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Ep331: Cost of capital: 2026 outlook
00:57:26
Four project finance industry veterans talk about what to expect this year for tax equity, tax credit sales and debt. The four are Jack Cargas, managing director and head of tax equity...
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- [00:00]
Jack Kargis
Foreign.
- [00:05]
Podcast Host
Welcome to Currents, the Norton Rose Fulbright Podcast. Today we bring to you another one of our annual traditions, the 2026 cost of capital, moderated by my partner Keith Martin.
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Keith Martin
Welcome everyone. I'm Keith Martin with Thornton Rose Fulbright in Washington. Our call today is about the outlook for the cost of capital this year. All eyes this morning have been on Davos. President Trump told business and political leaders that the US Will not use force to take Greenland. US Stock market is rebounding after a massive sell off yesterday. The 10 year treasury bond rate is down a little over 1 basis point this morning to 4.28%. SOFR, which is the base rate used to price bank debt, is in the 3.6% range, down from 3.8% at year end 2025. I asked a group on New Year's Eve to predict what would be the biggest News story in 2026. In the first three weeks of the year are guide. We are in for another roller coaster ride on the policy front. This makes it hard to know what to put in financial models. We have a distinguished group to help understand current conditions in the tax equity and debt markets. They are as follows. Jack Kargis is Head of Originations on the tax Equity desk at bank of America. Rubio Song is Managing Director and Head of Energy investments for JP Morgan. Bank of America and JP Morgan together have accounted for roughly half the US Tax equity market in recent years. Ralph Cho is co CEO of Aptera Infrastructure Capital and a longtime banker who has his finger on the pulse of the US Debt markets. Beth Waters is Managing Director for Project Finance Americas at mufg, a Japanese bank. It is a prominent lender in the US Project finance market. It's always interesting to talk first about tax equity volume to be able to compare years. But comparisons have become a lot harder lately because of the proliferation and deal structures and market fragmentation. There are at least five strategies for monetizing tax credits on U.S. renewable energy projects. Partnership flips or one. That's where a bank or other tax equity investor makes investment that expects to be repaid partly in tax benefits and partly in cash. There are also hybrid deals where the tax equity partnership plans to sell most of the tax credits to another company. There are preferred equity partnerships with cash investors where the partnership sells all the tax credits. There are straight tax credit sales and then sale leasebacks, which were an earlier form of tax equity, are also making a comeback. So let me start with Rubio Song. Rubio, break it down for us. What was tax equity? What were tax equity and tax credit sales volumes in 2025 and how did they compare to 2024?
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Rubio Song
Thank you, Keith. Appreciate that opportunity to answer your question, as you alluded to in the opening statement, that, you know, this market has involved a great deal over the last few years. So it's became, you know, the statistics became harder to track. But I think we have a good visibility into the traditional technology sectors like wind, solar battery. And for those, you know, we count total tax equity, including the traditional tax equity, hybrid tax equity or preferred tax equity, or direct credit sales in those sectors. We kind of have a study by variant in total. And then there's other technologies that generate credits such as 45x or 45u or 35z. Those are typically transacted on the direct credit transfer market or TCT market. That market is a little bit opaque in terms of, you know, charging the total transaction volume. And we estimate the roughly around 10 to 15 variance last year. So that put the total tax equity and the tax credit transfer market size at 45 to 50 billion last year.
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Keith Martin
Which is a huge increase. Do you have, do you have a sense for how large an increase that was over 2024?
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Rubio Song
We estimated roughly that's about a 10% year over year increase. Certainly overall, looking at the installation of wind solar battery projects, that's probably a single digit increase in 25 over 24.
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Keith Martin
Okay, Jack Kargish, what mix of solar, wind and storage projects are you seeing?
- [04:42]
Jack Kargis
Keith, first allow me to say good morning from San Francisco. Thank you for again including bank of America and your annual Norton Rose Fulbright outlook call. It's a pleasure to have. The renewables development marketplace generally reports a breakdown across the traditional renewables technologies, which Rubio mentioned, of about a third wind and two thirds solar and solar plus storage. The tax driven financing market in response to that development marketplace broadly reflects that breakdown.
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Keith Martin
Okay, that's a lot of solar.
- [05:14]
Jack Kargis
Yeah, solar's grown. If I could, another interesting question in this realm of how much of the tax equity market is made up of traditional tax equity, where investors plan to keep the tax credits on their own books. And how much is made up of hybrid tax equity, which transactions include tax transfer features that are either optional or obligatory. We are seeing some statistic keepers saying that the traditional tax equity structure, where there is no intended sale of tax credits, may have made up as much as 30% of the tax equity market. That may have been true in 2024, but we anecdotally would think that that was a rather slimmer proportion to 2025. It is very hard as Ruby said to put a fine number on any of these statistics anymore because of the presence of the various transaction types that you described at the top of this call.
