Alec Borisoff is a partner in the New York office of Milbank and is a member of the firm’s project, energy and infrastructure finance group. He was previously resident in the firm’s Washington, DC office and from 2012–2017 headed the firm’s Tokyo office.
Alec’s experience includes the representation of project sponsors, financial institutions, export credit and multilateral development agencies and other project participants in a wide range of US and cross-border project and structured financings, investment transactions and restructurings, with a particular emphasis on mining, oil and gas, infrastructure and power-related financings. He has significant experience working on complex multi-sourced financings and workouts involving official credit agencies, having represented over 20 multilateral development banks, export credit agencies and other official lending institutions over the past few years.
Sama Rahman* is an associate in the New York office of Milbank LLP and a member of the firm’s global project, energy and infrastructure finance group.
Sama’s experience includes the representation of project sponsors, government bodies and financial institutions on a range of project development, financing and mergers & acquisitions transactions.
1 What have been the trends over the past year or so in terms of deal activity in the project finance sector in your jurisdiction?
At Milbank, the global project, energy and infrastructure finance group is particularly well situated to discern the trends affecting the project finance space in the US and comparatively against global markets. In a year that followed one of the most tumultuous years in memory, the project finance market continued to perform well. New covid-19 variants created some uncertainty; however, the relatively widespread vaccination rollout throughout the country greatly alleviated the health and economic burdens of the covid-19 pandemic. The market showed strong performance and total project finance loans in the United States for 2021 totalled US$62.3 billion over 200 transactions, an increase of 11 per cent over 2020 according to Refinitiv. Power, as usual, led the charge, with oil and gas and transportation taking significant but smaller portions of total deal value. Renewables made up a large portion of the total number of deals closed despite ongoing supply chain issues driving up the cost of inputs. The first half of 2021 was strong, with investors taking advantage of cheap funding and a comparatively safe asset class.
As dealmakers grew comfortable with the work-from-home reality, momentum continued through the year. Heavy activity continued through year-end with significant activity in M&A, related acquisition financings, the USPP market and an influx of strong private equity sponsors (both domestic and foreign) training their eye on US-based assets, opening up additional capital for the sector. A number of large domestic transactions, such as the US$2.61 billion Dominion Cove Point financing (described in greater detail below), closed through the year.
The widespread vaccination rollout, emergence of the Delta and Omicron variants and rising death toll in the US meant that covid-19 continued to dominate headlines through the year. Nonetheless, it was certainly not lonely in the headlines as other major events, such as the 6 January 2021 attack on the US Capitol, the widespread power outages in Texas and the Biden administration’s rejoining of the Paris Climate Accords, also impacted the country’s efforts to return to a more ‘business-as-usual’ environment. Similarly, at a time when infrastructure is seen as a safe bet for governments hoping to jumpstart economic growth and create jobs, the Biden administration appears to be embracing this prevailing orthodoxy through its Bipartisan Infrastructure Law and the array of capital projects it will enable, creating an expectation of further growth opportunity in the domestic power, infrastructure and energy space.
2 In terms of project finance transactions, which industry sectors have been the most active and what have been the most significant deals to close in your jurisdiction?Renewables led the charge, charting in the largest portion of total loan value according to IJGlobal. As expected in 2021, significant pressure to decarbonise the US economy and continued reliance on federal and state tax incentives for wind and solar projects pushed developers to continue a spree of new project development, significant refinancings and the push to combine battery storage into the renewable project package. Milbank teamed-up with a syndicate of lenders to close a US$804 million greenfield project financing for the Edwards & Sanborn Solar and Storage Facility developed by Terra-Gen, which is expected to be the world’s largest integrated solar-powered battery storage, project upon completion. The tax equity market continued to be strong benefiting from the late 2020 extensions of the Investment Tax Credit (ITC) for an additional two years for solar and an extension of the PTC for wind for one year. Notably, a 30 per cent ITC was introduced for offshore wind projects with construction beginning before 2026. Furthermore, several proposals to extend the use of tax credits to other more out-of-the-box green technologies were debated through 2021 and may come to fruition in 2022, including expanding the ITC to include energy storage projects and a choice between the production tax credit (PTC) and ITC for clean hydrogen projects, both proposals under the Biden administration’s Build Back Better bill, which is yet to be approved by the US Senate. Political support for this bill stalled in 2021 with an evenly divided US Senate. However, the Biden administration has signalled its intention to keep pursuing these reforms. For now, sponsors and investors can still rely on guidance that the ITC applies to energy storage associated with otherwise eligible projects. Major conventional players such as LS Power are zeroing in on pumped storage hydroelectric facilities and electric vehicle charging platforms. Tax incentive structures previously used for wind and solar projects are being repurposed for 45Q carbon capture projects. While not a major market share at this stage, these precursors will be important for the future of renewables and energy transition developments and, with a climate-oriented party holding the White House, a Senate (albeit with a razor-thin margin) and a congressional majority, we can expect a policy preference for technology that enhances renewable and sustainable energy goals. Hydrogen-based fuel, in both the energy and transportation sectors is also being looked at closely, although not yet hitting stride. For example, SGH2 Energy Global is developing a hydrogen production facility in Lancaster CA, based on gasification of recycled plastic and paper, which promises to be more efficient that current electrolysis technology.
