Turmoil in the yieldco market could be assuaged with the transition to a ‘new normal’ where expectations are lower, according to Linklaters partner Jeffrey Cohen.
Some yieldcos have already lowered their growth expectations and with it their valuations, Cohen said. “That’s where the newer generation of yieldcos has indicated it will go.”
Abengoa Yield, one of Cohen’s clients, said in its last earnings call that it could meet next year’s projections based on its existing assets, without requiring further acquisitions.
Abengoa Yield also indicated it would seek a new sponsor to supplement the Spanish infrastructure developer Abengoa.
Problems with a sponsor need not be fatal, Cohen said. “Yieldcos could always make acquisitions from third parties,” he pointed out.
“They were never limited, contractually or otherwise, in their ability to make acquisitions from companies other than their sponsors.”
Currently, however, instead of looking further afield for projects, the yieldcos are experiencing challenges in purchasing plants where they have a right of first offer, which is affecting the valuation of solar assets.
Nevertheless, there are signs that yieldcos will be able to survive in a toned-down form, with observers predicting a return to growth, albeit more sedate, for the yieldco sector in 2016.
But if problems with the yieldco model persist, then the companies have an option that is not currently being discussed, he said.
“One path some yieldcos could take, although none have suggested they are going to do this, is just to become operating companies rather than yieldcos and take the services in house instead of contracting them out to the sponsor,” he remarked.
“They’ve got a lot of good assets.”
However, he emphasised: “Nobody has suggested that they are going to do that. The more natural approach is to register a new normal, which means, in the short term, a lower valuation and a much-reduced pace of growth in the dividend.”
This is fortunate, since converting to an operating company status, while possible as a last resort, would not be easy. “It’s just such a radically different model,” said Cohen, who is speaking at YieldCon USA in New York, USA, next month.
“They’d have to rethink all the relationships with their sponsors. They’d also have to figure out whether they are going to start developing new assets or they are going to continue to be buyers of assets as they come online.”
For now, he believes: “It’s a more radical step than people are ready to take. There is enough faith that things can turn around, that the market can become more hospitable, without taking those radical steps yet.”