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Keith Martin
So maybe the surprising thing was one third win given the efforts by the Trump administration to make it harder to build wind projects. Also, I think most people think most tax equity partnerships these days are hybrids. You're suggesting that Wasn't true in 24 30%? Well still most. But 30% is a stimulate number. We're not hybrids, but it's smaller percentage in 25 that we're not hybrids. The tax credit sale market seems interested in all types of tax credits, but not all tax credits lend themselves to tax equity structures. Rubio had a list of some that are just direct sales. What tax credits besides the traditional credits on power projects do you think are getting the most traction in the tax equity market? Any?
- [06:56]
Jack Kargis
Well, you're right. Solar, solar plus battery, wind clearly lend themselves to tax equity partnership structures and are widely used. We think structurally similar tax credits can also work with tax equity partnerships and are achieving some traction. Things like standalone storage, obviously advanced manufacturing, clean hydrogen, tier 4, 45x and 45v carbon capture which is 45q. All of those are potentially available for tax equity partnerships.
- [07:29]
Keith Martin
So you're open to those. Did you see any 45v as in Victor Hydrogen deals last year?
- [07:36]
Jack Kargis
We have seen interest in them but we don't think there's a large upswelling of transactions at the moment.
- [07:44]
Keith Martin
Okay Rubio, Same answer on 45V as invector. No, no deals last year.
- [07:50]
Rubio Song
No, we haven't seen any deals last year. And I'll just add to Jack's comment on the one solar battery breakdown and we can see you know when became in terms of looking at the installation in the US it's becoming a challenge. Right? And you know roughly 7 gigawatt you have here which means the total wind solar factory storage sector of 70 gigawatts. So that's representing us around 10% installation in the U.S. of course the other one projects are still I think attracting a lot of investor interest in the tax equity space, either IGC or pt. So they're receiving a lot of interest from investors. It's time to keep diversified portfolio in green solar. Certainly the solar and storage became a.
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Keith Martin
I will come back to when because I want to drill down into repowerings. But Rubio, sticking with you, how was 2025 for you and what do you expect this year?
- [08:55]
Rubio Song
2025 is a very busy year for us executing over $7 billion in tax equity and hybrid tax equity and the direct transfer space for our clients. So we certainly see 2020, that momentum continues to 2026. We see a very strong pipeline for 26.
- [09:14]
Keith Martin
And beyond meaning, beyond meaning 2027.
- [09:17]
Rubio Song
Yes. I mean, you know, we're looking at a 2027 financing clients. I mean these projects as we know takes a long time to build. And so the financing needs protect equity and the project finance of course, you know, banks, you know, 18 plus units of banks.
- [09:36]
Keith Martin
Okay, Jack Kargis, how was 2025 for you and what do you expect this year?
- [09:41]
Jack Kargis
Keith, I'd like to mention that we address at bank of America the renewable energy finance market with three different groups. The one that I'm in, the Renewable energy Finance group, which is basically tax equity for utility scale projects and residential solar. And then we also have a group known as Global Infrastructure and Sustainable Finance Group, which is a strong market leader in the development and execution of bespoke structures across the world and across these platforms. And then we have a deeply capable tax credit transfer desk which we set up directly after the passage of the ira, which also a market leader in that particular specialty. And the reason I mentioned them all is because it was a busy year for all three of our groups that directly participate in these tax driven markets. So you know, all three of the groups saw a rush to start construction and get some deals done at the end of the year. And we also noted that some market participants, including some of ours, reported this their the end of 2025 as their busiest year end ever in terms of projects, dollars raised, et cetera. Some of the sponsors and also the third party providers such as the engineering firms, no, law firms and financial advisors were severely stretched. And we expect more of the same in 2026 including probable rush to start construction by July 3rd this year in order to lock in that four year construction timeframe. So we expect another strong pipeline and busy year.
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Keith Martin
Okay, sounds exhausting. Rubio, last year most deals involved legacy tax credits on projects that were under construction by the end of 2024. Those projects in which technology neutral tax credits will be claimed were just starting to come to market late in the year. Will the market roll forward into technology neutral financings with the same momentum or have we now turned into a road with a lot of speed bumps on it?
- [11:32]
Rubio Song
I would say Keith, you know radio energy financing has always been a bumpy road from my 20 plus years experience in industry. But whether it be tech neutral credit financing can go less bumpy. I mean that really depends on the Treasury Initial guidance. Fiat. Right. We are fearing that initial guidance that can come out anytime now. So a lot of questions hopefully will be answered by the initial guidance. The full regulation is going to take longer and we hope and believe the treasury guidance will address a lot of the questions that the financing parties have raised the United States. So it's more transparent and actionable. I think most of the 2026, even 2027 projects we are seeing today, you know, under the legacy credit, FIAC stands.
- [12:29]
Keith Martin
For Foreign Entity of Concern. We'll come back to that as well. Rubio Tax equity has accounted historically for about 35% of the capital stack plus or minus 5% in ITC investment tax credit deals and 65% plus or minus 10% in PTC production tax credit deals. What are the percentages today we are seeing?
