Solar projects shine in US market

Berkshire-Hathaway-owned MidAmerican Energy Holdings broke new ground in the US corporate bond market last week by having its solar project, Topaz Solar Farms, raise US$850m of 27-year amortising bonds to fund construction of one of the world’s biggest solar energy projects.

The deal, rated Baa3/BBB–/BBB–, is the biggest renewable energy project finance bond issue done in US dollars without a government guarantee and only the second time institutional bond investors beyond the private placement market have been willing to step up in size and fund construction of a renewable energy project without it having a Triple A wrap.

The deal’s success has raised hopes that the corporate bond market could help fill the void left by European banks that can no longer afford to provide long-dated loans to US power projects.

“This deal is a fantastic benchmark and shows the evolution of the US project finance business going from bank lending to private placement fixed rate bonds to full-blown Rule 144a issuance in the bond market,” said a project finance head away from the transaction but familiar with the project.

Typically, corporate bond market money managers have rarely wanted to take on construction risk, leaving loans from European and Japanese banks as the dominant source of long-dated funding for power projects in the US.

The last time institutional investors took on a 144a project finance bond from a renewable energy developer was in July 2010, when Terra-Gen Power’s subsidiary, Alta Wind Holdings II-V, raised US$580m through a 7.00% 24.5-year 144a bond issue.

About 100 yield-starved investors showed up to the deal’s roadshow, impressed by the quality of the sponsor, the fact that leading solar panel manufacturer First Solar was constructing and managing the project and that it has a 25-year power purchase agreement with Pacific Gas & Electric.

“The pricing is very competitive with what could be done in the loan market for a deal like this”

Topaz first announced a US$700m deal talked at 5.875%. Lead managers Barclays Capital (lead left and structuring adviser), Citigroup and Royal Bank of Scotland built a book of about US$1.2bn to increase it to US$850m and tighten the coupon on the 15.6-year average life deal to 5.75% or 379.9bp over Treasuries.

“The pricing is very competitive with what could be done in the loan market for a deal like this,” said a head of project financing at a major bank in New York away from the leads.

“Taking into account bank loan fees and the cost of swaps, this pricing is equivalent to doing a loan at Libor plus 275bp–250bp, which is very competitive to where bank pricing used to be, before European banks started to pull back from lending in dollars.”

The deal was priced aggressively to its Alta Wind comp, which was trading at more than 400bp. It is understood that the deal was broadly syndicated among a mix of regular corporate bond buyers and more seasoned project finance investors from the private placement market.

The issue provides an excellent pricing benchmark for what are believed to be at least three more renewable energy project bond offerings in the works, totalling about US$3bn.