It’s easy being green and dynamic
Capital Dynamics manages money and assets across a number of sectors but the group is increasingly focusing on renewable power. By Nic Stone.
In the 1890s, William Wrigley Jr moved from Philadelphia to Chicago to sell baking powder, among other household items. He offered customers incentives to buy his product, which included him giving away little sticks of chewing gum as a thank you. The gum proved incredibly popular and Wrigley went on to focus on that line of business, launching his eponymous confectionery company that survives to this day, and making millions in the process.
Private asset management company Capital Dynamics, founded in 1999 but with roots stemming back to 1988, has more than US$15bn in assets under management and has raised 48 funds in its short life. In 2010, the company established its Clean Energy Infrastructure (CEI) business. It has a global client base that includes institutional investors, high net-worth individuals and financial advisers.
In the energy space, the company built up a solid portfolio and was part of some of the larger financings of gas-fired power projects in the United States. In 2016, the group took part of the US$218m equity financing backing the 475MW Kings Mountain Energy Centre natural gas-fired combined-cycle power scheme in North Carolina.
But Capital Dynamics too noticed a part of its portfolio that would perhaps represent greater opportunities and a better match to its investors – renewable energy.
“A couple of years ago we were talking about expanding more broadly away from renewables,” said John Breckenridge, senior managing director and head of the CEI team, after a review of the power space saw that the renewables sector was growing rapidly.
“The trend continues to be evident that renewables are more and more competitive in terms of the levellised cost of energy in more markets [against all other forms of generation]. They are spreading and the penetration is growing.”
So what took place over the ensuing months and years was a keen focus on the renewable energy sector by the company’s various clean energy funds and an active search for more opportunities.
Acquisitions followed acquisitions; Capital Dynamics bought stakes in First Solar’s 250MW Moapa and 280MW California Flats projects in Nevada and California, respectively, and more recently bought out 8minutenergy Renewables’ equity interest in the 121MW Springbok 3 project in California and 50% of GE Energy Financial Services’ 28.5MW Whiteside Hill wind farm in Dumfries Galloway.
“To be specialised is a big advantage,” Breckenridge said. “Overall, in infrastructure, renewables now account for about 50% of the transactions in the space. That is a huge amount of deal flow.”
The focus on renewables came to a head when Capital Dynamics announced that its CEI business had signed an agreement with energy developer Tenaska to develop a portfolio of greenfield solar projects in the Midwestern United States. The deal closed on November 26 2018.
The transaction includes 14 solar projects with approximately 2,000MW in the Midcontinent Independent System Operator (MISO) market. The portfolio represents a large share of all solar projects currently in the MISO North interconnection queue, with projects in Michigan, Missouri, Illinois, Wisconsin, Indiana and Minnesota.
“This agreement was a unique opportunity for us to acquire a meaningful pipeline of solar capacity in an efficient project development structure within a market poised for growth,” said Benoit Allehaut, director of Capital Dynamics’ CEI team.
The company’s CEI team is now the second-largest owner of solar projects in the United States. The company has a portfolio of 3.1GW of net power generation across more than 100 projects and over US$4.9bn of assets under management, according to its latest figures.
The project finance piece of the puzzle is very important for the Capital Dynamics team. When they enter into an agreement to buy a project or portfolio, a key part of getting the deal done is having the financing in place.
Capital Dynamics reached final close on yet another clean energy fund in August this year - the Clean Energy and Infrastructure VII JV LLC fund. The group was able to secure capital commitments of US$1.2bn, which will allow the company to continue its investment spree.
CEI VII is a successor fund to CEI V, which held its final close earlier this year at US$1.2bn and has now been fully invested in over 1.5GW of solar projects in the US.
Dutch asset manager APG, the California State Teachers’ Retirement System (CalSTRS), and a wholly-owned subsidiary of the Abu Dhabi Investment Authority (ADIA), the three investors in the CEI V vehicle, are the primary equity participants in CEI VII. The fund will invest in US-based utility-scale renewable generation assets, according to the company.
“With the close of CEI VII, we will continue to execute our proven investment strategy of investing in high-quality renewable energy generation projects,” said Breckenridge.
