Norton Rose Fulbright: Solar Refinancing and M&A Full Transcript

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Available on Norton Rose Fulbright or Apple Podcasts.

“Richard Matsui, founder and CEO of kWh Analytics, is back to give us an update on their Solar Lendscape from the asset owners’ perspective. We get into their methodology, discuss the recent trend of refinancing and how refinancing is being built into models, strategic partnerships in the industry and more.”

[Full Transcript]

TODD ALEXANDER: Welcome to Currents, a Norton Rose Fulbright podcast dedicated to project finance trends.  I’m Todd Alexander, your host, and a partner at Norton Rose Fulbright’s New York office.  Today, we’re recording with a Currents podcast favorite, Richard Matsui, founder and CEO of kWh Analytics.  kWh Analytics is focused on solar risk assessment and mitigation, through the use of one of the most comprehensive sets of data on the performance of solar projects in the US. Richard’s here today to discuss a recent update of his Solar Lendscape. Good to see you again.

RICHARD MATSUI: Thanks a lot, Todd. 

MR. ALEXANDER: So first, for those who haven’t looked at your website, or didn’t catch the last podcast that you did on this, what is the Lendscape?

MR. MATSUI: Definitely. So the Solar Lendscape catalogs the solar industry’s most active lenders and tax equity investors, all here in the US market.  The survey was conducted with sponsor needs in mind, so the key stats tend to be what a sponsor would find helpful. “What’s the bank’s check sizes, the target market segments, the product type?” From our count, there are 31 active tax-equity investors in the market today, 52 active solar lenders.  On the debt side, we’re seeing 31 lenders that are now valuing the Solar Revenue Put, and seven of them have actually closed with credit enhancement.  I’d say that perhaps the Solar Lendscape has turned out to be a pretty popular resource, in large part due to the podcast, actually the most visited page on our company’s website now, more than what we actually do, but that’s okay.  You can find it by going on the Solar Lendscape, just googling that, or by going to our website,

MR. ALEXANDER:  And for those of you out there who are looking for either tax equity or looking for lenders, or for that matter, looking for a job, from my perspective just looking at it, it’s great, because it’s almost like a lead table, but with simplified format so you can figure out very quickly who does what in what segment of the market, and who the active players are, and get that up in less than three minutes you can pretty much figure out what’s going on the market. 

MR. MATSUI:  That’s the idea.

MR. ALEXANDER:  So what’s new in the Lendscape?

MR. MATSUI:  Maybe as a backdrop, so given the hot M&A market you may not have listened to the podcasts yet with Todd a couple weeks ago.  We’re getting a lot of questions from developers about who can actually go out and buy these assets from them.  So we decided to now profile the fifty most active long-term asset owners in the space.  So we’re profiling this with the lens of what a developer would care about.  So, therefore, we found things like the acquisition check size, the stage of development they acquire at, whether it be pre-interconnect all the way up to operating.  The market segment they operate in, the size of portfolio, M&A volume.  All those kinds of factors.

MR. ALEXANDER:  I know your business generally is very data-driven, so how do you get data for this that 1) people can feel is reliable?  And then 2) the market’s so big, how do you assure that you’re really covering it properly?

MR. MATSUI:  That’s a great question and I wouldn’t say that this is a perfect survey that way.  I would say that we did primarily rely upon a survey that we sent out to various firms and then we supplemented that survey with publicly available data from both the permitting data sets as well as press releases.

MR. ALEXANDER:  Let’s talk about trends since the last time you were in here.  You already mentioned that M&A is really the big new trend.  In your Lendscape, you note that there are fifty sponsors who bought about $10 billion worth of solar projects last year.  Do you have an idea of why this is the case?  Why the M&A Lendscape or landscape, depending on which we want to use here, why that’s changed, and why there’s so much activity on the M&A side?  And who’s doing most of the buying and selling.

MR. MATSUI:  Boy.  So, I find this fascinating as well, I think the Lendscape helps to tell the story of what’s happening, at least with numbers instead of just the quality of trends I think we all see.  So, at least from what I can see, there’s an awful lot of M&A for the operating asset side, and that’s a relatively new phenomenon.  Because these operating assets just had such high dollar per megawatt RPPA rates, those transactions are really driving a lot of the big recent headlines that we’re seeing.  So, a couple of notable portfolios that have traded hands recently, the AltaGas portfolio that went to Terraform, C&I operating assets.  Sunpower sold off their portfolio to Goldman.  C&I operating assets again.  Cyprus sold off a pretty sizeable utility-scale portfolio to Cubico.  The list really goes on, but a lot of this happens to be on the operating side now.

