It would often be a good thing for the renewable energy industry if a solar company received column space in several of the most widely circulated newspapers and periodicals on the planet. However, recent articles in the Wall Street Journal, the Financial Times and Forbes regarding accounting irregularities and late-day trading in Hanergy, one of the largest publicly-traded companies in China and the largest publicly-traded solar company by value in the world, have painted a less-than-flattering picture. They also provide a stark reminder of the need to undertake strong partner diligence in renewable energy transactions.
Even the most scrupulous and fastidious management teams will be increasingly subject to headline risk as both deal and partner sizes increase enough to catch the eye of major media outlets. Sharing space with a major financial institution in a press release is one of the benefits many developers negotiate strenuously for when closing a transaction; sharing a headline with that same institution in a negative context could be twice as damaging.
Deal partners could also increase the exposure of even privately-held developers to the capital markets through aggregation approaches such as YieldCos, inviting regulatory scrutiny in ways that traditional private funding models have not. Developers need to remember that project finance deals, by their very nature, play out over long time periods. Even those with a short-term interest in a project need to realize that their role in the development and funding process could be scrutinized for years to come. Addressing regulatory investigations can be an expensive and time-consuming distraction for even veteran deal teams, increasing the importance of carefully scrutinizing any partners that are subject to securities laws.
Project diligence processes may not be standardized throughout the space, but they are at least consistently undertaken. However, thorough diligence on counterparties is not as common, a state of affairs which needs to change with the maturation of the renewable energy sector. Promulgating change is often, of course, easier said than done. Perfect information is not always available to developers regarding publicly-traded partners, never mind counterparties with little performance history and minimal online footprints. However it is incumbent upon developers and financiers to utilize best practices to avoid landing in the headlines, or worse, on the radar of regulators.
Special thanks to Morgan Gerard who assisted in the preparation of this post.