Coronavirus: The tax equity, debt and M&A markets
Tax equity for renewable energy was expected to be a $15 billion market this year, and interest rates on bank debt had dropped to 125 to 137.5 basis points over LIBOR – before the coronavirus hit. Is financing still available for power and infrastructure projects? Has there been any change in availability or cost of tax equity, bank debt, B loans and project bonds? How have asset valuations been affected?
A panel discussed these and other questions during a call on March 25. The panelists are Jack Cargas, managing director and head of originations on the tax equity desk at Bank of America, Yale Henderson, managing director and head of energy investments for JPMorgan, Ralph Cho, co-head of power and infrastructure for North America for Investec, Max Lipkind, managing director and head of energy and power leveraged finance for Credit Suisse, and John C.S. Anderson, global head of corporate finance and infrastructure at Manulife. The moderator is Keith Martin with Norton Rose Fulbright in Washington.
MARTIN: Jack Cargas, how is coronavirus affecting the supply of tax equity? Many companies are suffering big losses that have to affect tax capacity.
CARGAS: We have not seen a huge negative impact on the tax equity market so far. We are well aware that some observers are predicting significant tax equity market dislocation in 2020 due to the virus and, as we all know, markets can change quickly. We have heard rumors that one or two tax equity investors have pressed pause on investing, but the investors in question are episodic participants. It is too early to call it a market trend.
Over time, the tax equity market has developed a core competency in handling disruption. Examples include how the market handled the 2008 financial crisis and 2017 tax law changes. Maybe that core competency is not enough to help us through everything, but hopefully the experience can provide a road map for dealing with the virus in the tax equity market. The virus could be just another type of disruption.
MARTIN: Yale Henderson, is the tax equity market still functioning?
HENDERSON: Wholeheartedly, yes. I think Jack summarized it well. It is business as usual as much as possible for us. We are working hard to execute on every awarded transaction, and I am sure that is true for a majority, if not all, of the significant long-term players in the tax equity market. As Jack said, there may be a few of the newer players, if not fully dedicated players, hitting pause at the moment as they try to figure out what their long-term situations are. JPMorgan is committed to this market long term, and it continues to think this will be its biggest year yet.
MARTIN: Both of you invested $3 billion last year. Yale, you told me before coronavirus hit that you were planning to get to $4 billion this year. Does that mean you will be somewhere between $3 and $4 billion?
HENDERSON: Definitely, if not above that.
MARTIN: Mike Garland, CEO of Pattern Energy, said on a CEO call we hosted Friday, “The market, for the most part, is uncertain in that we are seeing people starting to back off a little bit in both the tax equity market and the lending market because they are unsure about availability of capital and the pricing. It is more about pricing. A lot of the banks are saying it will cost more to go forward with these projects. Some of them are starting to say, ‘Maybe the entire market is headed for a slowdown, so I would rather close on some good projects while I can.’ There is general uncertainty all around.”
Listening to you, Yale, you do not see that from where you sit.
HENDERSON: Quality projects will be able to find financing even in uncertain times. We have a very full plate. Our biggest constraint continues to be human resources and our ability to execute on the number of opportunities that we think fit our criteria and that we want to pursue.
There is no cost-of-capital or pricing issue at the moment, although we are certainly attuned to movements in our bank’s underlying cost of funds, but that is something we believe can be managed as it has through various other cycles.
MARTIN: Going back to Jack Cargas, do you foresee any change in terms for tax equity deals that close over the next few months?
CARGAS: Not significantly. At Bank of America, it is business as usual to the extent possible. As our CFO said earlier this week to the press, we are here to be part of the solution and coronavirus is not an opportunity to impose more stringent terms and conditions. We intend to live up to our existing commitments. We will continue to selectively seek new business in much the same way as before, always keeping a clear focus on maintaining our investment risk parameters.
MARTIN: Yale Henderson, any change in terms?
HENDERSON: No. Knock on wood, the virus hopefully will not affect the underlying terms and conditions. Like Bank of America, we are not using this as an opportunity to improve on terms. We underwrite each deal on its individual merits and determine what are the appropriate terms and conditions for that particular transaction, just as we have for the last 15 years.