MR. ALEXANDER:  And one thing, last time you were in here, you talked about how it turns out after the fact that many of these projects are really underperforming based on their P50 level.  I think you threw out 3% last time, on average.  What does that mean in terms of M&A valuations and how confident are people in the data that they have in terms of the solar resource going forward since that’s such a huge driver of valuation?

MR. MATSUI:  Right.  And it’s a great question.  When I think about the study that we did with those nine other firms, the overall implication seems hard to escape, which is that acquirers who are accepting the IE’s P50 at face value are likely overpaying for those assets.  If I think about the next level below this, here is that for every one percent under performance below one’s P50, is probably about 25 basis points of reduction to levered IRR.

So let’s just say that if the D&B study is representative of the broader industry, and therefore, you’ve got that 3% underperformance, it’s just across the industry, the new norm, then sponsors are getting nearly 1% less IRR than they thought when they bought something.  So if your “8% return” is actually 7%, even before we start making some of these merchant assumptions that firms are making, it just seems highly unlikely that you’ll actually end up getting to that 8% return.  It’s a problem for acquirers across the spectrum.  If you’re doing a NTP, if you’re doing operating, this is still a challenge either way.  We’re also seeing this problem happening much more frequently now, given that IE estimates continue to increase relative to what the historical data would tend to suggest.

MR. ALEXANDER:  So let’s talk about one thing that increases IRR, which is declining interest rates.  Like people are refinancing their home mortgages, there have been several refinancings of renewable energy projects.  How do you see that factoring into the market now, we have the recent rate cut and potentially more before the end of the year.  Are you hearing much in the market about either refi opportunities or people building that into their models?

MR. MATSUI:  Yes.  It’s a quarter point, I suppose, so, I guess in the broader concept of things, it’s perhaps not so huge in itself.  But it absolutely does call attention to the biggest opportunity we see in the industry today.  It’s right below the surface, but it’s the refinancing of these operating assets. 

Spreads have tightened by more than fifty basis points in just the past few years, and we’ve been seeing experienced CFOs use this as an opportunity to take cash off the table, bank the gains and then lock in these new low rates.  On top of the decrease in spread, they’re using the Solar Revenue Put, which means they can increase their loan size by about 10%, which, of course, further increases their IRRs.  Maybe one sub-trend we’ve seen to this, that historically, debt refinancing was happening mostly in preparation of a post-flip, or when the miniperm was hitting a step-up.  But given the macro environment today, we’re seeing that refinancings pencil as quickly as two years after the initial financing.  And that’s a lot faster than I think people would conventionally think.

MR. ALEXANDER:  One additional component which you kind of touched on is the margin.  So it’s not just the interest rate, but it’s also the margin.  In the deals I’m doing now, you’re starting to see construction financings below 100 basis points in the margin and then close to that on the term financing.  You know, the margins are getting very compressed here.  Do you have any information on that, generally what you’re seeing in the market or were people embarrassed to even tell you?  [laughter]  If they’re getting money.

MR. MATSUI:  It’s funny enough, I was talking to a lender yesterday.  I’m not as close to the construction debt market, just given the nature of what we do.  And I said, “Oh, I’ve been hearing that construction debt spreads are below 100 basis points now.”  And the lender laughed and said, “I don’t even remember the last time I’ve seen 80 basis points.”  Which, wow.  That is incredibly cheap.  On the term debt side, which we do see a bit more of, it seems like the standard for utility-scale nowadays is L+125 but we did see our first deal at L+112.  Just a few months ago now.  So it’s really hard to see spreads getting much tighter than this, right?  But it’s also true that ten-year treasury is at 1.7% now.  And just six months ago, and this really shocked me when I looked it up, it was 100 basis points higher.

MR. ALEXANDER:  Are there any specific refinancings or new structures that you’re able to discuss on the podcast in a public forum, or do we have to wait for next time for you to show up when you update this Lendscape again?

