Overview
During this webinar, Partners Christopher Gladbach and Joel Hugenberger were joined by Fred Petit, co-head of Power and Infrastructure North America at Investec, for a discussion on various aspects of tax credit transferability and how lenders have addressed them in the current market.
Top takeaways included:
- With the advent of tax credit transferability, sponsors have a wider range of structuring options for debt and equity.
- Some sponsors may choose a preferred equity structure where a sponsor and an investor form a partnership and the sponsor’s membership interest can be used as collateral for a back-leverage financing, generally paralleling a back-leverage financing for a traditional tax equity partnership.
- Some sponsors may not bring in a third-party investor and instead pursue project level debt after a project is placed in service. In this scenario, a forbearance agreement between the lenders and the tax credit purchaser will likely be necessary to mitigate recapture risk for the tax credit purchaser.
- Direct pay options for certain types of tax credits, such as Sections 45X, 45V and 45Q, also present interesting opportunities for bridge financing. In deciding between transferability and direct pay, sponsors should weigh the carrying costs of debt against the discount rate (and transaction expenses) for transferred tax credits (currently between $0.92 and $0.95 on the dollar depending on timing and the technology).
- Advance rates for bridge loan financings where a tax credit purchaser has committed to purchasing a project’s tax credits are generally near 100%, conforming to the advance rates seen in a traditional tax equity structure. Advance rates where a tax credit purchaser hasn’t been lined up are lower to account for transfer price risk, but as the tax credit market continues to prove to be liquid, advance rates approaching 75% are not uncommon.
- In light of the time period for when a tax credit purchaser actually pays for the credits (which may not be until March 15 of the year after the project is placed in service), sponsors may request greater flexibility in the outside takeout date for bridge loan financings.
- Intercreditor and forbearance considerations will be key to certain structures that utilize a mix of preferred equity and project or back-leveraged debt. We are also seeing a variety of platform and junior mezzanine type portfolio financings. Those financings carry significant intercreditor complexities and often require multiparty negotiations to allocate risk and collateral appropriately.