- [12:53]
Rubio Song
You know, we looked at probably over 50 utility scale wind, solar battery projects last year and we are seeing the percentage of tax equity financing Property centered around 45%. You know, most of them are between 40 and 50%, either RTC or PTC. I mean, most of the projects, I would say nearly 80% of projects we evaluating today choose ITC and most of them qualifies. One of the two adders, Samo Complex, for both adders that put the ITC percentage at 40% and some are the 50%. So that translates to roughly around 45% in the capital structure. It evenly run up in project costs due to inflation, due to tariffs, et cetera. So I think the tax act refinancing percentage of the total capital stack has been dropping. Right now we don't see much of the projects, you know, with over 70% financing by tax equity very soon.
- [13:57]
Keith Martin
Okay, let me give a little more background. As Jack said, there was a rush to start construction of all types of projects by the end of 2025 to avoid new FIAC limits on the amount of Chinese equipment that can be used in projects. There will be another rush to start construction of wind and Solar projects by July 4th this year to lock in four years to build. Otherwise, wind and solar projects have to be finished by the end of 2027 to qualify for federal tax credits. Jack Kargis, coming back to you. Most developers have been relying on work on main power transformers as a start of construction. Do you have any benchmarks for what you need to see to treat such work as the start of construction?
- [14:41]
Jack Kargis
Generally, most market participants, sponsors and investors and their respective law firms would say that building MPT qualifies as physical work of a significant nature, which is the term of art. However, it must be specialized, custom engineered, project specific equipment. It cannot be standard stock inventory. Also, the physical fabrication of the transformer must have commenced with an executed enforceable finding, written contracts in place. Those are some of the benchmarks.
- [15:15]
Keith Martin
Do you have any standard for how much work you want to see before the deadline? You know we see a wide range of things. A conservator tank, two radiators, conservative tank. In all the radiators, transformer care. There are different dollar amounts, different number of labor hours. Do you draw lines anywhere?
- [15:33]
Jack Kargis
Well, as you know, there are no bright lines in the law and so we don't draw bright lines. We do it on facts and circumstances. The more of that construction the better.
- [15:43]
Keith Martin
Okay, the law firms are under pressure to bless factory work on such things as medium voltage transformers, inverters, inverter skids, trackers as a start of construction. Are you treating work on any such items as the start of construction currently?
- [15:59]
Jack Kargis
Well, those are challenging questions. We have not seen a large sort of upswell of requests in this regard. But the same rules about non inventory that I just mentioned with respect to mpts apply here as well. And some of the items you just listed can be viewed by the law firms and therefore by their clients, such as standard stock, as inventoriable and therefore difficult to use as qualifying assets.
- [16:28]
Keith Martin
Okay, so the same question is, is it a stock item? One more construction start question for you. Many developers need more than four years to finish projects, particularly after the Trump administration froze federal approvals for wet and solar projects. How open are you to proof of continuous efforts on projects to buy more time? And these, just to be clear, these you can only rely on continuous efforts if construction started by September 1 last year. After that it's continuous actual construction.
- [17:01]
Jack Kargis
Again, facts and circumstances and also the sort of regulatory environment at that time will probably be meaningful. There may be an implicit risk allocation question in your question which parties probably are not yet in a position to address. This might not need to be answered for several years.
- [17:22]
Keith Martin
Okay, Rubio Song People listen to this call hoping to get a sense of what to assume in financial models about the cost of capital. What is your advice about what to put in models for the cost of tax equity this year?
- [17:38]
Rubio Song
Unfortunately, that's not a short answer. There's no single number. There's a multitude of variables here. I think the foremost question for the developer to answer is whether to be like PDC or ITC with respect to those projects and certainly that different sets of investors are interested in PTC versus itc. And certainly we See a supply demand imbalance in the ITC monetization market versus the ptc. So that.
- [18:16]
Keith Martin
Imbalance meaning more sponsors with projects than there is tax equity or the reverse.
- [18:23]
Ralph Cho
It.
- [18:27]
Rubio Song
As I mentioned earlier, we see the projects mostly electing ITC, right? 80% of the projects we have today electing ITC. So that requires a lot of current year tax capacity to monetize these ITCs. Therefore you see the huge growth in hybrid tax equity or preferred tax equity where 99% of, up to 99% of those credit are Kaiser. The credit buyers got it.
- [18:57]
Keith Martin
So it's pretty more straight on that tax capacity in the market. Well, if, if, if people have a good sense of what tax equity cost last year, do you think, do you think there'll be much change this year?
- [19:09]
Ralph Cho
That there'll be a little change?
- [19:12]
Rubio Song
I think on the PDC monetization front, as long as the long term interest rate that remains stable, we see, you know, good by demand balance in the PDC monetization market. The ITC front as I mentioned before, you know, due to the supply of ITC and the demand for corporate tax capacity, that imbalance probably is going to getting worse and therefore that's going to put downward pressure on the TCT price.
- [19:44]
Keith Martin
Okay, interesting. Jack Kargis Sonova filed last year for bankruptcy. It was a rooftop residential solar developer. Has that changed how you look at the residential solar deals?