MR. MATSUI:  [laughs]  So I think there’s been a couple.  I feel like refinancings is, by nature, one of those events that are both important and yet not urgent for most CFOs.  So perhaps it doesn’t get as much press in general.  But two that come to mind is, one -- the team AES Distributed did a refinancing, that was on a DG portfolio with us.  And then there was another one with the Invenergy team.  That was for a utility-scale project out in Illinois.

MR. ALEXANDER:  Richard, do you have any numbers for us or just a general indication on how big the opportunity is for refinancing and what the potential is for market recaps for sponsors?

MR. MATSUI:  So this is where, as a data company, this is exactly the sort of thing that we think a lot about.  So when I looked at the Lendscape, what I did was, I said, “Okay, you take the top 50 sponsors here.  Just these 50 names alone account for $35 billion in solar projects.”  So if you start segmenting that out by, based on how old these projects are, if just those 50 sponsors were to refinance the assets that are two years and older, that alone would unlock about $1 billion of cash for this industry.  And for the broader industry, we see that there’s an opportunity to take about $3 billion of cash and put it into treasury.  It’s hard to understate how big of an opportunity this is for the industry, especially given the macroeconomic uncertainty that you’re alluding to, that’s coming up ahead.

MR. ALEXANDER:  Beyond the refinancing trends and M&A trends, are there any other smaller trends or maybe less material trends that you see out there that we should touch on before we end the podcast?

MR. MATSUI:  I think there’s maybe two trends that came to mind when I was looking at the Lendscape.  So the first is that -- rewind the clock three years ago, there was a strong emergence of, at least what I’ve heard someone call, aggregators.  So, a business model where you’re buying assets pre-NTP from smaller developers, kind of punting them into larger portfolios and then financing the whole thing with tax equity now that there’s -- it’s hit that critical mass.  So that seems to have been ebbing in the recent years.  So Cyprus selling that big portfolio to Cubico, then there has been some high profile turnover over there and then Pinegate with Hancock -- that’s another name that comes to mind.  It’s like 400 megawatts that was sold off in that transaction. 

Another trend that comes to mind when I look at the Lendscape is, really broadly speaking, on an alliance between development and long-term capital.  And so maybe one scion out of this is that on the in-house side, you see M&A that’s been occurring.  So not to beat a dead horse on this -- I know you have previous guests that have mentioned this, but Power Corporation buying Nautilus Solar, PPL bought Safari, Gaz Metro bought Standard Solar.  There’s a sense that development firms are looking for capital and long-term capital looking for pipeline.  So that seems to be one side of it. 

The other side that comes to mind is really if it’s not an M&A transaction, sometimes you’re getting these interesting strategic partnerships that are emerging.  So just two weeks ago, Sol Systems and CapDyn announced that partnership.  Pine Gate and Hancock similarly announced a partnership.  So the moral of the story appears to be that, in this environment, if the two sides of the table are now starting to reach across and figuring out longer term ways of working together, at least to me, it does raise a question of what’s going to happen to some of the stand-alone players, really on either side of the table.

MR. ALEXANDER:  Yeah, maybe it’s a substitute for the YieldCo model.

MR. MATSUI:  A substitute in the sense of?

MR. ALEXANDER:  Another way to marry the long term holders of these projects with the people who take more risk in developing them.  I agree with you and it seems like there’s a new equilibrium being reached now that the YieldCos are not the exit strategy for most of these players anymore.

MR. MATSUI:  And the fact that development platforms are now getting valued as development platforms, as opposed to a pipeline of potential assets.  It seems to have been a relatively new trend, at least from what I can see, but I can certainly see if I’m development team I’m now able to see some valuation off of that, an exit seems a lot more attractive than it did probably a year ago.

MR. ALEXANDER:  Alright, well, speaking of a year ago, I’m sure you’ll be in here sooner than a year--

MR. MATSUI:  Thanks a lot, Todd.

MR. ALEXANDER:  For when you’ve got the next Lendscape, but it’s good to see you again and see you soon.

MR. MATSUI:  Thanks a lot.

MR. ALEXANDER:  You can find us online at or send us an email at  Please rate, review and subscribe on Apple podcasts, Spotify or your preferred podcast app.  Our show today was produced by Emily Rogers.  Stay ahead of the currents.