MARTIN: Has either of you sent out a term sheet for a new deal in March?
HENDERSON: We just got approval to send a letter of intent yesterday, so yes. We are actively engaged in talks about new opportunities and are engaging with customers on deals that we believe fit our underwriting criteria.
CARGAS: We have continued to engage in LOI negotiations during March. The 2020 tax equity market has a dynamic that we had predicted during our cost-of-capital call before any knowledge of the virus. We expect increased demand for tax equity this year and, in response to that expectation, many sponsors came to the market early in mid- to late 2019 with 2020 projects. We are working toward crystalizing those transactions.
Many of those transactions are portfolios of four to 10 projects. Portfolio deals require a lot of effort to get done. So even before we knew of the virus, the market was already expected to be in overdrive this year.
It is not necessarily the right metric to focus on how many new term sheets or letters of intent are being issued. The reality is there are a lot of deals in the pipeline. Market volume may still set records this year because wind projects have to be finished by year end to qualify for tax credits at the full rate.
HENDERSON: I agree completely with Jack on that front. As the three of us discussed on the January cost-of-capital call, this market was already very hot and we had awards in place in 2019 and made additional awards in January and February 2020 for deals to close this year on a much more rapid pace than we had ever seen before. The groundwork for a very busy year was already laid well before coronavirus led to a halt in business travel.
MARTIN: I am watching the questions come in from listeners. One question being asked repeatedly is whether the $2.2 trillion relief bill the Senate is expected to pass today extends deadlines for renewable energy projects to qualify for tax credits. It does not.
Early drafts of the bill authorized spending $3 billion to buy more oil for the strategic petroleum reserve in an effort to prop up oil prices. That did not make the final bill either. The renewables industry will try again in a fourth-round stimulus bill, perhaps in another four to six weeks, to extend the deadlines to start construction and will be talking to the Treasury and IRS about more time to finish projects.
Moving on, let’s move into a lightning round of tax equity questions with quick answers. Yale Henderson, you predicted in January that the market would be a $15 billion market this year for renewable energy tax equity. What are you expecting today?
HENDERSON: We fully plan on being in that vicinity at least from a JPMorgan standpoint.
MARTIN: That does not tell me the market as a whole. Do you have a sense whether we will get to $15 billion or even the $12 to $13 billion that the market reached last year?
CARGAS: I don’t think anyone knows yet. There will continue to be significant demand. We are sure of that, but we do not know whether there will be construction delays or major supply-chain disruptions. We are seeing some force majeure notices. It is hard to guess at the final market size when there are exogenous factors that will affect transaction volume that are not in our control as tax equity investors.
MARTIN: Do either of you have any concerns about cash flow in the renewable energy market and, if so, on what types of projects? Does that then affect availability of tax equity for those types of projects?
HENDERSON: Nothing new. The offtake contracts have been transitioning over the last several years to less robust revenue contracts. The nature of those contracts and how they are affected by the current environment is obviously something on which we are focused. Hopefully the coronavirus will have a fairly short-term impact and these are long-term projects, so there should not be any more heightened concern.
MARTIN: So it is still possible to finance hedged projects that sell into the spot market?
HENDERSON: Yes. The terms and conditions for such deals have been evolving over time, not because of sudden events like coronavirus, but because we learn more and see more actual results over time. As we become more knowledgeable and experienced, we refine our views about how such deals should be structured and how we want to proceed with them.
MR CARGAS: We look at the identity of the counterparty, the price, the tenor—all of those things will be evaluated. If the hedge looks pretty similar to what we have supported in the past, we expect it to continue to be a supportable offtake arrangement.
MARTIN: Two more questions. We have talked in the past about wind projects that started construction in 2016, but will not be finished this year. Both of you have said that your institutions had not decided yet whether you would finance 2016 projects that slip into 2021. Are you closer to a decision?
CARGAS: Our view is that we need to comply with both the letter and the spirit of the IRS rules. It is not terribly clear what the IRS requires as proof that there were continuous efforts over the four years to advance the project. Sponsors need to prove that to be allowed more time. We need guidance.
MARTIN: The last question is whether there is any correlation between collapsing share prices in the stock market and the supply of tax equity?