“We greatly appreciate the continued confidence of our major investors and are committed to helping them achieve both their investment and ESG goals. Our highly focused and efficient approach to the sector has led to great success for CEI V and we look forward to continuing to execute our strategy with CEI VII.”
A good way to see how the company’s strategy manifests itself in the market and the role banks and investors can play is seen through its recently completed take-private of the 8point3 yieldco, which was financed via the CEI V fund and its investors, an equity bridge loan, and a private placement take-out.
8point3 Energy Partners was formed in 2015 and was owned by SunPower Corporation (36.5%), First Solar (28%), and public shareholders (35.5%) in a yieldco structure traded on Nasdaq.
The vehicle is a portfolio of 15 operating, contracted solar projects located in California, Colorado, and Maryland totalling 945MW. It is approximately 92% contracted by MW capacity with investment grade utility-scale offtakers.
At financial close, the weighted-average remaining tenor of the offtake agreements was 19.1 years. Each project, except a small residential portfolio, is owned through tax equity partnerships.
The yieldco owners first sounded out buyers in 2017. The idea was that a new, deep-pocketed buyer would allow those groups to pay down debt and benefit 8point3 by lowering its cost of capital.
A presentation on the yieldco by the owners revealed that it had been decided to review alternatives for the company as it encountered a higher cost of capital and difficulty in accessing the capital markets on a consistent basis.
This fact meant the yieldco was forced to waive its rights to several projects in which it had right of first offer and those projects were sold to third parties.
“You have got to recognise, like any other type of investment, you need the right type of investor,” said Breckenridge. “People that don’t have the right type of capital – if it is short term or high cost or public equity – they are moving away from the market as they are not well suited to the asset class.”
8point3 received interest from over 130 parties during the sale process and signed more than 30 non-disclosure agreements before selecting Capital Dynamics as the winning bidder.
The deal represented about US$977m in equity value and about US$1.7bn in enterprise value. It was one of the largest renewable energy transactions in 2018.
Capital Dynamics has had a number of long-term allies in the financing strategy – most notably arranger Japanese bank MUFG and German insurer Allianz through its Allianz Global Investors platform.
The structure first saw a US$1.1bn, 364-day bridge loan facility underwritten by MUFG and a US$60m letter of credit. Funds from the bridge financing were utilised to fund the acquisition prior to the long-term private placement notes.
Shortly after the acquisition closed, the acquired portfolio was split into separate non-cross collateralised holding companies, 8point3 Solar InvestCo 1 and 8point3 Solar InvestCo 2, in order to arrange two private placement note financings that repaid the equity bridge financing.
There were then the two private placements; 8point3 Solar InvestCo 1 issued US$411.2m of 17.5-year private placement notes and a US$62.8m letter of credit facility, and 8point3 Solar InvestCo 2 issued US$760m of 25.5-year private placement notes bought entirely by Allianz and a US$52.8m letter of credit facility.
Key Bank also led a term loan financing for the 8point3 residential solar portfolio.
Cumulatively, the financings were utilised to fully repay the bridge financing within three days of its funding. All financings were back-leveraged.
The financings were structured as two separate fully-amortising 4(a)2 note transactions, to maximise debt proceeds and optimise loan pricing and structure for the sponsor.
The bond issuances were sized and structured to meet both rating agency criteria and the sponsor’s funding objectives, successfully achieving a BBB– rating from Kroll on InvestCo 1 and BBB rating from Fitch on InvestCo 2.
The bridge financing was oversubscribed and fully syndicated ahead of the launch of the notes, while the InvestCo 1 deal represents one of the tightest priced back leverage notes deals at 10-year US Treasuries plus 175bp.
The Capital Dynamics team navigated regulatory approvals in California, Colorado, and Maryland, together with FERC and CFIUS to secure approvals in a timely manner.
As a result of the transactions, 8point3’s Class A shares are no longer publicly traded on Nasdaq. 8point3’s shareholders and the yieldco’s sponsors, First Solar and SunPower, received US$12.48 per share.
