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Mr. John Joshi [email protected] 818-294-3381 . Renewable Energy Financing and Securitization. SECOND ANNUAL FARE CONFERENCE Orlando, Florida March 26 th, 2010. John Joshi: Firm: CapitalFusion Partners Phone: 818.294.3381

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Mr john joshi jjoshi@capitalfusionpartners com 818 294 3381 l.jpg

Mr. John Joshi

[email protected] 818-294-3381

Renewable Energy Financing and Securitization

SECOND ANNUAL FARE CONFERENCE

Orlando, Florida

March 26th, 2010


Contact information l.jpg

John Joshi: Firm: CapitalFusion Partners

Phone: 818.294.3381

Email [email protected]

Contact Information


Disclaimer notice l.jpg
Disclaimer Notice

This confidential presentation has been prepared for informational purposes only and is not an offer to buy or sell any security or instrument or to participate in any particular trading strategy. This presentation is based on information that is believed to be reliable. No representation is made that it is accurate or complete. Certain assumptions have been made arriving at any returns detailed herein. No representation is made that any of the returns indicated will be achieved. Changes to the assumptions may have a material impact on any returns detailed. Past performance is not necessarily indicative of future returns. Price and availability are subject to change without notice. CapitalFusion Partners, (“CFP”), will provide additional information if available on request.


Overview l.jpg
Overview

  • A Potential New Asset Class : Renewable Energy Structures

  • Potential for Securitization in the Solar, Wind and other energy sectors


Challenges l.jpg
Challenges

  • Developing a new market creates numerous challenges

    • Standardizing documents

    • Origination of assets

    • Servicing of assets

    • Loan file documentation standards

    • Performance data

    • Systems and technology issues

    • Lien registration, assignment, enforcement

    • Bankruptcy protection vehicles

    • Tax and accounting guidelines for securitization

    • Rating methodologies

    • Development of investor base


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Challenges

  • Lenders – Do they need capital markets funding?

    • Capital relief – do lenders need off-balance sheet financing?

    • Liquidity – do lenders need liquidity?

    • Cost effective – is the capital markets solution too expensive?

  • Investors – Is this asset class attractive to investors?

    • Opportunity – is it a long-term investment opportunity?

    • Pricing – can the risks be managed?

    • Regulatory – is there an appropriate regulatory treatment?

    • Credit – are there credible sources of credit enhancement?

    • Liquidity – will there be a viable secondary market?


  • Credit process l.jpg
    Credit Process

    • Quantitative cashflow and scenario analysis using internally developed models:

      • Cashflow and waterfall modeling

      • Analyzing regulatory policy, historic and market implied loss profiles

      • Portfolio diversity and correlation among projects

    • A key goal is to minimize portfolio concentration and correlation while optimizing the portfolios with regard to credit, policy and market risks


    Renewable energy finance securitization rational l.jpg
    Renewable Energy Finance – Securitization Rational

    • Capital markets provide a large, long term and liquid source of finance for infrastructure

    • Capital markets can be flexible and offer more flexible covenants than commercial bank debt

      • Longer tenors

      • Fixed and / or indexed rates

      • Third-party credit enhancement

      • Softer covenants

    • Green credentials allow structures to be more innovative

    • Minimum transaction size for public markets is $100 - $200+ million allowing a portfolio approach


    Benefits of solar securitization l.jpg

    Incentives are effectively backed by the US Government

    Static asset pool, no active management is required

    Scalable infrastructure, proven lease origination model

    Dependable technology with low cost insurance available

    Targeting high credit score customers

    Low variability natural resource with over 40 year observation history

    Resilient market for electricity even in uncertain economic times

    Credit transparency of involved public utility companies

    Dominance of federal monetary and tax incentives over system leasing cash flows

    Interconnection risks are small

    Fully utilize all cash and tax incentives available for customers thereby eliminating the high-cost/long-payback

    Potential to incorporate solar with little or no upfront cost

    Lower their monthly cost compared to grid power by running meter backwards

    Hedge against future electricity cost

    Solar lease company provides a turnkey system, including engineering, design, installation, monitoring, full maintenance and performance guarantee

    Investors can utilize tax incentives to achieve a healthy return on investments

    Benefits of Solar Securitization


    Renewable energy finance securitization basics l.jpg
    Renewable Energy Finance – Securitization Basics ?

