In this new podcast by The Alta Group, Brian DePonte, who leads Key Equipment Finance Clean Energy, describes his unique market focus with all of its complexities and the need for deep asset knowledge.
DePonte leans on a robust asset management team and outside consultants who specialize in energy markets.
In the 40-minute interview, he discusses a new approach to risk management in which credit and performance risks are separated, and he notes the value of business due diligence and a long-term view.
Looking ahead, “storage is going to be the game-changer,” he says. By combining energy and storage or developing a “microgrid,” users will gain more energy usage efficiency and this will help bring price points down.
Investors are becoming interested in these deals as they see more successful financing occurring in renewable areas such as solar and wind.
Here is a sampling of DePonte's interview, with a link to the full podcast below.
On Key's recent Clean Energy team announcement
"What we saw were little pockets of activity where we were doing energy financing in one part of the business that were being underwritten, maybe a little differently. So rather than trying to do that in different parts of Key, we thought, let’s consolidate that under one team," DePonte says.
"We are now able to be agnostic and provide the energy expertise the team has to all of Key. It’s an exciting change, and we’re starting some interesting collaborations with different parts of the organization. The feedback we’ve gotten has been pretty positive. I think people are pretty excited about it."
What makes energy financing different than other forms of equipment finance?
"One is the underlying assets themselves, and the other is the nature of the contract through which energy or savings is being delivered," DePonte explained.
"Let’s talk about the assets first. You’ve got solar panels, racks and inverters – all of these things that go into a typical solar project. While that’s pretty mainstream nowadays, you still want to have companies of reputation that you are working with. For example, having an independent engineer go out and check how the system was designed and how it’s built to make sure you are getting something that’s reliable.
"If you are providing the tax equity, you are going to be the owner of that system, and you are going to monetize all of those tax benefits. If you are going to own it for 10 years, or however long your financing period is (and there is always the chance it could come back if you do a Fair Market Value lease), then you are going to want to know you have a good, solid, well-built asset.
"In other forms of collateral, you may have fuel cells. For a lot of folks, fuel cells are this magical device that takes in fossil fuels (doesn’t burn it) and converts it to electricity. There are support risks there that you have to vet, such as the company who’s providing it, how long they’ve been around, how well capitalized they may be or may not be. You also have to ask: Are there ongoing maintenance issues associated with devices like that?
"There are lots of complexities in the asset base that are kind of unique to the energy space – not too far afield from something like if you leased an aircraft. You’d want to know that those engines are being rebuilt and redone on a regular basis.
"The same is true of combined heat and power, where you have engines that are turning a generator but also the heat is being harvested off that combustion process and then utilized in the building somewhere. There’s a lot more ongoing maintenance and upkeep issues once you get comfortable with the technology itself."
What are the different kinds of energy financing structures?
"The structure can also be kind of complex," Deponte said. "A lot of the solar projects are financed through an SPE (Special Purpose Entity). All of the contracts reside with that special purpose entity, and you have to go through all of those.
"There’s a Power Purchase Agreement that’s typically created between a developer and a customer. If you are going to finance those Power Purchase Agreements, you need to have great outside counsel typically to go through those and vet those.
"There are also interconnection agreements, site leases - all kinds of things that go with it that can add a couple of layers of complexity.
"Once you’ve done a few, you can get comfortable with it. We’ve had lenders in the industry approach us to acquire some of those opportunities so they could learn, and we encourage that because that’s great for the entire industry.
"Even though we typically originate to hold, there are some times when we will syndicate transactions. You have to get your head around all of those nuances that go with contract itself, (i.e. who is responsible for the source of payment? Is that source of payment backstopped in any way?)
"Typically, the Power Purchase Agreement -- say it’s between Company ABC and the City of Anytown -- the city is only going pay for electrons delivered. While you have a really good credit there that you want to factor in, if no power is delivered (kind of going back to the asset quality), then you're not going to have any revenue.
"That’s where you are going to want to look at everything else that is in the construct of that agreement to get really comfortable with it, so maybe you loan less than the full amount. There’s an opportunity there for a product called a 467 loan that really works like prepaid or allocated rent and you can utilize to loan only 80% of the project costs, and the developer is going to put in the other 20%.
"There are a lot of moving parts to these, as you can tell, and taking them apart, or finding one and taking it apart and seeing how each of those components interact and how there’s interdependence on those components, can really help you get comfortable with how they work."
How does Key work with the different agreements and scenarios?
"In the Power Purchase Agreement, the customer is agreeing to buy all of the power it does produce," DePonte said. "But you do have cyclical nature. You are not going to get as much power in January off a solar project as you would in July when the sun is high and hot in the sky. You need to factor that in, and you are looking at cash flows on an annual basis and with some seasonality.
"Typically, in all of these there is a level of certainty that is provided by the independent engineer and other elements that gets you comfortable with the fact that there will be a certain amount of power produced by this project.
"There are a couple of different ways to get these projects financed, and there are a couple of different schools of thought. One is a single investor lease, and the other involves multiple parties. Typically, the larger the opportunity is and the more complex it is, the greater the roles are expanded of those multiple lenders.
"We are a single lender shop at Key Equipment Finance, so we bring the entire capital stack for the financing. We’ve had to get comfortable with that seasonality, but we aren’t taking any risk where there could be a zero payment from the customer."
Check out DePonte's full 40-minute interview with The Alta Group here: