While yield-hungry investors of all stripes are viewing distributed, small-scale solar companies ever more favorably, the founders and management of the target companies are finding that there are attractive alternatives to selling stakes in their businesses outright.
Interest in commercial and industrial-scale (C&I) developers has come from a wide range of investors in recent years − from utility holding companies and larger developers to private equity and infrastructure fund managers.
They are drawn to the subsector by its relatively high returns, as the deluge of capital into more mainstream renewable energy investments − such as grid-scale solar with utility offtakers − has compressed yields, say deal watchers.
In one of the most recent such transactions, JLC Infrastructure, an investor and asset management firm backed by former Los Angeles Lakers star Earvin “Magic” Johnson, Jr, acquired a stake in Greenskies Renewable Energy.
Based in Middletown, Connecticut, Greenskies has built and now operates C&I projects with a combined capacity in excess of 230MW. Its development pipeline includes contracted projects totaling over 100MW of capacity that are due to be brought online in the next 18 months.
JLC Infrastructure Fund − a joint venture founded in 2015 by Magic Johnson Enterprises and Loop Capital − joins Clean Focus Yield, a subsidiary of Taiwanese solar module manufacturer Neo Solar Power Energy Corp, as an investor in Greenskies. The developer is set to be rebranded Greenskies Clean Energy.
Such deals are a boon for financial and legal advisory firms with a strong track record in C&I solar, such as KeyBanc Capital Markets. A pioneering lender and capital markets shop for distributed generation companies, Key acted as financial adviser to JLC on the Greenskies deal. On the legal side, meanwhile, Winston & Strawn advised JLC while Troutman Sanders advised Greenskies.
But while some solar developers are eager to bring in equity partners, others that have explored selling stakes in their businesses have ultimately opted instead for alternatives such as mezzanine capital.
“We get offers all the time,” said the CEO of a distributed solar company. “But if you look at some of the companies that have been acquired by utility companies, for example, it doesn’t always seem to work out that well.”
Big sun energy
SunEnergy1, which started off as a rooftop solar developer but has since moved to ground-mounted, grid-scale projects for mainly corporate clients, hired Marathon Capital to run a strategic review in 2018 to assess options including selling an equity stake in the company.
After receiving several offers, however, the company − owned and run by Australian race car driver Kenny Habul − decided to keep control of itself and lever up with mezzanine capital instead.
Ares Management provided the roughly $50 million in mezz debt, which was structured at the holdco level above two SunEnergy1 projects in North Carolina, around six weeks ago (December 2019). The projects are:
ING Capital provided the senior debt for both projects, while US Bank acquired tax equity stakes in the projects, investing $61 million in Ranchland and $87 million in Holloman.
Ranchland came online in March 2018 and sells 50% of its output to Digital Realty, which uses the power to support several of its data center customers in Ashburn, Virginia, according to Digital Realty’s senior director of sustainability Aaron Binkley.
Holloman began commercial operations in August 2019 and has a power purchase agreement (PPA) with Fifth Third Bank.
The exact structure of the Ares deal was not disclosed, but other mezzanine loans in the market generally have tenors ranging from four to 10 years and are typically priced around 10%, while borrowers often have the option to repay in cash or in kind, says a deal watcher.
SunEnergy1 is using the proceeds of the transaction with Ares to transition from a develop-build-sell business model to a develop-own-operate approach. The mezzanine funding helps the developer hold onto equity in its operating units, opening up the possibility of aggregating a larger portfolio to sell or refinance at a later date.
Another solar shop, Soltage, took back ownership control over the summer (2019) when it raised fresh capital with which to buy out equity investor Tenaska. Prudential Capital Group supplied the cash, which was described as “growth funding” in an announcement in June.
The company’s management used at least some of the proceeds to buy back Tenaska’s stake in the company, says a person familiar with the situation.
Tenaska made its first investment in Soltage in 2008 and increased its stake in 2015.
Altus Power America further demonstrated the range of funding options available to C&I solar developers when it announced an $850 million, three-tranche funding package comprising:
- a securitization
- a bank loan
- a preferred equity investment
Altus’ private equity backer, Blackstone, played a major role. An affiliate of the firm, Blackstone Insurance Solutions, arranged the investment grade securitization, which was secured on Altus’ 130-asset operational project portfolio, which totals some 180MW of capacity, while GSO Capital Partners, Blackstone’s credit arm, provided the preferred equity.
Meanwhile, a syndicate of banks signed a delayed-draw construction-to-term loan facility to support projects in development.
“With this Blackstone-led recapitalization, we have now optimized our capital structure with investment grade-rated debt as well as delayed draw committed capital," says Altus managing partner Gregg Felton. "We believe this combination provides us with some of the most competitive and flexible capital in the market."
The structure of the securitization was not disclosed. The issuance of bonds backed by residential solar loans, leases and PPA cashflows has gradually become an established funding mechanism in recent years and C&I solar is considered to be the next frontier by solar securitization specialists.
Rooftop solar-focused Altus aims to turn Blackstone’s formidable real estate network to its advantage as it seeks to bolster its origination efforts.
“Our 10-plus-years history combined with the backing of Blackstone gives us the credibility to pursue partnerships with REITs and other large corporations," adds Lars Norell, also a managing partner at Altus.
(A version of this story first appeared on Power, Finance & Risk)