HENDERSON: Not that I am aware.
MARTIN: Ralph Cho, how is coronavirus affecting the supply of bank debt?
CHO: Market conditions are choppy. Unlike institutional lenders who react with lightning speed to market changes, term loan A lenders are more of a lagging indicator. Most banks will tell you that they are open for business, but it would not surprise me if credit risk officers are challenging deals and scrutinizing them more than ever before. Deals that were already in the market are being approved. People are still working toward closings, but the process is slower, in some cases painfully so.
We are getting a lot of last-minute questions from risk officers about the impact of coronavirus on projections. You can tell they are getting nervous right before the deals close.
It will be more challenging to do new deals that are not already in the pipeline. I certainly do not see any aggressive underwriting options being pitched to sponsors today.
South Korean capital has accounted for a large part of the liquidity in the term loan A market lately. South Korean capital has slowed down quite a bit due to increased foreign exchange risk, general market volatility and an inability to fly here to do diligence. This has forced many Koreans to take a pause.
MARTIN: That may answer my next question, which is has there been a change in terms for loans that are closing?
CHO: There are not enough market comparables to tell whether there has been a general change in credit terms. Borrowers have been suggesting that we assume that market conditions will come back to normal, so let’s put current economic conditions to the side. The credit structures that we are offering remain largely in line with precedent, but certainly we are looking at financing structures that can weather higher stress scenarios.
Pricing is certainly going to move depending on where liquidity shakes out. Pricing on smaller deals will be easier to maintain. Status quo pricing may be harder to maintain in larger transactions where you need the cooperation of more lenders. Market uncertainty and the risk of defaults is already driving up the cost of funds for some banks.
MARTIN: We hear that the spreads being quoted for new deals, where there are such quotes, are all over the map in a sign of the general uncertainty about where the market is headed. Are you seeing that as well?
CHO: Yes. It is a form of price discovery. We have a deal that we are closing next week. Fortunately we were in the market for funds before the crisis hit, and so we are maintaining pricing. If I had to go back out again today to raise funding, how much wider would it be? I have spoken with some of my peers. If you recall, pricing got as ridiculously tight as LIBOR plus 75 basis points on short-term construction loans. Are those deals available today? Probably not. If you force the bank to close on a deal today, how much wider would the spread be? It looks like 25 to 50 basis points wider. That is not a big jump based on comparable pricing in the public debt market.
MARTIN: Have you issued any letters of intent or new term sheets in March?
CHO: We are putting out indicative term sheets, yes.
MARTIN: Do you expect to close the deals in the next couple months or are the term sheets subject to caveats that mean no closing unless market conditions improve?
CHO: Again, our borrowers are asking us to assume there is a return to normal market conditions. Generally our clients are not pressed for cash. They are not saying, “Let’s close, and I don’t care what the pricing is.” Certainly, if we had to close today, the pricing would be worse. They are asking us to price deals that will close when the market returns to normal. I don’t have a crystal ball. Is that two weeks from now? Four to six weeks? We want to be constructive and give our borrowers feedback on what is doable when market conditions normalize. I think a lot of banks will be nervous closing blindly into current market conditions.
MARTIN: The federal government is printing a staggering amount of money through Federal Reserve Bank purchases and the fiscal stimulus measures. Trump said we are at war. We know from past wars where spending skyrockets that inflation follows. Are there growing inflation concerns, and if so, how will they play out in deals? I have also heard a counter argument that deflation is the biggest concern.
CHO: I know people are thinking about it. I have not heard any direct concerns about inflation, but I have to imagine that the inflation assumptions embedded in financing projections and power pricing curves are going to come under greater scrutiny.
Term Loan B
MARTIN: Let’s switch to Max Lipkind with Credit Suisse and the term loan B market. Max, is the B loan market still open?
LIPKIND: Ralph commented on the velocity of change in the traditional bank market. The institutional debt market, which is the term loan B as well as the high-yield market, is much quicker to react and that has been very much the case this go-around.
The B loan market has sold out some 20 points over the last couple weeks and stands at 76¢ on the dollar as of yesterday, which is the lowest . . .
MARTIN: That is what the average B loan debt instrument trades for today compared to the face amount?
