October's Newsletter - Yieldco sell-offs signal a model under strain

Posted on 26 October 2023

​Yieldco sell-offs signal a model under strain

Mint Selection and energy transition news service Energy Rev take a closer look at how listed yieldcos are adapting to current market conditions.

The higher central bank base rates of the past 12-18 months and soaring inflation have posed new questions for the managers of listed renewables companies, with related increased supply chain costs – not to mention volatile power markets – contributing to a sharp drop in share prices across the board.

These challenges have been compounded by a more macro trend for reallocation away from infrastructure as an alternative asset class, in part due to the denominator effect, with higher-yielding gilts often seen as a more assured bet in the current market.

A glance at some of the UK-listed yieldcos is revealing: TRIG has shed just over 20% of its value over the past six months, JLEN has done much the same, Foresight Solar Fund is down around 24%, Bluefield Solar Income Fund is at minus 17%, Greencoat UK Wind is down by around 16%, while NextEnergy Solar Fund (NESF) is down 25%. A late recent rally for Downing Renewables & Infrastructure Trust sees it just over 10% lower than six months previous.

Meanwhile, Dublin-listed and euro-denominated Greencoat Renewables has also fallen in share price by more than 18% over the same period.

This situation practically chokes off one of the main supplies of capital to these companies, namely the issue of shares to raise equity, which is the lifeblood of yieldcos if they wish to keep growing in order to offer a return on investment for their shareholders (aside from through the issue of dividends).

In addition, investors have lenders “breathing down their necks” to up the servicing of their revolving credit facilities, as with their share prices going down this can in some time instances take them past their gearing limits, one industry source told Energy Rev this week.

The summer period has seen fund managers’ plans put into action to address the issue..

NESF in June appointed financial adviser JLL to run a sale of a 236MW UK solar portfolio, which it had first announced at the end of April to raise funds to reduce drawdowns under its RCF, finance the acquisition of a circa GBP 500m pipeline of UK and international solar and storage projects, as well as to conduct a share buy-back, for example.

That process is understood to be still ongoing, with bidding running through the autumn.

However, others have already concluded disposals, often pursued for much the same reasons as NESF.

In late August, TRIG concluded a deal to offload a 35MW trio of onshore wind farms in Ireland to Statkraft, although these were projects at the end of their operational lives, post-subsidy period and presented as opportunities for repowering that may always have been sold by the yieldco regardless of current fundraising conditions.

TRIG is understood to now also be pursuing the sale of a circa 30MW pair of onshore wind farms in Scotland, as well as the 55MW Pallas scheme in Ireland, to add to the list of assets heading out of its ownership.

Harmony Energy Income Trust is another to have successfully exited one of its investments with a deal to sell the ready-to-build 99MW Rye Common battery storage site to Pulse Clean Energy in early September after opting to find a buyer rather than increase leverage to finance its construction.

Octopus Renewables Infrastructure Trust (ORIT) also earlier this month sealed an agreement with Orlen for the sale of the 59MW Krzecin and Kuslin wind farms in Poland, with proceeds being used to pay down borrowings and potentially re-invest into pipeline assets.

ORIT is meanwhile presently running a transaction to dispose of the recently operational 48MW Ljungbyholm onshore wind farm in Sweden, with a second round of bidding expected to run over the coming weeks.

Others are also joining the fray; Gresham House Energy Storage Fund in recent weeks launched the sale of a circa 150MW portfolio of operational batteries in the UK, and Foresight Solar Fund in August mooted the 2024 offloading of a 200MW batch of operational schemes.

Finally, Aquila Energy Efficiency Trust is making moves to sell its entire portfolio in order to produce maximum value for shareholders, while its management earlier in 2023 noted, “the inherent difficulties in the construct of the portfolio, including the number of individual investments, multiple geographies and long tenors.”

This is also being carried out in the context of a share price that has slid from GBP 101.33 per share shortly after IPO in summer 2021 to GBP 59.50 per share as of August 15. Aquila’s is perhaps an extreme example and one which is partly attributable to the more nebulous and difficult mandate it employs when compared to most of its peers, and the rest of the listed yieldcos are understood to be planning to stay in business.