- [19:56]
Jack Kargis
Well, the residential solar space has had its challenges in recent years. There's no doubt about it. It gave us an opportunity to test our structure and it just, you know, confirms that we need to be sure that our structure in our residential solar deals is right. We've been in the market for some years, I think since 2013 in our case and we have learned a few things recently. But we remain in the market today and you know, we'll continue to remain in the market. I think the reality is that, you know, this is project finance and these transactions are structured around the project. There's no substitute for a top sponsor. But when there are difficulties, if you've structured your project financing right and you understand the inputs and the, you know, the offtakes and the operation than even in a circumstance where the sponsor has great difficulty, including bankruptcy, perhaps in the hands of another.
- [20:56]
Keith Martin
So they still work, you're still doing them. Noted. Jeffries this morning came out with a buy recommendation for Sunrun stock. Expecting a booming year for Sunrun. Rubio, going back to you, but feel free to comment on what Jack just said. There has been a push to repower Existing wind farms. What are your hot buttons in repowerings?
- [21:17]
Rubio Song
Yeah, we're not looking at the repowering. I've done quite a bit of repowering on wind over the last 10 years. I think our focus continues to be both the engineering, technical, due diligence front in terms of the technology retrofit and the really useful light of the project and the repowering as well as the business case, whether the repowering makes business sense, whether uplift generation, whether the stores the O and M cost going forward. Right. And of course the most critical question for repowering to qualify for the restart of the tax credits where so called 8020 tests is critical. We like to see very solid trade on that front to Satisfy the age 2010 and tennis will require multiple pay for precamped conclusion.
- [22:16]
Keith Martin
Okay, Jack, any hot buttons for you on repowering?
- [22:19]
Jack Kargis
Well, bank of America was the first bank to do tax equity for repowering back in 2018. The marketplace has developed significantly since that time. As Rubio said, there are specific tax tests which you absolutely have to satisfy. It's an on off switch and there are performance expectations which must be achieved. And you know, those vary slightly from transaction to transaction. But I think repowering is going to continue as a, you know, as a. It's part of our marketplace.
- [22:49]
Keith Martin
Okay, Jack, sticking with you then. Going back to fiac, Foreign entity of concern. These new FIAC rules took effect on January 1st this year for projects on which technology neutral tax credits will be claimed. They limit the amount of Chinese equipment that can be used in projects and they bar use of Chinese intellectual property rights that give equipment suppliers effective control over key aspects of US projects. Congress provided a list of 13 contract clauses that it believes are forms of effective control. So sponsors or developers need to scrub their equipment supply contracts with Chinese companies to make sure none of these contract provisions is in contracts. This seems like one area where you will just push the risk off on the developer. Is it more complicated than that?
- [23:38]
Jack Kargis
Well, probably is more complicated than that. It is true that there is a risk allocation question here similar to what we discussed earlier. But you know, we never want to invest into a circumstance where the expectation is that, you know, you call upon an indemnity or what have you, that the risk is, you know, crystallized and you know, we need to force it upon another party. I think the entire marketplace recognizes that it would benefit we, all of those players would benefit from guidance from the treasury and the IRS regarding fiac. We do know that Congress and the regulators are very aware of that, that not least because industry organizations have continued to make that point in Washington.
- [24:23]
Ralph Cho
And we also are conscious of the.
- [24:25]
Jack Kargis
Fact that guidance is important not only to the traditional renewables industries, but also to other technologies, including advanced domestic manufacturing and battery storage and geothermal and hydropower and nuclear power.
- [24:42]
Ralph Cho
So, you know, it may be simple.
- [24:44]
Jack Kargis
To say the risk could just be pushed off, but it would be much better for our sponsors in particular if we can all have a clarified view as to what that risk is. And we've been hearing that we're going to see Fiat guidance, you know, every week on a weekly basis since, I don't know, mid December. And we are still hopeful that that.
- [25:03]
Keith Martin
Fiat guidance is coming perhaps by the end of January there it's apparently drafted. It's over at the executive office of the President. Treasury is getting some pushback from the White House. There's a tussle between the two, the treasury and the White House. Over at Rubio, coming back to you. Some tax equity investors have moved to PAM accounting, which stands for proportional amortization method, instead of the more traditional HLBV or hypothetical liquidation and book value accounting for tracking earnings from tax equity investments. I think JP Morgan is using PAM accounting, if I'm not mistaken. What changes should a developer notice when there is such a shift?
- [25:48]
Jack Kargis
Sure.
- [25:48]
Rubio Song
Yes. I concur that the PAM accounting that's made available by FASB to yield energy credit investors two years ago, we see many of the tax equity investors adopt this methodology, certainly very simple and compared to HRBV it's easier to implement.
- [26:11]
Beth Waters
The.
- [26:12]
Rubio Song
I would say the developers probably in large part wouldn't see much significant change. You know, one, you know, one way to qualify for PAM accounting is to limit the cash distribution to the investors because you know, to qualify for the benefit from the active investment from cash distribution has to be less than 10%. Other way to say the tax credits or tax benefits have become more than 90% of the benefit to the investors to qualify under the time accounting. So that's one way the developer will see if qualified for time accounting in cash distribution to tax equity investors and might have to reduce. The other potential change I think is likely to the developer's favor is that some of the auditors focus on and they've been qualified under parent accounting. The tax act investors should not be deemed to have significant blueprints over the operations of the project. Therefore, some of the constant slides and in terms of threshold where the developed person needs tax investors content during the operational phase of the project, both threshold And ID have have to be revisited.