Natural gas has continued to be the conventional energy source of choice, with plenty of movement in the midstream and power sectors. Notable transactions include the US$2.61 billion holdco financing for Dominion’s Cove Point LNG export project in which Milbank represented the lenders and TransMontaigne’s US$1.15 billion refinancing in which Milbank also represented the lenders.
3 Which project sponsors have been most active in driving activity? Which banks have been most active in providing debt finance?While in the renewables space, major developers such as Clearway, Invenergy, Sunrun and others continue to play major roles in the US market, 2021 saw a continued push from major private equity firms, such as Carlyle, KKR, Apollo and Blackstone into realms historically reserved for a traditional PF shop. KKR made a US$3.37 billion purchase of a 20 per cent non-controlling interest in Sempra Energy’s new business platform, Sempra Infrastructure Partners, in connection with which Milbank advised the lenders. Private equity players are making exits too, with BlackRock selling the 240MW Big Sky wind farm to Dutch energy company Vitol in May 2021. Freeport LNG Development led the IJGlobal league tables for 2021, with six major transactions for a total value of US$6.9 billion, all related to its LNG facilities in Texas. Venture Global LNG followed in second, with multiple transactions relating to its Calcasieu Pass LNG and carbon capture and storage facility. On the renewables side, DE Shaw, Invenergy, NextEra and Clearway led the pack, each with more than US$2 billion put to work. Notably, deal volume and quantity is fairly spread out among sponsors, particularly when the massive LNG liquefaction transactions and other ‘one-and-done’ blockbuster transactions are taken out of the picture – deal data tables show that 21 different sponsors invested more than US$1 billion and 44 invested more than US$500 million in 2021.
On the lender side, MUFG continues to have the strongest presence in the US market, both in terms of deal value (US$5.5 billion) and number of transactions (72). Groupe BCPE, through its subsidiary Natixis, is a strong second, with a single mandated lead arranger title for significant projects such as the Vineyard Offshore Wind Farm and Traverse Wind Farm, followed by the usual players, SMBC, ING Group and Societe Generale in third through fifth respectively. Notably, Bluebell International, which had the second highest transactions total in 2020 and came in second in deal value did not rank in the top 100. A new entrant, Silicon Valley Bank, financed a large number of transactions exclusively in the renewables space, making the concept of a ‘green boutique’ a reality.
4 What are the biggest challenges that your clients face when implementing projects in your jurisdiction?While US residents might have a bit more trouble separating themselves from the news cycle, the reality is that despite the tumult in the US in 2021, investors still are able to invest safely and predictably in US assets. The US’s tried and true system, despite high-profile back and forth policy decisions on certain socially relevant pipeline assets such as Keystone XL, is still a boon for investors seeking to ensure what their contract says is what plays out on the ground. Investors also have the benefit of a benchmark currency, repeat players obligated reputationally to ‘play fair’ and a slew of experienced advisers ready to assist with new ventures. The Biden administration continues to rebuild important relationships and a reputation for consistency. The underlying base of the US system remains strong and investors have not abandoned the market.
On the other hand, the fact is that the US market is mature and competition can be brutal. With the safety and predictability comes a mess of market participants with deep pockets and experience to back it up. As a result, we have noted that foreign sponsors will take bold steps to find a foothold, pushing out others that previously would have had a sure chance of winning a bid. On the debt side, we have noted that Japanese and Korean investors are drawn to safe investments in the US due to the limited investment supply in their domestic markets, often teaming with experienced US players to convert opportunities.
The evolved US markets come with inherent added complexity over time as tweaks, caveats, and loopholes in policy and ‘market’ precedent are gradually introduced. With this complexity, newer entrants require expert advisers to guide them to the ‘cutting edge’ to maximise returns, while seasoned veterans expect that their advisers will be ready to play at their level and assist them with novel ideas.