Asset sales are also partly being driven by the hope that disposals can be achieved to buyers coming in at 6%-7% IRR levels, who still have “old money” raised from before interest rate spikes, one financial advisor told Energy Rev.

Yieldcos are subsequently aiming to use the proceeds from disposals to buy assets at higher discount rates with IRRs more in the 8%-9% range, although achieving such an outcome is not without its challenges given an ongoing valuation gap between buyers and sellers of assets.

However, Greencoat Renewables’s recent upping of its stake in Butendiek offshore wind farm is one example of a yieldco successfully concluding the acquisition of an operational asset.

Buying bonanza

Share buy-backs have now become routine for investment managers as a means to hopefully narrow the discount to NAV, but also to create value if beliefs about how current share prices significantly undervalue portfolios are borne out. But is this an effective use of managers’ time?

Gore Street Capital CEO Alex O’Cinneide – who oversees the group’s listed battery storage fund, which has seen its own share price drop by 34% over the past six months - would, for one, prefer to be concentrating more on the day-to-day of constructing portfolios.

“We are asked to make investment decisions over energy storage projects. Share buybacks haven’t seemed to work in narrowing discount to NAV for infrastructure vehicles. Is that our job? I’m not sure. It is accretive but is it as accretive as investing in assets?” he asks.

Recent moves also pose questions about the very nature of the yieldcos, the first of which were established several years ago as long-term holders of operating assets which provided stable cashflows and enjoyed low cost of capital due to the removal of all but the most mundane of risks, with engagements in development and construction rarely contemplated.

It has been several years since that latter element was upended in a bid to stave off dwindling returns from buying operational assets, with groups including ORIT and JLEN examples of funds pivoting towards earlier-stage project exposure in recent years, but other aspects have now changed to deliver the latest evolution of listed fund strategies.

Many investment managers tout the high index-linkage of their revenues, but this is seemingly not enough to stop the torpedoing of share prices in a high inflationary, high interest rate era.

“This is all part of the game that your NAV is correct, and that your share price should be higher,” another financial advisor told Energy Rev recently, alluding to the rationale for yieldcos’ growing tendency to sell on a portion of their operational asset base.

So, flipping assets to re-invest in earlier-stage scheme is becoming increasingly common for the yieldcos, with NESF’s ongoing 236MW sale mentioned above being conducted to help fund the development of the 250MW Lapwing Fen battery storage facility, while ORIT and Foresight Solar’s ongoing divestment plans are also both intended to help finance investments in higher-returning pipeline plays.

New priorities

Time will tell whether these are wise moves to help restore investor confidence in their asset base, or whether they will alienate the types of low-risk, long-term investors they originally sought to capture when establishing the funds.

But perhaps this evolution away from previous strategies doesn’t matter. After all, as current share prices suggest, many of those investors have already chosen to allocate elsewhere, particularly now that gilts have rebounded from their prolonged near-zero yield period since the global financial crisis.

“Do I think the structure of investment trusts is perfect? It’s a broad church in the market. At different times of the cycle, some things are appropriate and some aren’t. The society-critical thing is that we have a structure that has delivered renewables across GB,” says O’Cinneide.

Meanwhile, with so many assets currently out to market, it will also be up to buyers to sift through the varying qualities of these deals, not to mention the requirement to compare the disparate merits of end-of-life wind farms from ready-to-build solar and storage.

One investor with interests in the battery sector recently remarked to Energy Rev: “Asset sales are helpful to prove value, but people must compare like-for-like. If someone sells a one-hour duration asset with a short warranty that is a few years’ old, it doesn’t represent the value of a brand new, two-hour battery.”

The next few months will reveal the new homes for the assets subject to the multiple sales processes listed above, as well as whether each of them will indeed prove value and release sufficient capital to allow the yieldcos to keep growing.

There will also, hopefully, be increased visibility on how long the current macro ructions will persist, with implications for how soon these funds can return to their “normal” business, if at all. While currently just speculation among industry insiders, were current market conditions to persist for another year or more one could imagine a world in which some yieldcos opt to go private.

However, what seems more likely while equity markets effectively remain closed is that yieldcos start to tap subordinated holdco debt offerings for further liquidity – this is a route which many private market developers and IPPs have already gone down in recent quarters.

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