301 Moved Permanently

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Ever since he declared that 2013 would be the “year of the yieldco,” Andrew Redinger, managing director and head of KeyBanc Capital Markets’ Utilities, Power and Renewables Group, has pointed out the advantages of this financial vehicle as a course of equity for developers. Since then, yieldcos have taken off to find a prominence that seemingly outshone the solar projects they incorporated.

At least, until this summer.

With the financial community saying the market for yieldcos is saturated, many such companies have hit the pause button on acquiring new projects as stock prices slide. Solar Industry checked in with Redinger to find out what went wrong with yieldcos and ask whether the days of the asset class are numbered.

SI: Yieldcos were the darlings of the renewables-equity world. What happened?

Redinger: Yieldcos are just a tool in the toolbox. Somewhere along the line, yieldcos took on lives of their own. A yieldco exists just to be a source of capital - a source of cheaper equity for people developing projects. That’s what it was supposed to be.

There are a lot of factors that I think contributed to the point the industry is at now. But, let’s remember that fundamentally, nothing has changed from the first time NRG took this asset class public to now. The asset class is the same as it was 18 months ago - 20-year contracts, investment-grade off-take, non-cyclical. Compared with other yield-oriented asset classes - real estate investment trusts (REITs) and master limited partnerships (MLPs) - this one continues, on paper, to look a lot more attractive.

SI: So, what’s the problem?

Redinger: Well, what’s happened is, frankly, you have a product that Wall Street doesn’t understand. Remember, this product was developed by KeyBanc Capital Markets, and we sold it to NRG. Wall Street came in and copied it, and what’s taken place is it has done a very poor job of telling the story of what makes this asset class attractive.

Worldwide, yieldcos have raised $12 billion since the time NRG Yield went public to now - that’s a lot of capital to raise in a very short period of time. Because Wall Street wanted to raise so much money so quickly and there really wasn’t time for education, guess who it went to: a bunch of fast money - a lot of hedge funds.

Whether it is this industry or any other, hedge funds don’t get in because they understand the business. They get into it because of trading and technical-type opportunities. When you have that kind of money as the foundation of your investor base, you are going to have problems like the ones we’re experiencing now.

What will happen, and it might not be in 2016, but for sure in 2017, is that yieldcos will be the comeback player of the year - because nothing has changed fundamentally. In the long term, people are going to realize the value proposition we talked about 18 months ago when NRG Yield went public.

SI: So there is a lot of blame to go around - the lack of education, the unstable investor base, the press?

Redinger: Right. The other thing I will tell you that was like throwing gasoline on the fire is the incentive distribution rights (IDRs). NRG Yield went public, and it didn’t have any IDRs. Wall Street gets involved and says, “Let’s make this better.” Well, IDRs provide incentives for the companies to go out and raise money as fast as they can - in an industry that is in its infancy. It wasn’t ready for them.

SI: What’s wrong with IDRs?

Redinger: In other industries, the IDR is a win-win for the management team and shareholders. For example, there are IDRs in MLPs, but they came about well after the MLP business was established. It was a mature business when some smart guy on Wall Street created them.

The IDR is a contract, if you will, between both parties. The management says, “Listen, shareholders. I can grow my dividend from $0.02 to $0.15 in three years.” And the shareholders say, “That would be awesome! If you can do that, we will let you take more of the distributions (i.e., the high splits) as we go forward.”

It’s a pretty good incentive. But, the issue with IDRs is that eventually, when you hit the high splits - when management has fulfilled the contract and you as a shareholder have agreed to let the dividend grow very slowly going forward - the stock becomes rather straight-lined. When you hit high splits, your stock tends to become rather boring. It becomes a bond.

SI: So, in a mature industry, this isn’t a problem because there is more knowledge out there.

Redinger: In a mature industry, you have an investor base that, by and large, understands the asset class. But, when you get a bunch of hedge funds owning this and you throw in the IDRs, it’s like gasoline.

I keep going back to the idea that, fundamentally, nothing has changed. We’ve hit the pause button. The renewables companies and analyst community need to get back on the road. They need to start educating and bringing in the right type of investor.

By the way, there are some of those investors that have invested in these yieldcos, and even in the downturn, their positions largely haven’t changed. They’re not the ones exiting. It’s the hedge funds that are leaving.

SI: The death of yieldcos has been greatly exaggerated.

Redinger: Number one, yieldcos are far from dead. Two, people have to understand that they were just a tool for the developer. But somewhere along the line, the idea arose that the developer and the yieldco were joined at the hip - that all of a developer’s projects had to go into the yieldco affiliate. No! In fact, I have always contended that if the yieldco that you started sucks, you as a developer should be selling your project to the highest bidder.

Somehow the idea got started that “It’s SunEdison’s yieldco. It has to put everything in it.” No, that’s not true.

SI: Is it time to make REITs or MLPs viable tools in the developer’s toolbox?

Redinger: There is nothing wrong with the yieldco. People always want to change things. I challenge anybody to tell me what’s wrong with yieldcos. I don’t hear anybody saying anything, except people are pointing to how they’ve traded recently.

At the end of the day, what makes a yieldco different from MLPs and REITs is that it is a C-corp and will eventually have to pay taxes if it stops acquiring assets. That’s the only difference between yieldcos and those other vehicles. You would think that they would trade a little behind REITs and MLPs for that reason - not way behind, but it’s a reason they shouldn’t trade exactly the same. But then again, to counter that, these assets are contracted for 20 years, and all of the other assets are lucky to get seven years. There are pluses and minuses.

SI: It’s the end of the year - time for lists and predictions. What have you got?

Redinger: I said this already, and you heard it here: Yieldco will get the comeback player of the year award, middle of next year or in 2017.

Also, storage continues to inch its way up in our interest. It was down on the list a few years ago, but now it’s definitely in the top five. And, along with that is the microturbine for gas-fired generation that you put in your basement and hook up to your gas line. Those are things we’re watching very closely.

SI: We’ve talked about this before: Put solar on the roof, a microturbine in the basement and a battery in the closet.

Redinger: They all continue to advance. We are very focused on distributed generation in all of its forms. R