LIPKIND: Correct, which is the lowest level we have seen since the financial crisis in 2008. In terms of spread, what that implies is a widening to 625 basis points over LIBOR and a yield of about 11%.
In terms of primary activity over the last two to three weeks, there essentially has been none and for all intents and purposes, new issue markets are closed.
Let me give a few other data points.
Since March 9, we saw the four single worst daily sell-offs in the term loan B markets in the history of the market. We now have about just shy of $700 billion in loans trading below an $80 price, which compares to about $470 billion in the fall of 2008. That number is four times what we saw just on March 16. That below-$80 price segment represents 57% of the market. Ninety-seven percent of the market is trading below a $90 price. It was just 16% a couple weeks ago.
On the more distressed side of things, we have seen 15% of the overall market trade below a $70 price, compared to just 2% at the beginning of the year.
In short, the B market is deeply dislocated. I would not call it open right now, although we have seen some encouraging signs over the last couple days. Specifically, some of the larger liquid names were up yesterday a couple of points and they have been up three or four points over the course of today’s trading session. There are some green shoots there, but, notwithstanding, it is a pretty deep dislocation.
Let me make a couple comments about the high-yield index, essentially the securities cousin of the B loan market. That index stood at 14.4% as of last night, which is 870 basis points wide of the levels we saw at the beginning of the year when the high-yield index was yielding roughly 5.55%. Thus, the move has been even more pronounced in high yield, which makes sense given the largely unsecured nature of that market.
I would be remiss not to talk about the impact the sell-off in the energy sector has had on the overall indices. The CS energy index is yielding somewhere in the 28% range and has returned a staggering negative 45% return year to date. Virtually every pocket across the oil and gas universe has been affected with some of the Permian E&Ps suffering some of the sharpest declines. The sell-off has been broad.
MARTIN: Before going on, B loans are for riskier credits. These are single B and double B credits, correct?
LIPKIND: That’s correct. By and large, B loans would not be investment grade.
MARTIN: And this is bank paper placed with institutional lenders.
LIPKIND: That’s correct. The institutional investors range from the Korean investors that were mentioned earlier, CLOs, exchange-traded funds, and asset managers such as Fidelity, Franklin Templeton and others. B loans are placed across a very broad swath of investors, but CLOs have been the largest player over the last few years.
MARTIN: We heard on our cost-of-capital-outlook call in January that pricing for B loans was in the 250- to 375-basis-point range over LIBOR. You are now saying the spread is 625 basis points, correct?
LIPKIND: It varies. Let me give a few data points.
Not every sector will be affected uniformly and a double B credit in the oil and gas sector is not going to price like something that is less cyclical.
B loans to independent power producers are trading currently at an average of an $80 price, which is an all-in yield of about 8%. The larger power producers with more diversified portfolios trade in the low 80s – 83¢ or 84¢ on the dollar—and that is yielding about 9%. The single-asset, smaller deals are off a little more, particularly the ones that are less hedged. The yields on them are now in the double digits. It is hard to say that the market has moved from a spread of 350 to 650 basis points or to put a dollar price on it because we have not seen a ton of primary activity.
MARTIN: Let me bring John Anderson into this conversation. John, we heard the term loan B market is pretty much shut down. What about the bond market?
ANDERSON: The bond market is dominated by life insurance companies, and we are liquid in the current environment. We fund ourselves from the ongoing premiums coming in from life insurance policies. Our investors cannot call us out. They cannot ask for their money back early, so we remain active buyers in the public bond market. We are working on project transactions right now and, like you heard from Ralph Cho, the borrowers are saying to let the markets settle a bit before we try to figure out a price that works for both sides.
The advantage we have is we price off the liquid public bond market, and there has been a fire hose of new issuances over the last week and a half, so we have plenty of benchmarks to set pricing. In January, we were looking at project finance pricing at 3.5% to 3.75% fixed interest rates.
Roll forward to today and the broad market is easily up 200 to 300 basis points.
