45Z credits for making sustainable aviation fuel, and then investment tax credits for standalone storage and renewable natural gas projects. Do you see interest in all of them?

MR. CARGAS: This is the 12- to 18-month period I was talking about earlier. Many of these will take time to understand, structure and deliver.

Banks like ours with their many constituents, both internal and external, who are focused on low-carbon initiatives will be all over these incentives as they crystalize over the next few years. We are interested in all of the above and in finding out how much value we can add for our clientele by making a market in these incentives.

MR. MARTIN: Tax equity has been about 35% of the capital stack, plus or minus 5%, for solar. It has been about 65%, plus or minus 10%, for wind. Are these percentages likely to change after the Inflation Reduction Act?

MR. SONG: Yes. Tax equity will be a larger percentage of the capital stack, depending on whether a project qualifies for bonus tax credits and whether solar developers choose to claim PTCs rather than ITCs. The ITCs on utility-scale projects could jump from 30% to 50%, depending on the project location and percentage of domestic content. There are not only bonus ITCs, but also bonus PTCs.

MR. MARTIN: So no numbers yet, but the percentage will increase.

MR. SONG: If a solar ITC project moves to PTCs, the 35% could go to 45%. The 35% could also go to 45% if a solar ITC project sticks with ITCs, but qualifies for a 10% bonus credit.

MR. MARTIN: We have time for just a few more tax equity questions. There are two principal bonus credits. One is for using domestic content, and the other is for putting a project in an energy community that is transitioning from oil, gas or coal employment. Are you seeing deals where it is clear the projects qualify so that the bonus credits can be taken into account in pricing?

MR. CARGAS: We are seeing deals that look like they qualify and we are prepared to take the bonus credits into account in pricing. We expect in such cases to receive legal representations from the sponsors that the projects qualify.

MR. MARTIN: I suppose you also have to do enough diligence to feel confident the projects qualify.

Some sponsors may end up selling tax credits, but they have depreciation that is worth about 14¢ per dollar of capital cost that they will be unable to monetize if they just sell tax credits. Do you foresee a tax equity market for just depreciation?

MR. SONG: I do not.

MR. MARTIN: Jack Cargas, same answer?

MR. CARGAS: We do not think it's terribly likely. Depreciation-only deals are too small.

MR. MARTIN: Many solar developers are talking about claiming PTCs on a solar power plant and an ITC on the co-located battery. Are you doing such transactions?

MR. SONG: We are. We are evaluating some of these opportunities. We are hopeful that Treasury will clarify some of the technical matters.

MR. MARTIN: Are you already doing such deals without waiting for Treasury guidance?

MR. SONG: We are already doing them. In some cases, you can make the case that the battery is a standalone project.

MR. MARTIN: In what types of transactions are you requiring tax insurance?

MR. CARGAS: We only require it in certain circumstances, such as to support the conclusion that projects were under construction in time or the tax basis has been properly calculated. However, it will not cause us to invest in a transaction that we would not have done without insurance. We will not close into deals expecting to claim the insurance in the base case. Insurance can be helpful. It is not a huge driver.

MR. MARTIN: On past calls, we have talked about inability to buy casualty insurance on economic terms. Is that still an issue for projects in parts of the country with high risk of hurricanes, tornados and hail, and what happens if the sponsor cannot renew casualty insurance after a deal has already funded?

MR. SONG: Sponsors can get risk insurance, but the premium will be higher. That's one of the key items to address early in discussions with potential investors. How sensitive is project performance to potential increases in insurance premiums?

MR. MARTIN: The answer is that insurance can always be purchased for a price, so you expect it to be purchased.

What other new developments are you seeing as we enter 2023?

MR. CARGAS: The big new development is that the transition to cleaner energy is about to accelerate. The passage of the climate bill is viewed by many observers as the single most positive development in the history of renewable energy finance in the United States. It will provide a strong tailwind for renewables for 10 years at least, and maybe even for another 20 years or more, depending on how quickly the US reduces its greenhouse gas emissions.

Direct sales of tax credits will help with the transition. We expect transferability to help the market expand to better match demand.

MR. MARTIN: Rubiao Song, new developments?

MR. SONG: A significant number of mega projects are expected to come to the market in 2023. They include some very large onshore wind projects, major new transmission lines, carbon capture projects and large offshore wind farms. Each will require at least $1 billion in tax equity. Many will require several billion dollars of tax equity. This is going to take a lot of creative thinking to make it all happen.

Debt

MR. MARTIN: Let's move to debt. Next, we have Ralph Cho from Investec and Beth Waters from MUFG.

Ralph Cho, what was the volume of North American project finance bank debt in 2022 compared to 2021?