Goldman Sachs acted as financial adviser to SunPower, BofA Merrill Lynch as financial adviser to First Solar, and Evercore as financial adviser to the conflicts committee of the general partner. Amis Patel & Brewer served as primary legal counsel for Capital Dynamics on the acquisition.
“Capital Dynamics takes a relationship-view on its deals,” said Louise Pesce, managing director in the project finance team at MUFG.
“This makes the firm an excellent fit for MUFG as our project finance team focuses on core client support across industry and geographical sectors for the long term. [They are] a smart and committed team that approaches both project development and acquisitions with creativity and practicality.”
Capital Dynamics saw the gap in the market and “was ahead of the curve”, according to Jorge Camina, director, infrastructure debt, at Allianz Global Investors.
“We have a long record working with Capital Dynamics,” said Camina, mentioning the debt deals the two completed for the Moapa, Mount Signal 3, and California Flats solar acquisitions.
“This was our fourth deal together in less than 24 months. There was a natural call for them when they started looking at 8point3 and thinking about financing.”
The yieldco model, of which 8point3 is an interesting ornament, was all the rage in the renewable energy finance market a couple of years ago. But the Capital Dynamics team noticed that the capital in the sector just wasn’t gelling properly with the assets.
The yieldco model didn’t necessarily mean the right capital was going to the right place, that growth was occurring, or that it offered the best fit for renewable assets.
“The genesis of 8point3 was a combination of the yieldco not being suited to the market, and the cost of capital going up,” said Breckenridge.
“Renewables is more a long term, patient, yield focused investment. One benefit of being a specialist is the ability to figure out where issues with execution might be.”
The profile of these deals was low risk, with long-term contracts, which made them an ideal candidate for institutional capital, which has been increasingly looking to infrastructure as a sector to invest.
“What became evident was that absolute execution certainty was critical to the sellers,” said Tim Short, a director at Capital Dynamics and the leader of the 8point3 deal internally. “To achieve that they needed an understanding of every piece of the financing and the structure we were walking into.”
With constant talk of a wall of capital in the US project finance market, selecting a market to transact in was one of Short’s major tasks, as was showing how the bridge-to-bond structure’s certainty was attractive for the sellers.
“There is a tremendous amount of liquidity in the bank market. It is an easier market to transact in. But part of the job is to match the financing to the deal,” he said. “The fixed rate note market can take a huge component of interest rate risk off the table.”
That was important for Capital Dynamics. From Allianz’s perspective, there were a number of things that they brought to the deal.
“These were natural assets for a platform like ours,” said Allianz’s Camina. “Confidentiality was very important, so was engaging early with the visibility in what we can provide. So from very early there was a very specific proposal.”
Allianz committed to the financing around January 2018, when the deal was announced, and then funded the deal in June.
The days ahead
Capital Dynamics is looking to build on its momentum. The company has continued its buying spree of late. Part of the strategy it enacts involves making sure a project financing is in place when it buys assets, according to Breckenridge and Short.
The company agreed to acquire 8minutenergy Renewables’ equity interest in the 121MW Springbok 3 solar project in Kern County, California, recently for an undisclosed price.
Capital Dynamics is arranging tax equity and debt financing for Springbok3, with financial close and regulatory approvals expected in Q4 2018.
The loan tenor is expected to be significantly longer than a typical project financing based on the project’s lengthy power purchase agreement (PPA). Springbok 3 has a 27-year PPA with the Southern California Public Power Authority (SCPPA) with an option for a three-year extension. Commercial operation is expected in June 2019.
“We are continuing to execute the same strategy. We are looking for high quality assets lent to high quality investors,” said Breckenridge.
“There is a huge amount of volume in the market. You will continue to see individual transactions from us and we will participate in any opportunities that involve a portfolio of assets.”
As for new sectors, they will still be green-friendly, according to Breckenridge.
“Storage will play an increasing role and it will become a focus for us,” he said. “I am not sure everyone is pricing it appropriately, but adding storage to these assets adds value. The financing market for storage is developing very rapidly. Even just a year ago it was still the Wild West. Now there are a large number of credible institutions ready to lend.”