Let me make that more specific for you. If you were looking at a single A corporate bond at the end of January, it would have paid an interest rate of 2.5%. Today, to bring a new deal to market would require interest of 4.7%. A BBB issuer that could get an interest rate of 2.8% at the end of January is probably looking at 5% to 5.5% today. A BBB- issuer—these are corporate, so a more liquid market—might have come to market at the end of January at 3.3%, but would have to come to the market this week at 7%.
I will make a couple observations. Last week we had $63 billion come to market in new investment-grade public bond issuances. That is the fifth largest week of the market of all time and the largest Friday we have ever seen in the public bond market.
If you are looking at pricing benchmarks today, you might well say it is better value for the borrower to structure a loan to a BBB credit quality and come to market at 5.5% rather than push it to BBB- and be looking at 7%. The pricing for incremental risk may not be great value to the issuer.
These are real benchmarks, and they are in a very disrupted place. As I said, our borrowers in the project finance sector who do not need money this week are not necessarily trying to figure out pricing this week. The market came back last week with a lot of very high-quality issuances as it will through the coming weeks. That new-issue population will expand. We will get better benchmarks, and we will have a better ability to figure out a price that works for both sides.
MARTIN: So the project bond market is still open, rates have gone up, but people are willing to lend. Are there any signs of potential liquidity issues?
ANDERSON: The life insurance community should be well capitalized and have money to invest. At our shop, we lent $550 million last week alone and put out $200 million this week with our public market customers. Demand for project bonds has not really been affected by the coronavirus shock. I do not see liquidity concerns on the demand side.
We did our portfolio reviews this week. We are very focused on construction risk just because many jurisdictions with coronavirus have ceased construction activity, and so construction delays are being factored into schedules and we are having to figure out how that affects the credit profile of the project, but that is a more tactical consideration than a liquidity issue.
MARTIN: Let me ask Ralph Cho one question, then Max Lipkind and then we will go to Ted Brandt.
Ralph, are you seeing any reluctance by banks to allow further draws on construction debt? Lenders usually want independent engineers to certify that projects remain on schedule for construction.
CHO: Of course. There is heavy scrutiny. Our credit teams have been all over this, scrutinizing what sponsors are drawing down and making sure that the use of proceeds is within the guidelines. We are evaluating our portfolios, especially projects with construction risk and reassessing timing delays, given supply-chain issues due to the coronavirus.
MARTIN: Max Lipkind, the term loan B market is shut. Has anything the Fed has done this week or that is part of the CARES Act that is expected to pass the Senate today likely to unlock the term loan B market?
LIPKIND: It is certainly helpful insofar as it gets the broader risk market functioning. A lot of what the Fed announced yesterday is going to affect the low-investment-grade guy more than the non-investment grade issuer. We are seeing the secondary markets gearing back up a little bit yesterday and a little bit more today, particularly across the more liquid names.
Any and all stimulus will be helpful to our market. A little bit less directly because, from our read of it, it has been more targeted toward investment-grade issuers, but as the markets start to function in a more orderly manner and we see pricing in the secondary levels move up 10 or 15 basis points into a more manageable price range, we will start to see the primary term loan B markets reopen. There is a lot of money on the sidelines that could be put to work.
I think the way I would characterize it is indirectly helpful and we certainly expect to see some of the impact on our markets.
MARTIN: Let me go to Ted Brandt. How are asset valuations being affected?
BRANDT: It is soon to tell, but let me make just a couple points before diving into specifics.
First, you have to think about the wealth effect. There are very few Americans who are richer at the end of March than they were at the beginning of March. Behavioral economics suggest that wealth perceptions drive consumer spending, which is 70% of our market. Clearly what has just happened with the repricing of the equity and debt markets is going to have at least a short-term effect.
Second, renewable energy is the tip of the spear in the M&A market. For the last number of years, we have had a Pollyanna existence in that equity markets were sky high and did not seem like they could possibly go higher, so the risk to buyers was on the downside. Fixed-income markets were priced to the point where even junk bond levels were 300 basis points over, and nobody could get any real yield for taking real credit risks.
Renewable energy was performing pretty well and even though the offtake agreements were becoming riskier, our market worked.
What Max Lipkind just said should tell you all you need to know about current conditions in the M&A market. Our buyers are divided between financials and strategics. What we are hearing from the financials is why the hell would anyone buy a 7% to 8% after-tax rate of return when BBB bonds are on offer at something close to that and they are completely liquid.