MR. CHO: It was up quite a bit from the year before. Refinitiv, which is my primary source, hasn't released its final year-end volumes, but we can extrapolate, based on its third-quarter numbers. The third-quarter North American project finance bank debt volumes totaled about $72 billion spread over 158 deals. At this run rate, I expect to see 2022 volumes of at least $96 billion over 211 deals. That would be a 43% increase, year over year, which would make it a record year.

That is on a smaller deal count of 211 deals in 2022 versus 224 deals in 2021.

MR. MARTIN: Why, if the tax equity volume was down, did the bank market set a record?

MR. CHO: There were a substantial number of large-scale, monster deals in the market in 2022. There was also a shift in focus to energy security. LNG deals made a comeback. There were a lot of large infrastructure deals. There was an airport deal. There was a really interesting semiconductor deal with Brookfield for Intel. These deals are not in the $500 million range but in the billions: very large deals.

MR. MARTIN: The war in Ukraine was a factor. It increased interest in LNG.

How many active lenders were there in 2022, and how many do you expect in 2023?

MR. CHO: I see around 90 lenders participating in project finance loans these days. Some folks may quote a higher number, but these are the ones I think are real. The number of consistent players in these types of loans was probably down in 2022. It was maybe 30 or 35 versus 45 to 50 the year before. Although bank appetite remains very solid — and I want to emphasize that — we have lost pockets of lender liquidity from, for example, South Korean institutions and grey-market lenders. They are not really lending actively today.

The divergence in pricing from the B-loan market to the A-loan market really didn't help the grey-market institutions that have better-yielding alternatives in other markets. We have also seen a significant number of lenders take a pause because they do not have the same pressure to put the capital out, and they are just waiting for a better deal to come along. The bank market is still relatively aggressive, especially when it comes to pricing and structure.

MR. MARTIN: Beth Waters, do all loans now use SOFR as the benchmark rate?

MS. WATERS: Pretty much. The regulators require everything be SOFR by July 1 this year, but they were telling our bank that we had to move to SOFR by the end of 2022, so all of our new deals are SOFR. Existing loans are still transitioning. They have until July 1 to do so.

MR. MARTIN: What is the current SOFR rate?

MS. WATERS: There used to be multiple SOFR rates, but the regulators have changed it to require really just one SOFR, which is daily SOFR, and right now that is 4.3%.

However, borrowers want term SOFR, because with daily SOFR, you get a rate change every day, and then you don't know what your payment is until the end of the period. So banks have created "term SOFR," with one, three and six-month rates. This morning, one-month SOFR is 4.48%. Three-month SOFR is 4.63%. Six-month is 4.79%.

Then there is a warehousing cost that the banks add to that. Every bank has a different calculation. It is a protection for the bank because it does not know what the daily SOFR rate will be over the period. The warehousing cost can range anywhere from 1.5 to eight or nine basis points on top of that. That is evolving as we go.

MR. MARTIN: What does that translate to as a coupon rate, say, for a wind or solar project for the back-levered term debt?

MS. WATERS: When you say the coupon, inclusive of the margin?

MR. MARTIN: Yes.

MS. WATERS: We always keep everything separate. The current margin for a construction loan could be anywhere from 125 to 150 basis points over the daily SOFR base rate. Add that to 4.3%.

Then there is a credit spread adjustment to adjust for the fact that SOFR is a risk-free rate. For term SOFRs, we add 10, 15 and 25 basis points respectively to the one, three and six-month quotes. It may be blended into the rate, so you might not even have that adder quoted. The market is continuing to evolve.

MR. CHO: I agree with Beth on that. The credit spread adjustment of 10 to 25 basis points was added when we were transitioning deals from LIBOR to SOFR because there was a point when LIBOR was a bit higher than SOFR. As we move away from LIBOR completely, the credit spread adjustment should eventually go away by being priced into the margin. Banks have already started doing that on some new deals this year.

MR. MARTIN: Is there a SOFR floor on bank loans?

MS. WATERS: Yes. Zero. We don't go below zero, just like we did not go below zero with LIBOR.

MR. MARTIN: What fees should borrowers expect to have to pay? Break it down for construction versus tax equity bridge versus term loans.

MR. CHO: The first is a structuring fee that the lead bank receives. The structuring fee can range — I am talking really high-level here — anywhere between $250,000 all the way up to $2 million per bank. It may be even higher for a monster deal. The fee depends on the size, complexity and amount of work and due diligence that are expected to be required.

Next, there is an up-front fee that can range between 100 to 200 basis points that varies based on whether the loan is sold into the wholesale market versus the general retail market.

Finally, if the credit facility is fully underwritten, you should expect to pay an additional underwriting fee of anywhere from 25 to 50 basis points. That is essentially an insurance premium that the borrower pays to feel comfortable it will be able to close the loan by a particular time. This is critical in M&A deals.

