US yieldcos must learn from past traumas


August 12, 2016

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The US listed yieldco market has been teetering for a year, and the dramatic collapse of SunEdison four months ago threatened to push the whole market off a very tall cliff.

But there is now evidence that this market is tentatively starting to pick up again. If these structures are to survive into the future then they must learn from their problems first time around. Practically, this is likely to mean adopting more conservative strategies.

The problems with US listed yieldcos have been well-rehearsed.

First, they gave investors unrealistic expectations of the returns that could be made from wind and solar farms. They promised double-digit returns on assets that would typically deliver a steady 5%-6%, and could only deliver those double-digit returns as long as they continued buying assets and raising money. Falling investor confidence exposed the folly of this business model.

And second, their need to continually buy assets to deliver those promised returns resulted in fierce competition between yieldcos to do deals. With only a limited number of assets to go for, this drove up prices and affected returns — which then hit investor confidence.

These must be addressed if US listed yieldcos are to have a rosy future. Will they be? We hope so, and we can follow the prospects of two yieldcos to see what happens in practice.

On Monday, US developer Pattern announced that its yieldco arm planned to raise $239m by selling 10million Class A shares, and said it would use the money to buy more projects from its development arm. In June, it committed to buy the 324MW Broadview wind farm in New Mexico for $269m when the development completes in early 2017.

And, on Tuesday, NRG Energy’s yieldco arm launched its own $150m fundraising, which it said it would use to pay off debt as well as fund new acquisitions and investments.

The very fact that two US listed yieldcos are looking to raise funds tells us a few things.

First, they feel that investor confidence is returning to listed renewable energy companies after last year’s rout, which must be a good thing. If more retail investors are putting their money into renewables then that should have a positive benefit on acceptance of renewables including wind, and underline that the sector has strong business credentials.

Second, it tells us that large developers still see the stock market as a viable way to fund new developments. It is another weapon in the arsenal of those looking to fund schemes. A range of funding sources is a benefit to the sector as sluggish growth continues.

And third, it should give confidence in the health of the US market. These firms expect good investment opportunities following the five-year extension of the US production tax credit late last year, and want to raise money so they can cash in.

We expect other fundraisings to emerge through 2016, and we are not alone. Andrew Redinger, head of KeyBanc Capital Markets’ utilities, power and renewable energy group, said in June that yieldcos were “poised for a huge comeback”; and that the Pattern fundraising would set the tone for the market. To us, it looks like Pattern’s plan is focused on gradual growth and, if this happens, it could point the way for other yieldcos to act conservatively.

And, in our view, it is the conservative yieldcos that will be most attractive to investors.

If the yieldco pain of the last year has taught investors anything, it is that wind farms are not fast-growth assets. It is exceptionally rare that a company would buy a project and be able to make huge improvements to the amount of energy produced. After SunEdison, we expect investors to be more alert about the risks posed by yieldcos that promise too much.

Better to get steady returns than risk losing it all.

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