- [27:34]
Keith Martin
So this may be a net positive for developers. Less cash going to the tax equity investor potentially and less safe for the tax equity investor over operation of the project. Let me wrap up here on the tax equity segment with this question. I'll go back to Jack. What other new trends are you seeing as we enter 2026 more in different types of transactions?
- [27:57]
Jack Kargis
As you mentioned Keith, when we were talking about the difficulty of tracking volumes, there used to be a common term vanilla tax equity which I never necessarily believed in. But now it's more like, you know, to continue the ice cream analogy, 31 flavors of of different types of transactions. That may be an exaggeration but the point is there are, you know, many more sort of bespoke features that are being instituted into these transactions and that's exacerbated by the plethora of tax credit types, the potential usage of some of those tax credit types in tax equity partnerships. And also it's exacerbated by the electrification of everything which we've talked about before and also by the demand for power from AI and from data centers. And one other thing that I want to point out regarding, you know, what we're seeing in the marketplace is there was a significant acquisition of a mid sized developer by a large tech company which could very well be a leading indicator or a bellwether of what kinds of things there could be to come in order to accommodate the demand from the tech sector.
- [29:15]
Keith Martin
So that was the 4.4 plus billion acquisition by Google of Intersect Power that Google has tax capacity. Maybe not. It may take that out of the tax equity market. Rubio Song what new trends did we not mention that you are seeing as we move to 2026?
- [29:36]
Rubio Song
You know I certainly agree. Jeff just mentioned right that half hour into the call we only mentioned AI once. So that trend is kind of continuing in terms of the load growth and the electricity price increase resurgency. The recent report on the CPI inflation in the 2.7% for 2025 holding electricity price inflation is 6.6% across the country. Certain regions are certainly seeing much higher increased electricity prices. So that's going to continue I think hopefully that day tailwind to continue to support the development of the renewable energy projects. One other thing we do and we already discussed, emphasize the need to develop to develop tax credit buyer market. I mean we see overbuster growth over the last three years but that growth need to continue to bring more tax credit covered buyers. If not all as we're saying, you know There's a surprise again, imbalance on the ITC side. And you know, increasingly, you know that the size of these projects, the size of the ITC that require many more buyers to come into the market. And I think industry as a whole is doing a good job in terms of educating the coverage value experts and, and we encourage the eyes with our sponsor partners to talk to their corporate clients, to talk to potentially offtakers and other suppliers to these projects and evaluate their tax capacity and hopefully we'll be able to bring more buyers to this market. What we call this. Bring your own buyer and model and that will serve the industry well.
- [31:34]
Ralph Cho
Okay.
- [31:34]
Keith Martin
Rapidly growing market, need more tax capacity to service it. Let's move to debt. That was Jack Kargis from Bank of America and Rubio Song from JP Morgan. Please stick around as we may have time for audience questions at the end. Moving to dat, Ralph Cho from Aptera and Beth Waters from mufg. Starting with Ralph, what was the volume of North American Project Finance bank debt in 2025 compared to 2024?
- [32:02]
Ralph Cho
Morning everybody. Thanks again for having me here. Hopefully, hopefully I don't lose my connection like I did last time. That was a disaster. But to answer your question, Keith, we're, We're basically at 10 year highs, right? As the banker was not busy working on deals last year, I'm not sure what they were working on. According to Refinitiv 2025 volumes in North America came out just a little bit under 260 billion and that was spread across almost 500 deals. And if you think about it, it's like a crazy number, right? Because that's like a quarter of a trillion dollars. Basically every sector that we saw was on fire. Whether you're talking about lng, renewables, digital, everything was contributing significantly to support that number. We even saw like a $1 billion greenfield CCGT close and we hadn't seen construction like that for natural gas in a couple years. So anyway, more importantly, not just North American volumes were up, but global volumes were up over 500 billion. And if you look at volumes in the B loan, bond market, private credit, they're all at highs. And just to put the context on how high we are in North America, if you compare it year over year, we're up 41%. And so that tells you human capital for sure was short this year. It was really short. Definitely support from, from AI this year to keep things going.
- [33:24]
Keith Martin
So up. Did I hear that correctly? Up 41% in North American project finance debt. Is that dollar, dollar amount or just deal volume, number of deals, dollar volume, dollars. Okay, and then how many active lenders were there in 2025 and was that a change from the year before?
