Solar Hedge Opens Door to Greater Leverage, Says Analytics Firm


By Richard Metcalf, originally posted on Power Finance & Risk.

A solar analytics firm called kWh Analytics is marketing a production hedge product that it claims will allow sponsors to raise more debt on contracted solar projects in the U.S.

The product, called a solar revenue put, could allow sponsors to reduce the debt service coverage ratio for their projects from the existing market standard, which is between 1.3 times and 1.35 times, to 1.1 times, according to Richard Matsui, CEO and Co-founder of kWh Analytics.

“The value of that debt is greater than the cost of the insurance product,” he told PFR on Tuesday in New York, where he was meeting bankers to discuss the application of the hedge.

The San Francisco-based firm has so far provided quotes for $450 million of projects, and has discussed the solar revenue put with about 30 lenders.

Two project finance deals involving the hedge are under scrutiny by commercial banks’ credit committees, says Matsui.

“Getting this through credit committees is going to be really hard,” he concedes. “But something we’re seeing in the market is that there is just a ton of capital out there, and there’s a lot of lenders chasing few deals, so this is a way lenders can differentiate themselves.”

Bankers say the solar revenue put has the potential to be a useful innovation, so long as it is priced appropriately, but add that it will be up to sponsors to take the lead.

“It’s certainly a product that needs to be initiated by the borrower-sponsor,” says a project finance banker in New York who has discussed the hedge with Matsui. “In theory it could bring them more debt… then it comes down to a cost-benefit analysis.”

“Like any insurance product, it’s useful to the degree it’s priced efficiently,” says PJ Deschenes, a partner at boutique investment bank Greentech Capital Advisors in New York. “It could allow you to finance something you wouldn’t be able to come up with your equity check for otherwise, but the question is what are you giving away to realize that?”

While kWh Analytics underwrites and distributes the solar revenue put through its own licensed insurance brokerage subsidiary, Kudos Insurance Services, investment grade insurance carriers provide the necessary balance sheet support.

The solar revenue put is not a replacement for title insurance and does not cover curtailment risk or loss of revenue due to operations and maintenance contractors failing to carry out their duties.

While traditional insurance companies have made attempts to provide solar production guarantees in the past, their policies were either too expensive or worded in such a way that the coverage was not comprehensive, says Matsui.

Unlike the conventional insurers, kWh Analytics is able to leverage a large database of U.S. solar projects, which it has obtained as a result of selling its risk management software to tax equity investors.

The firm works with more than half of the tax equity investors in the market, including PNC Bank and Google, says Matsui. “What that means is we have data on 10% to 20% of all operating solar plants in the U.S.”

“That’s huge, to have that quality and quantity of data and that vote of confidence from these players,” says Richard Dovere, CEO of solar project sponsor C2 Energy in New York. “There’s definitely going to be a place in the market for this.”

“It’ll be another tool within the market,” says Conor McKenna, M.D. at CohnReznick Capital in New York. “Whenever you gain data in a market where there is a lack of clarity or the lack of an aggregation set there is value.”