5 Are there any proposed legal or regulatory changes that may give rise to new opportunities in project development and finance? Do you believe these changes will open the market up to a broader range of participants?As noted above, renewable energy and other green policy initiatives are going to be the major spectacle of 2022. With the executive and legislature controlled by the Democratic Party, we can expect to see continued movement towards green energy, though the extent to which is to be seen and will depend greatly upon whether the Biden administration is able to pass its Build Back Better bill.
Investors should watch for extensions and modifications to existing PTC and ITC tax credit structures, additional qualifying technologies, in the vein of the 45Q carbon capture facility eligibility, and other backstops such as Department of Energy guarantees. Biden’s proposals are ambitious but the razor-thin majority held by the Democrats in the Senate makes the passage of legislation difficult. State-administered renewable energy credit trading programmes will also be important to watch as investor-owned utilities attempt to comply with ever-expanding renewable portfolio standards.
The private sector seems keen to follow suit – for example, BP has stated that it intends to become a net zero company by 2050 (or sooner) and recently entered into a 50:50 partnership with Equinor to develop the Empire and Beacon offshore wind projects. It will be important to track how other major players, including BP’s peers in the oil and gas industry as well as other industries like the petrochemical and transportation industries, adapt to what appears to be a permanent shift.
Some initially predicted a greater degree of hostility from the Biden administration towards oil and gas development; however, 2021 saw the Biden administration outpace the Trump administration in issuing drilling permits on public lands. Nonetheless, the administration has also taken meaningful steps to shift away from fossil fuels, including a recent proposal to increase royalty rates and rents for drillers but stopped short of a ban on drilling. This perceived inconsistency is likely the product of an administration attempting to accelerate the growth of green energy in the country’s energy mix while also recognising the value of oil and gas in the US economy.
6 What trends have you been seeing in terms of range of project participants? What factors have influenced negotiations on commercial terms and risk allocation? Are there any particularly innovative features?We have noted a significant uptick in foreign investment at all levels of the capital stack, as well as inroads by major domestic private equity (PE) players that previously focused on standard leveraged finance transactions. Companies and investors are generally looking for safe opportunities and calculated risks and the project finance structure provides a particularly streamlined management system catered to these needs. A number of Canadian funds are entering the US transportation market through targeted acquisitions – Milbank represented Caisse de dépôt et placement du Québec in connection with the acquisition of a 15 per cent interest in the Indiana Toll Road from IFM Investors (itself an Australian pension fund manager). Axium Infrastructure acquired a 50 per cent interest in George Energy Partners, which has a long-term contract to operate the utility and energy system for George University, and Milbank represented the institutional investors financing the acquisition. As noted above, Milbank also assisted BlackRock its sale of the 240MW Big Sky wind farm to Dutch energy company Vitol.
The inroads made by PE firms and cross pollination of leveraged finance and project finance advisers have created opportunities for those able to wield a bit of influence or who can reference relevant comparisons effectively. The reputation of the project finance market as a strict but predictable funding source for sponsors has evolved ever so slightly, and sponsors are using the strength of the ‘buyer’s market’ in the finance space to seek more control over operational decisions and reporting requirements where excessive lender oversight may have historically been viewed as onerous or likely to cause foot faults.
7 What are the major changes in activity levels or new trends you anticipate over the next year or so?We generally expect the market to continue to reflect the grit that defined 2021 in 2022, as investors react to an improving macroeconomic situation, increased stability in the domestic space and diminishing impact of the covid-19 pandemic. Despite a sense of optimism, several external challenges loom on the horizon. Growing inflation is driving up the cost of materials for renewable energy projects and the uncertainty around the US Federal Reserve’s response is making certain market participants nervous. While infrastructure assets are perceived to be a natural hedge against inflation, other assets are exposed to interest rate risk and may be negatively impacted by higher interest rates. Similarly, we are yet to understand the full impact of poor diplomatic relations with China; however, we can already see adverse consequences of measures such as the Biden administration’s extension of Trump-era tariffs on imported solar panels, which is driving up the cost of developing solar projects in the US. Other macroeconomic factors that cannot be controlled or predicted and that create challenges include the ongoing supply chain disruptions caused by the covid-19 pandemic and Russia’s invasion of Ukraine. Nevertheless, investors have proven that they can weather one of the most significant crises of modern times and it is unlikely that these concerns will have a material effect on deal flow in the near term. Sponsors engaged in carbon-heavy industries will need to make contingency plans for increased regulation, decreased incentives and potential competition from subsidised green alternatives. Participants in polluting industries should be aware of the impact their investments have on their reputation and bottom line if handled incorrectly and the power that a well-organised or merely inopportune and popular protest can have on the permitting process administered by an executive branch predisposed to align with a climate conscious viewpoint. Furthermore, as the focus on environmental, social and corporate governance (ESG) grows and the move towards standardised ESG reporting continues, participants in polluting industries will find themselves exposed to greater reputational risk.