The renewable energy business, if the coronavirus shutdown lasts for any period of time, is going to have more competition because, for the first time in a number of years, public equity markets look very attractive with the Dow having dipped as much as it has. At the same time, there is a lot of money to be made in fixed-income assets. I think the strategics will still be there, and I really believe that this is a short-term storm that will level out over time, but in a market like this, what sells best is quality cash flow. The price is a function of the effective discount rate on offer.
MARTIN: Does the M&A market continue to function in these circumstances because sellers are desperate for cash or does a widening bid-ask spread mean it shuts down?
BRANDT: That is similar to what Ralph described in the bank markets.
Deals that have already been signed are moving to close. For deals that are near signing, there is a re-trade risk, but people still seem to be talking and trying to work through terms and trying to get there. Anything new is being slow played by the market. We have several clients on the sell side who were ready to launch in March, and we are now talking about May.
The other side is the buy side, and we have never had more phone calls from large, well-capitalized organizations saying, “Now is our time, and we are open for business.” There is still plenty of cash equity floating around the market. We are not closing up shop and laying everybody off, but we are nervous that transactions are going to slow. We see it as short-term, but these are really tricky times. In the near term, expect lots of volatility and pauses.
MARTIN: You always have a good sense of the discount rates that winning bidders are using to value deals. Has there been a change in those rates as a result of coronavirus?
BRANDT: Think of broad M&A shops that do a lot of trading in multiple markets. It is clear that that money seems to be drying up and does not seem to be available into the market. We are representing several very committed ESG-related funds and several strategics in very advanced processes, and they seem to be bidding aggressively and holding their pricing.
My sense is that development capital is probably in question, and people are asking whether they can still raise tax equity. We are still seeing long-term demand from steady equity players for contracted performing wind and solar projects.
MARTIN: People have been talking for several years now about a “wall of money” chasing deals. You called it “satchels of euros.” What is it today?
BRANDT: There is still a wall of money, but it is probably not as high. The utilities and global investors still have aggressive goals, are committed to moving forward and see this as a short-term blip. The infrastructure guys and the ESG folks are still very much in the market.
MARTIN: Let’s go to audience questions. Several audience members ask why there is such a clear disconnect between what the tax equity investors are saying and the debt view. Ralph Cho, do you want to try that one?
CHO: If you talk to banks, they are open. They are looking at deals. For new transactions, I think people are going to be scrutinizing the credits a little more and things are taking a bit longer. The bank market is not closed or shut down.
ANDERSON: That is true for tax equity and project bonds as well. The issue is where to price a new transaction with the uncertainty. That is probably true across all of our markets.
MARTIN: The next question is for the tax equity investors. “In light of most shops announcing negative earnings per share of 20% to 60% depending on the shop, how is it possible that we will not have major tax equity contraction?”
HENDERSON: I am not aware that JPMorgan has said anything about its earnings per share and how they will be affected.
CARGAS: Same here.
MARTIN: Next question, for Ralph Cho. “Are banks
experiencing any kind of liquidity issues?”
CHO: We have not heard of any. Obviously corporate revolvers are being drawn down. Specifically for our bank, we have had underwritings for which we had gone to market, and lenders that we thought had committed to take part of the deal are backing out. The problem is not yet widespread, but we have had problems where lenders do not close and rescind. That is a problem because we are on the hook.
On top of that, there are indications that there could be a slowdown on repayment. Everyone is very focused on that. So given these issues, I have to imagine that all banks are concerned about their liquidity positions. They are evaluating new deals. They are looking at what monies are expected to come in and what monies are expected to go out. Nobody wants to be in a situation where there is a liquidity crunch at his or her institution.
ANDERSON: We have a $20 billion portfolio with financial institutions, and the view of our financial institutions team is that we feel much better about the banking system and how well capitalized it is now compared to the situation in 2008. The system is much more robust. There is not as much of an asset bubble shock; it is more temporary demand destruction. We are dealing with a different animal than in 2008.
MARTIN: John Anderson, an audience member asks, “Are insurance companies shoring up liquidity to deal with increased death due to COVID-19?”
