Travis Lowder, NREL and Ronald S. Borod, DLA Piper LLP (US)
October 11, 2013 | 0 Comments
The pre-buyout structure is also challenging from a tax equity perspective. If a developer defaults on its loan, then the bank would need to step into the developer's position in the project entity to protect and realize upon its collateral. As stated in Part I of this series, the tax equity's interest in the partnership is typically to prevent any changes of ownership for tax and management continuity purposes — the bank's step-in rights could run counter to these interests. Moreover, if the bank forecloses on the equity interests, then recapture could be triggered, and the tax equity could lose any unrealized tax benefits.
To permit these step-in rights and pledges of the developer's partnership interest would probably require the negotiation of tripartite agreements among tax equity investors, the developer, and the lender. The mock ratings project currently under way in the SAPC working group is intended, in part, to educate the market on the types of provisions that should optimally be included in these agreements.
The post-buyout structure is designed for execution after the recapture period when the tax equity has received the full value of the investment tax credit (ITC) and accelerated depreciation. Developers could use the proceeds from this securitization to finance the buyout of the tax equity, which is common for developers to do after recapture. The developer would essentially purchase the solar project or portfolio using its own funds (derived primarily from the securitization), and thus acquire full control to pledge the solar assets and cash flows to backstop the securitization debt.
Figure 2. The post-buyout structure
This structure could be advantageous for developers because it affords them the time during the 5-year recapture period to prove the viability of the solar assets, the O&M systems, and the partnership accounting and reporting protocols. It also allows them to prove the reliability of the cash flows needed to obtain a favorable rating. However, it would mean that developers could not expect to leverage their projects using potentially lower-cost securitization debt until later in the life cycle of the projects.
Another challenge of this structure is in the size and capitalization requirements for the developer/sponsor. Because this model envisages a single developer-sponsored securitization, it presupposes a critical mass of solar assets to support an economic securitization. This may limit the potential issuers to the large third-party finance providers and installers and a handful of commercial developers. One possible alternative for the smaller players would be a multi-issuer financing where several solar originators pool their assets into a single securitization, with each sponsor forming its own separate SPV. These SPVs would receive the transfer of each originator's solar assets, and each SPV would issue its own separate debt instruments. These debt instruments could then be pooled into a grantor trust, which would in turn issue pass-through certificates to investors.
The SAPC legal team will be testing these structures in a mock filing with major ratings agencies this fall. One of the goals is to see what type of credit rating they could obtain given a representative pool of solar assets. More information on the mock filing will become available as the process plays out — in the meantime, the SAPC legal team is drafting term sheets (documents that describe the legal structure of the securitization and are included in a bigger packet of information about the deal) to accompany these filings.
This article was originally published on NREL Renewable Energy Finance and was republished with permission.