- [33:47]
Ralph Cho
So I know you always ask me this. You know, personally I always have a keen interest in seeing what new lenders come into our markets, both banks and non banks. So with that said, like in 2025, we saw a host of new lenders come to the market. Some were banks I've never heard of, some are banks that had been in the market stopped and now they're coming back to start the PF desk. We saw real estate investors coming in, abs lenders and of course all my favorite wave of newly formed private credit shops also raising capital for deployment. Not too many new lenders focused on renewables just because that sector is like very, very competitive. But we certainly saw new lenders visible in LNG and digital assets. Regarding the actual number, there's no shortage of people playing in this space. Like the term loading market has over 100 plus infrastructure lenders and they are all ready and available to review deals across the carrot stack. Some more active than others. But more important than the number of lenders, I would say that the actual liquidity in the market runs simply super deep. When you look at banks like these mega banks taking super large holds, and you look at these retail lenders all scrounging for funded debt, you can really tell that there is a huge amount of capital out there. The irony is that even in a year where you have very, very high volumes, lenders are still all short paper and looking to buy assets. I can tell you personally, our team was looking to buy funded assets at the end of last year. And we found it very difficult to get any meaningful amount of paper out of people's hands in the secondary market. So anyway, if you have paper, we're definitely buyers.
- [35:25]
Keith Martin
Okay, interesting. Beth, I have a longer question for you. What effects are the Trump policies, meaning frequent changes in tariffs, a freeze on federal approvals for wind and solar projects, an expectation that short term interest rates will fall once a new Fed chairman takes office in May, and mass deportations. To what effect? How are these contributing? I'm sorry, let me rephrase that. There are four policies I'm focused on. One is frequent changes in tariffs. Second is a freeze on federal approvals for wind and solar. Third is the expectation short term interest rates will start falling in May once a new Fed chairman is takes office. And then the last is mass deportations that are contributing to a shortage of construction workers. What effects are these Having on the ability of developers to finance projects.
- [36:16]
Beth Waters
Keith, can you hear me okay?
- [36:18]
Keith Martin
Yes, perfectly.
- [36:20]
Rubio Song
Okay.
- [36:21]
Beth Waters
It's funny because I think there are some who have been affected like offshore wind. The banks are not open for financing for offshore wind. And then you have the new rules on onshore wind and solar on federal land. So that's definitely have an impact. But every other aspect of the business I think banks are there. As Ralph just said, there's a tremendous amount of liquidity. I think what we're seeing is a lot of due diligence going on. Fiat, you know, it's not only the equipment. What came up for me this past few months was the fact that clients are concerned about Chinese lenders. So Chinese are no longer going to be financing at these transactions. I'm also seeing developers are shifting to source their solar in the US market and it's a little more tricky and they're using US assemblers. And then again a lot of due diligence on the tariffs and fiat for the banks. And then one last comment I wanted to make on interest rates. Interest rates Fed rate went down three times last year I think total of 75 bips. But the 20 year swap rate which is what is used for project finance debt, that was unchanged by fiscal year end it was at 4.10. And then just yesterday we talked to my swap, that is at 4.25. So it went up since the end of the year. The expectation is that 20 year swap rate should go down by about 25 bips this year to settle at 4%.
- [37:48]
Keith Martin
Interesting. Ralph, going back to you, the hottest new product in recent years has been borrowing based facilities where a developer can draw on a revolving loan facility to cover late stage development costs. What metrics apply to such facilities?
- [38:04]
Ralph Cho
So we've been talking about pre NTP facilities for years now.
- [38:08]
Rubio Song
Right.
- [38:08]
Ralph Cho
And we could definitely talk about this for hours.
- [38:12]
Rubio Song
Right.
- [38:12]
Ralph Cho
But for I guess for this purpose, let's break it out into three main categories. Right? You have the mainstream pre NTP facilities. These are what I would consider debt service covered. Terrific. Right. They're all structured at a whole co level. Lenders for the most part maintain collateral in the whole portfolio. Let's say the equity of the operating assets, your construction assets, your development assets. You basically take the cash flows coming off your operating assets and construction assets and you sign it to some kind of aggressive debt size. That's like DSCR debt service coverage ratio.
- [38:48]
Rubio Song
Right.
- [38:49]
Ralph Cho
And you use that cash that you raised at that level to funnel into your development assets so the developer can have LC's and some cash to continue to fuel their development using something cheaper than equity. These types of loans, we've syndicated billions, taken hundreds of billions on our, on our balance sheet and we price them somewhere around 350 to 400 basis points. Right. This is a very efficient cost of capital. The second type, what you're referring to, borrowing base wise, you are really looking at advancing some advanced rate, call it 50, 60% against a late stage development assets. Right? Late stage development assets to me means no binary risk. You've got your ppa, you got your interconnection, you got everything kind of lined up but you're not ready to push the button. They'll ascribe some kind of PV credential with an enterprise buy. Whether you use PVA,910, whatever the institution uses, you'll advance like 50, 60%. People are sizing against that. Then you'll take your operating assets and you'll do something similar and you'll have a more aggressive advance rate, maybe like 75, 80% against that. These types of facilities raise capital for the developer. And because of that type of nature where you're actually looking at the value of the portfolio, you know, they get priced a little bit wider. I would say anywhere from 450 to 600. And that pricing spread varies based on the size of the developer experience, all that stuff. The third type, the third type I would just bucket as like what I would consider like a gambling, like a gambling type of pre entity facility. We don't see as many of these anymore, but there were certain specialty borrowers out there that would take a super early look at your development pipeline and ascribe some kind of value to it.