ANDERSON: Thank you for that question. It is a good one. The death rate from coronavirus may be a 1.5% mortality rate, which is not as stark as, for example, SARS when it spread. From what we see so far, our sense is that we have good liquidity for claims.
MARTIN: Another member of the audience asks, “It sounds like there is liquidity, but it is only for higher quality projects and borrowers. Is the DIP market dead?”
LIPKIND: Clearly the market is gravitating toward the higher quality deals. Some contracted projects will see the pricing reset. At Credit Suisse, we are clearly open for business and have had a ton of investor dialog where at the right pricing and maybe even more importantly, right structures, capital will continue to be available. We are looking to use this dislocation to put money to work.
We have not heard any indication that the market for DIP financings for companies in bankruptcy has closed.
None of us likes to be dealing with those types of situations. They are unfortunate, but DIP financings by banks have historically had extraordinarily high recovery rates. There have not been a ton that have come in front of us in the last few days. These things take time to work through the system.
CHO: Higher risk deals are a function of how badly the borrower needs the money. Unless it needs the money right now, I don’t think it makes sense to come to market. There is a real-life example. The Competitive Power Ventures Three Rivers project is a construction deal. It is quasi-merchant in PJM. It is sub-investment grade. The sponsor delayed bringing the deal to market. It is a billion-dollar transaction. You need cooperation for a deal that size from a lot of banks. Pricing today would be a lot wider of what the norm should be. Based on that, I think it is the right call. Just delay until the markets stabilize.
MARTIN: Another question for the tax equity investors. “Has there been any change in appetite for residential versus utility-scale solar? Are you thinking more about risk in residential solar? What effect has this had on pricing?”
CARGAS: We remain interested in residential solar and utility-scale solar and utility-scale wind. I think the driver in residential solar is going to be consumer demand for new installations. We have heard some industry observers say they expect that demand to soften. I am not sure we are hearing that from our sponsors yet, but that is probably more of a driver than availability of tax equity.
HENDERSON: I agree. We are not overly worried that consumer defaults will mount on account of coronavirus if that is the question, particularly given our position in the capital stack. We are as committed to the residential solar market as before.
MARTIN: Last question, and this one is from me. Starting with John Anderson and go across the full panel, what issues, if any, are you facing that require a government response?
ANDERSON: None come directly to mind given the long-term funding nature of our business. The issues we see are really for businesses where their revenues are expected to collapse for four or five months. Think about the hospitality industry, and then that ripples into the real estate sector. How does the pain get shared through the system? Getting money into the hands of people who are without work for six months. Issues like that.
MARTIN: Ted Brandt, do you see anything that requires a government response?
BRANDT: I run a small business, and it is a little like owning a baseball team without a season. I am somewhat gratified about this new small business program in the Senate bill that looks like it is going to give firms like ours some amount of money on the condition that we continue to employ people. The other thing to mention is the deadlines to finish renewable energy projects have to change.
MARTIN: Max Lipkind, you have already had a government response through the Fed in your segment of the market. Is any further response required?
LIPKIND: Not at the moment. I think the one big difference today verses the 2008 financial crisis is the fact that the banks seem much better capitalized. To the extent businesses have seen their revenues collapse, they clearly could benefit from government intervention.
MARTIN: Ralph Cho, is there anything that requires a government response in the bank market?
CHO: It is basically what Max just said. We need to make sure that the banks maintain sufficient liquidity. So making sure that the funding costs remain reasonable has to be a priority.
MARTIN: Yale Henderson?
HENDERSON: The placed-in-service deadline has to be extended. That is the single biggest issue for the tax equity market.
MARTIN: Instead of requiring the projects be completed within four years, perhaps the Treasury ought to write off 2020 as a dead year?
HENDERSON: Instead of a four-year window, just change one word from four years to five years for 2016 projects. That would be the quickest fix and does not require Congress. All it requires is the IRS to act.
MARTIN: Jack Cargas, you already mentioned the need for guidance on what “continuous efforts” mean. Is there
MR. CARGAS: It would be good to have that clarity, but to me, that is a detail. All of the things that the CEO panel that you hosted last week said are important. That includes more time to finish construction.