BLOOMBERG - The yieldco market may face “a rush to the exit” from shareholders when interest rates go up. Higher rates may spark a “vicious cycle” that limits the companies ability to acquire more assets, making them appear increasingly overvalued, Michael Liebreich, founder of Bloomberg New Energy Finance, wrote in a report Monday.
The so-called yieldco model is booming. Fifteen U.S. and European companies raised $12 billion in public markets over the past 30 months, and their market values have climbed 84 percent to almost $28 billion. The businesses offer dividends that make them popular with investors, especially when yields for government bonds are low. Rising interest rates would make government debt more competitive, a potential threat to yieldco share prices, and the U.S. Federal Reserve has indicated that rates may begin to climb this year.
“Higher interest rates would mean lower share prices for yieldcos, and this would make it a lot more difficult for them to raise new equity,” Liebreich said in the report, which was co-authored by New Energy Finance Senior Analyst Angus McCrone.
Yieldcos currently pay annual dividends of 5 percent to 6 percent, which would be less competitive if U.S. 10-year rates return to their 2007 level of 5.3 percent Liebreich wrote.