    • Debt and Equity financing

    • Portfolio of assets

    • Low correlation

    • Increased diversity

    • Credit enhancement

    • More efficient structure for Equity investors

    • Special Purpose Vehicle (SPV) with bankruptcy remoteness

    • De-linking of credit risk from asset originators

    • Time and Risk tranched securities

    • Potential for increased liquidity for investors

    • Efficient balance sheet financing

    • Financial return and Social Dividends (Carbon / Emission Credits)‏

    • Potential to qualify as RECs under RGGI or VER under CCX


    Slide11 l.jpg

    Renewable Energy Finance– A StructuredProject

    Capital Markets

    (Financial Institutions, Private Equity,

    Hedge Funds...)‏

    Equity and/or Debt

    Ownership + Dividend and/or Principle + Interest

    Power Purchase Agreement

    ERUs / SRECs

    Global Carbon Market

    Cash

    Cash

    By-product: ERUs / SRECs

    Main product: Electricity

    Source : Fortis “Combining Project Finance with Trading ERU's


    Renewable energy financing portfolio approach to financing l.jpg
    Renewable Energy Financing – Portfolio Approach to Financing

    • Portfolio of Wind, Geothermal and Solar farms

    Cash

    Cash

    Equity and/or Debt

    ERUs / SRECS

    Power Purchase Agreement

    Pooled

    Cash flow

    Global Carbon Market

    Class A Bond

    Class B Bond

    Equity

    By-product: ERUs / SRECS


    Conduit flowchart l.jpg
    Conduit Flowchart Financing

    Solar

    Leasing

    Cos.

    Sell Leases*

    Leases

    Solar

    Projects

    Banks

    Conduit

    Securitization

    Market

    Loans/

    Leases

    Sell Loans/Leases*

    Convert Construction

    to Permanent Loans

    Issueand Sell

    ABS**

    Sell as Whole

    Loans/Leases

    Sell Loans*

    Loans

    Specialty

    Finance

    Cos./Brokers

    Whole Loan

    Secondary

    Market

    *Mayormaynotretainservicing

    **Periodicseparateissuancesasaggregationlevelswarrant


    Securitization diagram stylized l.jpg

    Lease Financing

    Lease

    $ Lease Payments

    $ Lease Payments

    Securitization Diagram – Stylized

    U.S.

    $Grant

    Lease

    Residential

    Host 1

    $Proceeds

    $ Loan

    $ Lease Payments

    Securitization

    Vehicle

    (SPE)

    Indenture

    Trustee

    Owner

    SPE

    Issue

    ABS

    Note

    Residential

    Host 2

    Pledge

    Lease

    Payments*

    Pledge

    Notes &

    Lease

    Payments*

    Residential

    Host N

    Tax

    Investor

    $ Equity

    Electric Power

    ABS

    $ Proceeds

    Tax

    Benefits &

    Profits**

    Lease

    Commercial

    Host 1

    $ PPA

    Payments

    $ Lease Payments*

    Electric Power

    Strategic

    Investor

    Investors

    $ Equity

    Lease

    Utilities

    Commercial

    Host 2

    $ PPA

    Payments

    Profits**

    $ Lease Payments*

    Electric Power

    100%

    Owned

    Lease

    $ PPA

    Payments

    Commercial

    Host N

    $ Lease Payments*

    Operating

    Company

    Operating &

    Maintenance

    Contract

    *Includes PPA Payments

    **Subject to flip after tax benefits received b y Tax Investor


    Slide15 l.jpg

    Conduit Management Financing

    Trustee / Custodian

    Solar ServicerServices Leases

    Solar Customer

    CapitalFusionPartners as Manager of Conduit and Securitization

    Solar Customer

    Conduit

    InvestorProvides Capital

    Conduit AffiliatedSolar Operating CompanyOriginates, Buys and Manages Leases and Equipment

    InvestorProvides Capital

    Solar Customer

    Solar Leasing Cos.Originates Leases

    Solar Customer

    Securitization Markets

    Sell as Whole Lease/Loan toSecondary Markets

    Banks / ThriftsOriginates Loans / Leases

    Specialty FinanceCos./BrokersOriginates Loans / Leases

    DLA Serves as Legal Counsel for the Conduit and Securitization


    Traditional forms of renewable energy project financing l.jpg
    Traditional Forms of Renewable Energy Project Financing Financing

    • Corporate Balance Sheet

      • A growing number of companies are entering renewable energy business through acquisitions, joint development agreements and as independent developers

    • Structure Involving Institutional tax equity investors

      • If you have an investor with significant tax appetite, the tax equity is a relatively low cost financing option


