Invenergy has become a mainstay of power project finance,regularly tapping lenders as it has built a 5.7 GW wind-centered operational portfolio. Thathas made the Chicago-based shop the largest independent wind generator in North America.
In a rare interview about the privately-held business, Michael Polsky, founder, president and ceo, and JimMurphy, coo and cfo, sat down with PFRExecutive Editor Peter Thompson to discuss a range of issues including debt structures, lender relationships, the prospects for solar and wind and whyan IPO is not in the cards.
Where do you think we are in the market cycle on project finance bank debt?
Jim Murphy: I think we are in a demand lull from the side of the lenders. There is not a lot of product out there. If we are speaking about power, if youlook at the major components of the space, you’ve got thermal projects—natural gas-fired projects—not too much being done. Most of what is beingdone is being done in the B loan market. With solar, there is some product there, but because solar is such a small segment,there is not a lot of activityfor the banks. Wind is pretty quiet right now. Most of the wind projects, as we have come out of the grant period, have shifted back to single investorPTC deals and that’s crowded the banks out again. And so, where I think there is product available for the banks in wind, there is a lot competition.
How is that manifestingitself in terms of what you’re seeing—the terms that are on offer?
JM: Where we are using bank debt in our project financing, we are seeing a lot of interest. We are seeing expansion of tenors and compression of spreads.
What are spreads for plain vanilla, contracted assets?
JM: It’s a little bit elusive when you talk about spreads and where we are. A few years ago we were looking at post-financial crisis spreads having blownout to sort of the 3%range. And now we are seeing numbers that are more in the twos. But, you have to be careful to compare apples and apples,because tenors are shorter now. As the costs of funding has gone up for banks—especially on the long end—we’re seeing more mini-perms. We’reseeing more abbreviated structures. So comparing a 3% margin on an 18-year deal to a250-275 you just have to make sure you are comparing the rightperiodicity there.
So you are seeing prices going down and tenors coming in.
JM: Well, prices are not necessarily going down because if you look at the underlying rate, 10-yearTreasuries have gone up 100 basis points in 100days. So we’re seeing the underlying going up and maybe the spreads coming in a little bit to compensate for that. But, again some of that is truly spreadcompression and some of that is difference in tenor.
What is your take on what is going on in the B loan market?
JM: We have traditionally used the bank market. We’ve been a long-term PPA shop looking to do a single asset, risk siloing approach. The B loanmarket has not been the ideal place todo that. The bank market has been very efficient for doing that historically.In 2011, we did a B loan as a holdcodeal. So we took a portfolio of levered deals and we did an upstream holdco financing in the B loan market. We found it to be a good market for thatproduct. The rating agency process is a bit daunting, time-consuming. The ability to use that market to get shorter tenor deals done—it does provide agood opportunity there. But, again for long-termPPA deals we’ve seen the bank market or the institutional market as a better landing spot for those.
What is your interest level in bond financing?
JM: If I’m a large utility—or arge other player in the space—using my balance sheet to build projects and then looking for a long-term takeout financing,the bond market can be attractive, especially for portfolio deals. And that’s how it was used when NextEra did deals years ago and people are looking atit in that context again. I think that’s the right use of the bond market.
For a player like Invenergy, we’re not balance sheet financing our construction projects. It really isn’t a viable option because to get there you wouldbe taking projects that have already been financed—probably with construction loans converting to term loans—and replacing those term loans with a portfolio deal, hoping to get savings through the portfolio effect. And there are downsides to that too: you start mixing your risk together and youstart running into the potential for contaminating good assets with bad assets.
Also, a bond deal is a lot less flexible than a bank deal. Even for projects that seem to be very straight forward, easily locked away for the long-term,there are always issues and there are always needs to re-examine the deal. So flexibility is important. You lose a little bit of that in the bond market—you don’t lose all of it. The last point would be pre-payment penalties, which we don’t face in the bank market as well.
The bond market does notmake it cheaper enough to overcome those reservations?
JM: It could. If you want to pool your assets and provide a portfolio play for the investors. You are going to drive your rate down and that market could beattractive in that regard. It’s just, what are your other objectives, and does that run counter to them? Again, I would go back to, if you’re building them onthe balance sheet it could be a very good takeout vehicle.
You’re known as a shop that gets good prices on your deals. At the same time, there seems to be a good relationship with banks. How do youfoster that?
JM: We have really focused on building strong relationships with key players. Folks who we know we can goto and get execution. Parties that haveproven over time to be pragmatic and to be problem-solvers. While it’s not an exceptionally small group, it is a fairly consistent group, and we don’t per se run auctions to try to drive the price to the lowest level. We get to that by knowing what we want, and going to the lending community and telling themwhat we want, and being confident that we can get it there. It’s worked very well.
Michael Polsky: There is one more thing. I think at the end of the day we have good product. We know what we are doing as far as putting projectstogether. And lenders obviously respect that and recognize this. It’s one thing when they are told, “This is my project. How does it look?” And then theystart doing the due diligence and then they find all sorts of issues there and so they try to grapple after-the-fact with how to deal with those issues. I thinkit starts with good projects. I think they know that when they go to Invenergy generally we try to minimize surprises. They know Jim and his team.Theytell them upfront how it is and how it is structured.
Our team—under Jim—with our experience, we know what is financeable, what’s not financeable. We try not to use lenders to take risks that lenders arenot equipped to take. That’s where a lot of problems come in, because I’m sure some people ask lenders to sort of take the issues and take the risk thatthey are really not prepared for. So, I think because of our experience we try to solve all these issues and put it in a package and a framework that webelieve is financeable upfront.
Is there anything new you are looking at in your financing mix?
JM: We’re always looking for something that brings greater efficiency, or better pricing. If you look across the capital stack you’ve got obviously the bankand B loan market and institutional investors. One thing that we have done recently is we married up in a couple of financings a bank piece with aninstitutional piece. That’s been very successful for us in a number of ways. One in particular has been minimizing the number of parties that need to bein the deal, because in this post-underwrite and syndicate period that we’re in, having to club up four to six banks is very difficult. And bringing in theinstitutional investor who can take a very large piece is very helpful.
That was the Prudential/Santander structure?
JM: Yes. That was another example where the three parties sat down together and developed the structure jointly, tried to determine what was going to work for everybody.
Check back next week for Invenergy's take on production tax credits, asset-based M&A and the solar market.