The total, all-in fees at the end of the day should range somewhere between 225 and 300 basis points. Please note that these are high-level numbers. The actual fees vary by the deal.

If a bank is underwriting a loan for you and writing a large check, you should expect to pay fees on the wider end of the range. If the lender is a retail bank, and an arranger is selling a small participation in a hot deal, expect to be paid fees at the tighter end of the range, or maybe even less.

For tax equity bridge loans, they have a shorter tenor so the fees will be lower.

MR. MARTIN: Does what you just said go for construction debt, as well?

MR. CHO: A lot of the construction debt we have done is debt that starts off as a construction loan and converts into a mini-perm term loan. Those are five- to seven-year deals. They would fall under the general framework I described.

MR. MARTIN: What are current debt-service-coverage ratios for wind, solar, storage and transmission?

MR. CHO: There has not been much change on the sizing methods, but of course every asset is different.

Contracted assets are really straightforward. Debt on wind projects size at 1.3 to 1.35 times debt service on a P50 forecast. Utility-scale solar will size at 1.2 to 1.25 times on a P50 forecast. Community solar is a little wider at 1.3 to 1.5 times on a P50 forecast. Residential solar, which is sized aggressively, sizes at up to 80% of the PV6. Battery storage coverage ratios are tighter, at like 1.2 times. These coverage ratios assume contracted — or hedged — cash flows. Lenders like those.

It is important to mention merchant cash flows. All borrowers want credit for merchant cash flows. I would, too. Merchant cash flow assumptions — whether the merchant revenue is from energy sales, ancillary services or a residual tail — have become more mainstream for commercial banks. Plain vanilla has evolved in the bank market to add a little bit of merchant exposure to contracted cash flows with basically no pricing premium.

This is how aggressive ESG lending has become, as banks have tried to differentiate themselves from other banks. Specifically banks are sizing loans on merchant energy revenue at around 2.0 to 2.5 times debt service coverage ratios. The million-dollar question is what is a comfortable balloon level to target at maturity. That varies by location, age and technology of the asset. It goes without saying that the more aggressive the credit profile, the wider the yield the arranger will have to offer to clear the market.

Holdco-consolidated coverage ratios go as tight as 1.1 times debt service. It would be tougher to get much tighter than that because the borrower has to put some equity into the deal.

Quasi-merchant gas deals are slightly more complicated. We have not seen too many of them, but if I had to size for capacity and revenue, those would probably end up around 1.0 to 1.15 times debt service coverage ratios. Swaps and call options size a little wider at 1.3 times. We like to use flat-line capacity forecasts, especially for markets like PJM and New England. We support that with some kind of cash sweep against a target to remain in balance.

Lastly, I will add something new that we have started lending lately. Late-stage developer loans are the latest rage with borrowers. Such loans are all structured slightly differently, based on the business model of the borrower. They are basically just giant letter-of-credit facilities that are being used to provide developers with more efficient capital to post as security for interconnection queue positions and PPAs. They are not really sized or structured on coverage ratios, but the bank analyzes what other assets and cash flows are available to support these facilities in a worst-case scenario where the LC is drawn.

We see more and more banks interested in these types of loans. By my count, we had about $3 billion of these facilities close last year, which is significant. I think this is going to be a very strong growth area for lenders and a critical source of capital for many renewable developers. It comes with premium pricing, at least until the supply of such debt increases after which we will see pricing come down.

MR. MARTIN: A lot to unpack there. Interesting data. What are current loan tenors for the renewable energy market?

MS. WATERS: They are usually construction plus five or plus seven. Occasionally there is a C+10, but the tenor has a lot to do with cost of funds for banks. That is a big issue today for banks, so tenors are coming in, and we can give better pricing on shorter tenors. The loan size is still a function of the amortization assumptions, even as we start pulling in on tenors.

MR. MARTIN: What are current advance rates on construction debt?

MS. WATERS: You have to do the normal debt sizing based on the term loan into which the construction loan will convert. If you do a construction loan without a term conversion on the theory that it is going to go to the capital markets, you would still want to size it for a potential bank takeout. The maximum draw is something like 85%, sometimes 90%.

MR. MARTIN: What is the spread above SOFR for construction debt? We heard on past calls that it had dipped as low as 75 basis points.

MS. WATERS: It is not that low now. Starting last spring, the market was extremely aggressive in pricing and what started happening is that bank costs of funds were going up. Some banks, maybe including MUFG, moved a little earlier to increase the cost of funds than others. Some banks, like MUFG, had a cost of fund increase a little earlier than others. Now I am seeing 125 basis points as the lowest spread on construction financing. We are not doing anything lower than that.

MR. MARTIN: That is a significant increase from even a year ago.

