Unlike residential, which has standardized credit scores, or utility-scale, which generally has utility off-takers, commercial and industrial (C&I) credit is incredibly complex – and can often be a deal breaker in middle market deals (which we generally categorize as 200kW – 5MW).
Why is credit such a deal breaker in C&I as opposed to other market sectors? To start, very few facilities are owner-occupied, and it is hard to guarantee that the same tenant will buy the electricity for the length of a 20 or even 15-year PPA. Think of your own booming solar business. As your company expands, you will need more office space. Can you guarantee to a solar developer (and thus, the end buyer: an investor) that you will be there to buy the electricity when your lease is up in five years? If you leave the building, can you ensure another reliable, rent-paying tenant will take your place, or that the owner of the building will be able to quickly find someone who will use electricity and take your place? No? Hence the issue…
C&I solar deals often die when the developer realizes all too late that the host has poor credit. How could that happen? For one, it is inherently uncomfortable for a developer to ask a host to turn over their audited financials, and developers sometimes have a hard time choosing how and when to fit “the talk” into the courting discussion. As a result, C&I developers often rely on the host’s word, rather than financial statements, to ensure creditworthiness (or worse, some subjective indicator – suit or haircut quality, a spic and span facility, etc.). Then, when it gets time to sell the project to an investor and further credit analysis reveals an issue, they realize the project cannot move forward. All of that development time (and money) wasted.
To prevent this, get a good understanding of host credit early, and also ensure that you understand the quality of the roof, the roof warrantee, and when it will need to be replaced. All of this should be done prior to, not after, negotiating the PPA. Credit should be the absolute first thing that is accounted for when selecting a host.
Host selection, though it sounds simple, is another key component to building a pipeline of financeable solar project opportunities. This is increasingly challenging as many of the most attractive hosts (i.e. big box stores) have been picked over. Focus on industries that society depends on, and those likely to flourish in the long run: distribution centers, grocery stores, banks, warehouses, housing authorities, and governmental entities (i.e. a fire station). Religious institutions can be hard for some investors, as can gas stations and hockey rinks in places where nobody plays hockey. Think to yourself: how long has the facility been around, and will it be here in another 20 years? Then, look into their audited financials, check that they have been paying their bills, and look into the company’s owned assets.
Diligence requires human review and a knowledgeable team to dive deep into credit beyond the surface to ensure that a developer’s project makes it to the finish line.
This is an excerpt from our Solar Project Finance Journal, a monthly electronic newsletter analyzing the solar industry’s latest trends based on our unique position in the solar financing space. To view the full Journal or subscribe, please e-mail firstname.lastname@example.org.
About Sol Systems
Sol Systems is a solar energy finance and investment firm. The company has facilitated financing for 171MW distributed generation solar projects on behalf of Fortune 100 corporations, insurance companies, utilities, banks, family offices, and individuals. It has over $550 million in assets under management as of September 2014. Sol Systems provides secure, sustainable investment opportunities to investor clients, and sophisticated project financing solutions to developers. The company’s tailored financial services range from tax structured investments and project acquisition, to debt financing and SREC portfolio management. For more information, please visit www.solsystemscompany.com