- [40:42]
Rubio Song
And advance against that.
- [40:43]
Ralph Cho
Definitely more binary risk. And if the developer does any of these assets, I mean the lender would have to figure out how to liquidate the portfolio. These prices are like equivalent to what I consider equity replacement. So they would price like 6, 7, 800, something like that.
- [41:01]
Keith Martin
Okay, Beth Waters, going back to you, focusing mainly on electric generating and storage facilities, what percentage of project costs can be borrowed during construction?
- [41:13]
Beth Waters
If you assume a good clean deal, you could get 90%.
- [41:16]
Rubio Song
And what if not 90% leverage?
- [41:19]
Beth Waters
Then it goes down. It all depends upon the specifics of that project.
- [41:23]
Keith Martin
And when you answer that question, are you thinking of is it 90% combined construction loan plus some sort of tax equity or tax credit bridge law?
- [41:33]
Rubio Song
Yes.
- [41:36]
Beth Waters
The total of the two cannot exceed 90%.
- [41:39]
Keith Martin
So let me stick with you on this next one. They're both covered and Uncovered or I think you call them naked tax credit bridge loans. What is the difference and what metrics apply to them?
- [41:51]
Beth Waters
So, and there's all different ways of describing, right, contracted, covered, committed tax equity. That's either tax equity or investors in the tax credits are there and they're committed to it. So, so in that circumstance we'd give a 98% advance rate and pricing should be around or about 150bps. When it's uncontracted, uncovered, uncommitted or naked. As I said, you'll have to. And that's so that you don't have a contract yet with that party. You think you're going to have someone, but you're not sure. So the advance rate is lower on ITCs. It's 75% advance rate assuming 90 cents on the dollar. So it nets you about 67.5% versus the 98% if you have committed funds PTCs. I think there's different approaches lately. One of it might be the same advanced rate as ITC, but it also could be slightly less assuming 70% advance on 90 cents on the dollar. But again that's kind of moving around a bit and you don't see as much as that in the market of the monetization of uncontracted PTCs. And then if the sponsor, either a sponsor knows that you are going directly to transfer credit or it might not.
- [42:59]
Rubio Song
Right.
- [42:59]
Beth Waters
They're, they're choosing between the two. But in any event, once they get somebody in, the lenders have already built in into the structure that you can increase your advance rate to 98% and get the lower pricing associated with traditional tax equity bridge loan right to 1 to 50. But if you don't have them. Right. It could be pricing, could be 225. That's, that's a, it could be less on deals. But 225 is a general assumption.
- [43:27]
Keith Martin
That does not sound like. Well, hold on. That doesn't sound like any change from the past. Is that right, Beth?
- [43:35]
Beth Waters
That's right.
- [43:36]
Keith Martin
Okay, Ralph, go ahead.
- [43:39]
Ralph Cho
I agree with all the advancements that you said. Only thing I'd be a little bit more aggressive on is like total overall leverage. I think that's 90%. We've seen lenders go all up to 95%. I know lenders always want some skin in the game, but this market, guys, is so aggressive that to win business, I mean we've seen and have gone up to 95% of total construction costs.
- [44:02]
Keith Martin
So press your lenders project credit.
- [44:07]
Beth Waters
I wouldn't, I Think it depends upon the investors, especially the larger the deal. You're not going to get super aggressive. I don't, I don't think I've ever done 95%. When you convert at code, maybe it goes down what's there. But I would think majority of lenders really don't like going past 90%. But Ralph has a different perspective on that.
- [44:28]
Jack Kargis
Fine.
- [44:29]
Rubio Song
Yeah.
- [44:29]
Ralph Cho
I would say when it converts, I think the developer or the owner is getting all their money back maybe plus some. That's what I would say. We've certainly seen that on data centers.
- [44:39]
Rubio Song
Yeah.
- [44:42]
Keith Martin
Beth, let me stick with you on this one. The debt service coverage ratio determines how much permanent debt a project can support. What are current coverage ratios?
- [44:52]
Beth Waters
Sure, I'll go through. But it hasn't changed since last year and it always. You have to remember I'm giving you middle of the road. Right. Somebody could be more aggressive working on some fields and depending on who the sponsor is and how many opportunities you have with them, you might get more aggressive. So just a middle of the road. On contrast, if you had solar P50125 to 130, P99 one year wind would be P50 135 to 140, P990 one year storage 115 to 120. And then if you take into consideration merchant, you have solar P5175, P991 year 140 wind P51.8 times P99140 to 150 and then storage two times. Again, these are General Nilus Airway.
- [45:39]
Keith Martin
Okay. Rev 70.
- [45:41]
Ralph Cho
If you have a merchant renewable asset. Keith. Guys, I would say you should forget about any meaningful financing, any demand from vendors. You tried and looked around, it's pretty dead. I think the nicest way I heard this the other day was from one of our clients. I thought they were like telling me that any, that any financing for their mercury batteries in ERCOT is on life support. My guess is that you could probably get away with like the minimum of exposure, maybe 25, maybe 30%. But after that I think no way. I don't think you'll find Samsung.