    How about debt l.jpg
    How about Debt? Financing

    • Debt has been a great source of leverage in wind deals, representing approx. 60% of the capital structure

      DSCR ratio of approx. 1.45

    • Problem: getting debt investor on board

      The niche was most recently claimed by European commercial banks looking for diversification and more “green” exposure

      Current state of the markets raises questions about viability of this source of financing for new deals


    Structural incentives l.jpg
    Structural Incentives Financing

    • Tax benefits (PTC, depreciation, ITC, Grant)‏

    • RECs / SRECs

    • Price of Energy

    Senior Debt

    Energy Sales,PTC

    REC sales

    Equity - TAX

    Tax Benefits

    Equity - Strategic


    Slide19 l.jpg
    RECs Financing

    Prospects for trading REC arguably relate to the RPS policies in each given state


    Upside potential through srec sales l.jpg
    Upside potential through SREC sales Financing

    • In compliance markets, prices range from $2 in TX to $55 in MA and $600+ in NJ

    • NJ solar projects cash flow components from SREC approaches 60% of the total cash flow available from a project

      March SREC Auction Prices

      Washington DC $290.00 Pennsylvania $250.00

      Maryland $390.09 New Jersey $665.00


    Equity investors l.jpg
    Equity Investors Financing

    Timing of cash flows reflects different investment objectives



    Policy summary of common international renewable energy tax incentives used l.jpg
    Policy – Summary of Common International Renewable Energy Tax Incentives Used

    • Investment Tax Incentives : Large-scale applications: Provide income tax deductions or credits for some fraction of the capital investment made in renewable energy projects.

    • Investment tax incentives: customer-sited applications: Tax deductions or credits are offered for some fraction of the costs of renewable energy systems or equipment installed on residences and businesses.

    • Production tax incentives: Provide income tax deductions or credits at a set rate per kilowatt-hour produced by renewable energy facilities.

    • Property tax reductions: Owners of land or real property used for renewable energy production facilities can have their property taxes reduced or eliminated.

    • Value-added tax (VAT) reductions: Exempts producers of renewable energy from taxes on up to 100 percent of the value added by an enterprise between purchase of inputs and sale of outputs.

    • Excise (sales) tax reductions: Exempts renewable energy equipment purchasers from up to 100 percent of excise (sales) tax for the purchase of renewable energy or related equipment.

    • Import duty reductions: Reduces or eliminates import duties on imported equipment and materials used for renewable energy production

    • Accelerated depreciation: Allows investors in renewable energy facilities to depreciate plant and equipment at a faster rate than typically allowed, thereby reducing stated income for purposes of income taxes.

    • Research, development, demonstration, and equipment manufacturing tax credits: Tax credits are offered for up to 100 percent of the money invested by a corporation in renewable energy technology development, including the manufacturing processes

    • Tax holidays: Reduces or eliminates income, VAT, or property taxes for a temporary period of up to 10 years

    • Taxes on conventional fuels: Some countries tax the consumption of nonrenewable energy (this is most often a fossil fuels or carbon tax). The absence of this tax on renewable energy can act as an incentive to consumers to use or buy renewable energy (e.g. instead of energy from fossil fuels).


    Policy effectiveness of tax policies l.jpg
    Policy – Effectiveness of Tax Policies Tax Incentives Used

    • Must be of sufficient size, scope, and length to be effective in influencing renewable energy investment and consumption decisions

    • Should be tailored according to the stage of renewable energy industry development in a country

    • Must be carefully designed to account for interactions with other government policies and energy market conditions

    • May require other supportive policy initiatives to create and sustain a healthy renewable energy sector


    Summary key elements for long term renewable energy portfolio l.jpg
    Summary Key Elements for Long-Term Renewable Energy Portfolio

    • National Policy and Targets for Renewable Energy Portfolio Standards (RPS), Feed-in-Tariff (FIT)

    • Legislation flexibility

      • Long term mandatory targets

      • Stability of the policy framework

      • Flexibility in target setting across sectors

      • Ensure cost effective policies

      • Consideration of environmental and social aspects

    • Market Mechanisms

      • Fair Cost Sharing

      • Incentives for entrepreneurship among developers and providers

      • Incentives for financiers

    • Tradable Allowance / Renewable Certificates

    • Remove barriers to renewable energies deployment

    • Energy security


    John joshi capitalfusion partners llc 818 294 3381 jjoshi@capitalfusionpartners com l.jpg

    John Joshi Portfolio

    CapitalFusion Partners LLC

    818-294-3381

    [email protected]

    Contact Us


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