MR. CHO: If we are talking about short-term construction bridge loans, the spreads are definitely wider than a year ago. I would have put the range around 100 to 125 basis points over SOFR. That is almost double the range of 60 to 70 basis points discussed a year ago. These are very short-term loans, like one year or less.

MR. MARTIN: Is the reason why the spread has widened purely that cost of funding has increased?

MS. WATERS: Yes.

There is a lot of appetite from banks, but our cost of funds is affecting our decision-making, and my management is not going to approve a deal that does not give us our hurdle rate. What hurdled a year ago is not hurdling now. We have a revised cost of funds put into our models every week or so. The funding cost is coming back in a little bit, but we don't know where it is headed.

MR. CHO: This is definitely a new trend. We have been in an environment the last many years where spreads have remained extremely tight. Now for the first time in a long time, the spreads are widening across every part of the capital spectrum.

I attribute this to what Beth said. The funding costs are definitely moving up. It is also easier to increase spreads when borrower demand is strong. There has been a ton of deal flow. A backlog is building in the market, and you have a lot of deals that need to clear. We see the same thing in all of the other debt markets, like the B-loan market and the project bond market. Pricing has gone up across the board, and it does not help that we are losing liquidity. The grey-market lenders who had been playing in our A-loan market are gone.

The bank market, even as much as it has moved up, has not moved up as much on a relative basis as the institutional loan market.

MS. WATERS: The smaller the deal, the more aggressive terms you can get because you will be pitching to certain banks whose funding costs are lower. As the deal gets larger, you have to get the last guy in, so it will trend upward on pricing.

MR. MARTIN: Is it still the case that banks are not charging a premium to lend on a back-levered basis compared to lending closer to the project assets?

MS. WATERS: Yes.

MR. MARTIN: How much appetite do you foresee among banks for some of the new asset types in the Inflation Reduction Act, such as hydrogen, sustainable aviation fuel, electric vehicle charging infrastructure, standalone storage, renewable natural gas, CO2 and hydrogen pipelines and transmission lines?

MR. CHO: There is a very strong appetite for all of these types of deals from the lending community. At least at Investec, we have done some creative financing around EV charging infrastructure. We have also closed standalone storage and some renewable natural gas deals.

Some of these other ones that you mentioned could be interesting, like the hydrogen and sustainable aviation fuel assets. We just need to see more deal flow in these areas, and there has to be a structure that is financeable and does not make lenders take equity-like risk. I want to see proven technology and contracted revenues for the first few deals.

MR. MARTIN: Are you seeing any interest in lending bridge debt against future revenue from tax credit sales: for example, for production tax credits?

MS. WATERS: Yes. We are working on structures where we would have to discount a decent amount to make sure that we get repaid. I am working with at least two borrowers.

MR. MARTIN: The key phrase there is "discount a decent amount." Do you think the advance rate would be 50%? 75%? 80%?

MS. WATERS: We have not narrowed in on it yet. We are working on it currently.

MR. MARTIN: Are there any other noteworthy trends for debt as we enter 2023?

MR. CHO: Here are some trends that I think we will see in 2023.

ESG lending will remain hot. The IRA breathed another 10 years of life into this sector with all of the subsidies that are being thrown in. Digital infrastructure is going to continue to print a lot of deal flow: not just data warehouses, but also fiber to the home could pick up, as well. We have seen a lot of that in Europe. Core infrastructure deal flow will remain active, especially ports, roads and bridges.

Energy security will remain a strong theme in 2023. We expect to see $30 billion of LNG credit facilities come to market over the next quarter or two. Investment funds will continue to raise large amounts of capital; however, new or first-time funds may have a tougher time given how crowded this space is becoming. A fear of recession will make personnel more reluctant to change jobs. People may be less tempted to jump to a new fund.

Thermal power activity will remain tough. I expect to see both acquisition and refinancing opportunities, but relative to other mainstream sectors, I think liquidity and structure have to be addressed if you want to sell such deals successfully in the market.

MS. WATERS: I also have mega deals on my list of 2023 trends, not just power, but also basic infrastructure and LNG.

Expect to see capacity issues at project finance banks. The US is feeling labor shortages across all sectors, including on bank lending desks. This limits how many deals banks can do. There will be a tendency in such a market to pick the cleanest and most profitable deals. Supply-chain issues are still lingering. We are going to see a lot more standalone batteries, and more with merchant revenue streams.

Uncertainty around funding costs will remain an issue. What effect will recession fears have on the market? In 2008 when the world was falling apart, project finance loans were going gangbusters, and we are going gangbusters now. We just had a record year. We are expecting that to continue. The pendulum is now swinging toward giving lenders more negotiating leverage; it has not been that way in a long time.