Investors fear yieldco buying frenzy

Major US renewables investors are growing concerned that the recent success of the yieldco model could be jeopardised by a compulsion among yieldco companies to buy up wind and solar projects at any cost.

The flip side of that concern, however, is that it’s a very good time to be a developer with projects to sell, according to experts.

Among financial institutions, there is rising alarm that “the availability of money from yieldcos means that junk is going to get financed”, claims Karin Berry, senior account manager at PNC Bank Energy Capital, a major tax-equity investor in US renewables.

Speaking Tuesday at PV America, Berry later clarified that her use of the word “junk” referred to “deals that cost more than they generate in revenue; deals that don’t pencil for anyone”.

“No one wants for the entire industry to get a black eye from a couple of deals that go south and make yieldco dividends look bad. There still has to be some discipline in the market, in what makes a good deal a good deal.”

The rise of the yieldco model has been one of the biggest stories in the renewables business over the past year, encompassing a rash of initial public offerings from the likes of Pattern Energy and NRG Yield (in New York), Greencoat UK Wind (in London), and TransAlta Renewables (in Toronto).

Other renewables heavy-hitters are preparing the groundwork for yieldco IPOs of their own, including SunEdison, Abengoa, and NextEra Energy (the latter expected to launch “in the next couple of months”, according to one banker familiar with the company).

Yieldcos allow renewables developers to efficiently recycle capital from completed assets back into earlier stage projects.

For investors, the allure of yieldcos is their steady and generous stream of dividends. But in order to keep those dividends growing, the companies must continue buying projects.

Even, perhaps, if no good deals are to be found.“If you’re a developer, you have to be thrilled with the emergence of yieldcos right now, out there competing for your assets,” says Jeff Eckel, chief executive of Hannon Armstrong, a real estate investment trust that invests in sustainable infrastructure, including renewables.

Hannon Armstrong went public last year.

At present, most yieldcos carry “lofty” valuations, says Eckel, specifically mentioning NRG Yield. NRG Yield shares have risen 84% since they were floated last summer.

“There is a very high growth rate, in our view, embedded in that stock price today,” Eckel says.

“That’s why – again – if you’re a developer, you’ve got to be completely thrilled. Because these yieldcos are going to have to buy a lot of projects, and they’re going to be way more sensitive to volume of investment than they are to the return.”

“I think they’re going to overpay,” Eckel says. “That’s my prediction. It’s a good time to own assets.”