High times for yieldco buyers amid macro downturn

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The Charging Bull sculpture in New York's Financial District on Feb. 7, 2018. A sell-off in global equity markets this week forced a correction in the stock market, coinciding with the sale of sponsors' equity in NRG Yield and 8point3 Energy Partners.
Source: Associated Press

A string of deals for large equity stakes in renewable energy yieldcos highlights the competitive edge of large infrastructure buyers, whose all-cash bids have driven discounts on deals against a backdrop of heightened volatility in global markets.

The culmination of sale processes at NRG Energy Inc. for its interest in NRG Yield Inc. on Feb. 7, as well as a sale of First Solar Inc. and SunPower Corp.'s joint-stake in 8point3 Energy Partners LP on Feb. 5, coincided with a volatile week of trading across global equities markets, which arrived on the heels of renewed fears of rising inflation and the prospect of higher interest rates. The volatility catalyzed a downturn in most major indices, with the S&P 500 sinking 10% lower from its Jan. 26 peak, qualifying the selloff as a market correction.

Despite the selloff, buyers of yieldcos emerged as large, privately held infrastructure funds, which have long been seen as appropriate long-term owners of yieldcos given their lower cost of capital versus publicly traded strategic owners. The parallel competitive processes for both NRG Yield and 8point3 likely offered infrastructure buyers a wealth of inventory to choose from as far as contracted yieldco assets for sale, even after peer Atlantica Yield plc secured a strategic sponsor in Algonquin Power & Utilities Corp. in late 2017.

Deal deluge

With the relative abundance of assets available in the market, the infrastructure buy-side may have seen its bargaining position strengthened with ample liquidity and at a discount to share prices. Bids by Global Infrastructure Partners, or GIP, and Capital Dynamics for NRG Yield and 8point3, respectively, came in below analyst expectations, before accounting for dips in share prices from the broader sell-off. GIP closed on a $15.8 billion fund in 2017, representing the largest infrastructure fund raised to date, according to Preqin data, which further points to about $160 billion in dry powder available to infrastructure funds worldwide.

GIP's $1.38 billion cash bid for NRG's 46% economic interest in NRG Yield equates to roughly $16.18 per share, according to Deutsche Bank analysts on Feb. 7, compared to where the yieldco's shares began the year at roughly $19.47 on Jan. 2. Following announcement of the deal, NRG Yield shares continued to sell off, falling to $16.64 to close the Feb. 8 session.

Concluding a wide-ranging sale process launched in April 2017 that reached as many as 130 potential buyers, Capital Dynamics emerged with an all-cash bid to acquire 8point3 at roughly $12.35 per share. That price also fell below analyst expectations, arriving at a roughly 11% discount to where shares ended on Feb. 5 at $13.83. Even if large infrastructure sponsors are seen as constructive for the growth and development of yieldco pipelines, the lack of premiums on recent deals may weigh on the peer group in the months ahead, Macquarie Research analysts said Feb. 8, noting the implied discount to valuations across the yieldco space.

"This reinforces to us a new reality that private funds are no longer throwing cheap capital at renewables the way they had, not too long ago, and that the public and private cost of capital appear to be converging in the higher single-digit percentages," Deutsche Bank added.

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Yieldco 2.0

Despite potential headwinds to valuations, the onslaught of infrastructure sponsors into yieldcos could present more strategic flexibility to pursue accretive third-party acquisitions, rather than funneling capital into development projects, as a means to growth.

TerraForm Power Inc, which last year saw its majority equity transferred to Brookfield Asset Management Inc., advanced a $1.2 billion tender offer to acquire 100% of outstanding shares for Spanish yieldco, Saeta Yield, S.A. at €12.20, or $14.90, per share as of Feb. 9. The proposed deal has already won the backing of several large Saeta shareholders, including GIP, which agreed to part with its 24% interest in Saeta, TerraForm said.

The deal underscores TerraForm's newfound ability to be opportunistic buyers where plausible, with Macquarie commending TerraForm on the deal's accretive benefits to cash available for distribution to share price, which it estimates at about $0.80 to $0.99 per share. The deal is set to be funded by $400 million in equity backstopped by Brookfield at $10.66 per share, and an additional $800 million in available liquidity, subject to refinancings at the project-level and cash released from Saeta.

But going forward, access to equity capital markets for yieldcos may be limited. Analysts point to NextEra Energy Partners as currently among the only yieldcos with the reliable capability to issue new equity, a testament to the strength of its sponsor, NextEra Energy Inc.

"It simply remains challenging for yieldcos not named [NextEra Energy Partners] to drum up enough investor interest to maintain equity valuations sufficient to attract new capital on palatable terms," Wells Fargo Securities LLC analysts said on Feb. 6. "It is unclear what might cause this dynamic to change as the market environment has been challenging since mid-2015 — a period of continued strong growth for renewables."