FORBES - After a stellar 2014 that saw a wave of IPOs and surging valuations, 2015 has turned out to be a challenging year for solar yieldcos (related: Understanding Solar Yieldcos). The Global Yieldco Index is down by about 24% from its mid-April highs, and many yieldcos that held IPOs this year have seen valuations tank. 8Point3 Energy Partners, the joint venture yieldco formed by solar manufacturersSunPower and First Solar, declined 35% since its listing in June, while TerraForm Global has declined 36% since its mid-July IPO. Below, we take a look at what could be driving the sell-off and how this could impact parent companies that float these issues.
Why Are Yieldco Stocks Declining?
1) Increasing Number Of Yieldcos: Per Bloomberg New Energy Finance, at least 15 yieldcos have had IPOs since 2013, raising over $12 billion in capital. This is likely to have increased the supply of available yieldco securities in the market, reducing the premium that income-focused investors are willing to pay for the once much sought-after asset class. Separately, there are concerns that the boom in yieldco formation has driven up demand for new renewable energy projects, making it more expensive for yieldcos to acquire new assets that can deliver steady cash flows. While this is good for solar project developers, it may be a net negative for yieldcos and their investors.
2) Rate Hike Will Make Bonds More Competitive, Expansion Expensive: Yieldcos proved popular in the era of low interest rates, as investors seeking above market yields found them attractive (dividend yields typically average about 6%). Now, the Federal Reserve is expected to raise U.S. interest rates in the near future and this could present a threat to yieldcos, since it would make government debt and bonds increasingly competitive. Although this concern was tempered this week, as the Fed elected to leave rates unchanged for now, it is certainly something on investors’ minds. Separately, a higher interest rate environment will make it more expensive for yieldcos to raise addition debt to fund expansions, leading to lower present values for projects.
3) Sell-Off In Solar Stocks Hurts Sentiment: Solar-linked equities have been performing poorly of late, and this could also be weighing on solar yieldcos. The Guggenheim Solar Index, a popular ETF that tracks solar stocks, has fallen from highs of over $45 in April 2015 to roughly $30 currently, amid economic headwinds in China, the looming Investment Tax Credit reduction in the United States (end of 2016) and the depressed oil market. Although crude oil and solar energy aren’t exact substitutes, the markets count crude oil as a proxy for the price of energy in general and this tends to hurt solar companies.
4) Investors Assigning Higher Risk Premiums: The concept of a solar yieldco is still relatively new, and companies have primarily focused on project origination and development so far. Not much attention has been paid to the operational aspects of the solar projects – to ensure that they will be able to generate adequate cash flows to meet future dividend payments and reinvestment needs – and transparency may need to improve in this regard. This could potentially be inflating the risk premium that investors allocate to these investment vehicles. While this certainly doesn’t apply to all yieldco issues, it is likely to be a factor for investors while valuing a yieldco.
Sell-Off Could Increase Cost Of Funding
Yieldcos are usually floated by solar project developers as a means of garnering cheaper equity funding. The yieldcos buy power plants from their parent companies (via so-called “drop-down” transactions), providing fresh capital for parent firms to build out new power projects. These yieldcos generate stable cash flows by selling electricity under power purchase agreements with utilities and distribute most of the cash flows (typically 80%) through stable quarterly dividends, while raising more debt and equity financing to buy assets. However, in the current situation, with depressed stock prices, yieldcos would have difficulty in tapping into the equity markets to raise additional cash. While yieldcos have often been perceived as the cheapest form of equity funding for solar projects, this has apparently changed. The chairman of the Solar Energy Industries Association recently indicated that private equity may be more attractive than yieldcos.