For companies still on the road to placing or finding tax equity in their capital stacks for 2018, you’ll need to turn on your fog lights. Even then, there are so many layers to the mist, it is not possible to see clearly if there is an oversupply or undersupply of tax equity for the year.
What is visible is that many existing large direct investors – institutions, banks, and corporates – placed all of their tax equity for 2018 early in the year, or even in late-2017 deals, given a reduced appetite under the new 21 percent tax rate. This has left syndicators (and a new type of market entrant, ‘syndicators of syndicators’) scrambling for capital willing to make a deal.
What is not visible, however, is when new capital will enter the market, as many existing tax equity allocations are already allocated. Consequently, timing and amounts are uncertain. Already deep into Q2. In many tax equity investors are offering terms that include an out at no cost for them if they fail to raise capital, but a breakup fee if the sponsor fails to deliver the project.
Yet, the clock is ticking for projects on track to place in service in 2018, leaving sponsors to choose which is less risky: accepting terms that in effect leave them captive to one investor’s pipeline, or waiting for certainty on committed capital.
Price-wise, some investors are feeling out how low sponsors will go – throwing out offers as low as $1/credit. Realistically (and expected), pricing has softened post-tax reform, but the bottom has not fallen out of the market. Rather, pricing has regressed to perhaps circa 2015 or 2016, before tax equity became plentiful in 2017.
With changes occurring week by week, sponsors and investors are communicating more frequently and transparently about when allocations are coming. In 2017, sponsors could rely on tax equity providers generally being able to do a deal when the timing was right for a project or portfolio. In 2018, however, tax equity capital will be committed very quickly after becoming available, making it necessary for sponsors to keep open lines of communication with potential tax equity partners.
Whether these practices will continue past the current ‘crunch’ is unclear, and will depend on how much capital enters the market after the full extent of tax reform is known. But, for now, if you’re finding your way through the fog, give us a call at 202-588-6278 or send an email to Jessica.Robbins@solsystems.com. We’re happy to help.
This is an excerpt from the May 2018 edition of The SOL SOURCE, a monthly electronic newsletter analyzing the latest trends in renewable energy based on our unique position in the solar industry. To receive future editions of the journal, please subscribe.
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