While certain investors were willing to weather the uncertainty of the Trump administration in favour of reduced tax rates, rollback of emissions and pollution requirements and other promises to remove regulatory red tape, many have welcomed a period of increased stability, a lean towards technocratic policymaking and bold and ambitious clean energy and other necessary infrastructure policies that the previous administration was unable to deliver. While massive spending was approved during the height of covid in the form of the CARES act, many have noted that the funds appropriated were a lifeline to struggling municipalities and subdivisions and will not be allocated to capital projects. This has changed with the passage of the Bipartisan Infrastructure Law, which allocates US$550 billion in new money for a variety of projects. A significant portion of this money will be provided directly to municipal governments who are subject to more in-depth value-for-money analyses to receive federal funding. Public-private partnership procurement methods are likely to be considered in a value-for-money analysis and this may lead to a great uptake of P3 projects, creating more opportunities for the private sector to play a role in overdue infrastructure projects in the US. Supply chains for advanced batteries for vehicles and energy storage will be strengthened, with the US Department of Energy recently announcing its intention to provide US$2.91 billion to boost production of advanced batteries pursuant to the Bipartisan Infrastructure Law. The department intends to fund plants for battery materials production and refining, battery manufacturing and battery recycling. Similarly, the Federal Highway Administration (part of the US Department of Transport) will administer around US$27 billion to repair approximately US$15,000 highway bridges across the US.
The Build Back Better bill discussed above is one potential source of new opportunity through the expansion of tax credits that will enable more storage projects and green hydrogen projects. We also expect major leaps forward in battery storage technology and other overdue investment in major capital projects. Consumer-facing ‘clean’ products will create the most buzz – electric vehicle (EV)developments, residential solar, ‘smart home’ products – but behind the scenes expect that steady progress will be made to progress utility scale storage options. We expect greater market activity throughout the advanced battery supply chain in the US, in part boosted by the Department of Energy’s planned actions noted above, including manufacturing and production of critical minerals. These activities will be broad in and will see a wide range of investors involved, including foreign investors seeking to build battery manufacturing plants in the US and local startups such as Form Energy (backed by heavyweights such as Bill Gates and Jeff Bezos), which recently closed its US$240 million Series D funding round and is expected to be developing and scaling up a new type of rechargeable battery made of iron, air and water (all cheaply and readily available). Meanwhile, Tesla recently announced it is making arrangements to source nickel from the Goro mine in New Caledonia that, if effective, will give it a significant advantage in the manufacture of batteries in the US. These are all less predictable developments in the market but will likely have a large impact on the energy transition markets in the US. Another factor to take into account when planning will be potential policy changes requiring government contractors to comply with minority and women owned business sourcing requirements and/or ‘buy American’ requirements, all of which are foreshadowed in the Biden climate order mentioned above.
The Inside Track What three things should a client consider when choosing counsel for a complex project financing?
By far the most important factor that a client should consider when selecting counsel is experience, not only in terms of specific industry knowledge but also in terms of bringing similar financings to a successful close. No two financings are exactly the same, so it’s important that counsel is able to draw from a wide breadth of comparable experience to anticipate issues and to help focus finance participants on key issues without getting distracted with the ‘noise’ that may distract less experienced counsel. Similarly, ensuring that counsel has a good reputation for being practical – both in terms of solving bespoke deal issues as well as guiding project participants through well-reasoned and market-tested solutions – is the ultimate value-add in terms of minimising time and cost considerations.
What are the most important factors for a client to consider and address to successfully implement a project in your country?Clients seeking to develop projects in the US must focus on several key factors that differentiate the US market from other markets around the world, all tied to the maturity and size of the US economy. Competition is fierce, as liquidity sources not just from the US but from around the world seek to compete for the relative stability offered by the US’s legal and financial systems. Regulatory regimes, while changing course periodically with the shifting political winds, are also relatively stable, but additionally require significant guidance at the local, state and federal levels. And perhaps most importantly, markets in the US can shift quickly – prodded both by policy incentives as well as popular support. Twenty years ago, LNG import terminals were going to be the wave of the new energy future; 10 years ago the renewable power markets were starting to expand at an accelerating pace while not yet being completely considered mainstream; 15 years from now we may think of the combustion engine as a relic of history as nothing but EVs populate our streets. And through it all, having competent and experienced counsel providing timely guidance will remain one of the most important factors of all.
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