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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
Mr. John Joshi

[email protected] 818-294-3381

Renewable Energy Financing and Securitization

SECOND ANNUAL FARE CONFERENCE

Orlando, Florida

March 26th, 2010

disclaimer notice
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
Overview
  • A Potential New Asset Class : Renewable Energy Structures
  • Potential for Securitization in the Solar, Wind and other energy sectors
challenges
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
challenges6
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
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
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
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
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

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
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
Conduit Flowchart

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

Lease

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

Conduit Management

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
Traditional Forms of Renewable Energy Project 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
How about Debt?
  • 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
Structural Incentives
  • 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
RECs

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

upside potential through srec sales
Upside potential through SREC sales
  • 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
Equity Investors

Timing of cash flows reflects different investment objectives

policy summary of common international renewable energy tax incentives used
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
Policy – Effectiveness of Tax Policies
  • 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
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
John Joshi

CapitalFusion Partners LLC

818-294-3381

[email protected]

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