- [46:15]
Keith Martin
This is storage I wasn't talking about.
- [46:18]
Beth Waters
Yeah, can I just correct something? I wasn't talking about 100% merchant, but just saying some merchant.
- [46:24]
Rubio Song
Yeah.
- [46:24]
Keith Martin
So let me drill down there. That's an interesting point. So Ralph, were you talking just about storage or anything merchant in ercot?
- [46:34]
Ralph Cho
Anything merchant, renewable, solar, wind, battery. I would limit it to 25 to 30% max.
- [46:41]
Keith Martin
Okay. You can finance the part that isn't merchant, but you have 25 or 30% merchant, then even that becomes difficult.
- [46:50]
Rubio Song
Yeah.
- [46:50]
Ralph Cho
I would say if you could size a loan and have it about 25 to 30%, rely on merchant cash flows, but I would not risk dealing that.
- [46:59]
Keith Martin
Beth, do you agree with that?
- [47:00]
Beth Waters
Yeah, it's deal specific. Right. We take a look at each transaction. I'm definitely not going over 40% merchant. And you have to look at the transaction and get comfort. And then you go back and you give feedback to the client based on model what you can live with.
- [47:16]
Keith Martin
Okay.
- [47:19]
Ralph Cho
And the only other asset class I mentioned is data center. Just taking up so much volume in the market.
- [47:24]
Rubio Song
Right.
- [47:24]
Ralph Cho
Those you can size down to 1.15 times against hyperscale contracts.
- [47:30]
Keith Martin
Interesting. Let's sticking with data centers. The biggest data center developers are expected to spend 500 billion just this year on expansion. Have there been any new developments in the last year in lending to finance new data centers? I would start with you, Ralph, and then go to Beth.
- [47:48]
Ralph Cho
Well, aside from lenders starting to shy away from taking extension risk, I would say like four primary things come to my mind. I'd say number one, a big theme we've seen is around core weave risk. Having core weave as a tenant, I think underwriting that risk is very, very tough. Even though billions of this credit has been moved into the market, lenders have priced it. I've seen it all over the place, like 325 to 425 spreads. It's bounced around. But as everyone's worried right now about overbuild on data centers, I think it's become very tough to sell this credit. Maybe one path is to move to institutions, but I think the pricing has defined an employee move maybe closer to where their bonds are trading. And that's been very volatile. Second big theme I would say is Oracle. They're in spotlight. This is interesting because they are an investment grade entity, but they're having a tough time in the market as well because everyone's kind of concerned around potential downgrades of this credit. Banks have also sold around billions of this credit into the market at around so for plus 250. But I think right now there's some large hub underwrites out there. So this is another piece of paper that might have to go to institutions. I'm hearing like shadow talk of prices as high as 350 spreads. I think the reality is you might also need some additional structural enhancements as well just to create a good path. Third point, maybe I think I've seen developers and we've also provided financing to developers that are pooling their assets and putting portfolios together and getting wholesale debt. Against this we can get very aggressive. I just told you that opcode debt service coverage ratios are times 1.15. We've got as tight as like 1.05 against portfolios with hyperscale contracts. I think these are very good for developers just to kind of give them some Runway so they don't have to quickly refinance as soon as they hit COD and tap an ABS market which right now continues to dwindle on capacity. Last point guys. I would say that we're also seeing an increasing amount of opportunities for like behind the meter or specifically these data centers. They need power, right to operate and if they are delayed in a queue for interconnection or sometimes you need delays for years and they have to do something so they're going to look for alternatives. We've talked to a number of developers that are trying to think of creative solutions and put some kind of generation asset on site. So this could be interesting. And we put some volumes I think for 2026.
- [50:12]
Keith Martin
Beth, coming back to you, what are current spreads above SOFR for construction debt versus permanent debt and how do they compare to spreads a year ago?
- [50:20]
Beth Waters
I don't think it's really changed much on construction loan. If you're talking about a clean deal, you'd have pricing at 150bps. I know that some clients, some sponsors can get pricing as low as 125, 137 and a half, but that's not common. And then you can see pricing higher if it's longer construction period. There's a merchant, there's ercot, something weird about the PPA basis, risk, et cetera. And then in the term loan piece it could go up and again this is middle of fairway but 162 and a half to 187.5 say that's what. So it would jump from 150 to 162 and a half to 187 and a half.
- [50:55]
Keith Martin
Okay.
- [50:58]
Beth Waters
Just to say if you had 10 to 20% merchant or 25% you get 25 bip increase and 30, 40%.
- [51:05]
Rubio Song
Merchant, another 25 bip.
- [51:07]
Keith Martin
Okay, a lot of good data here.
- [51:10]
Ralph Cho
Yeah, I feel like the best clients get the tightest end of the range.
- [51:13]
Rubio Song
Right.
- [51:13]
Ralph Cho
So they could probably pull it back to three, two like around the one.
- [51:17]
Rubio Song
And three eighths range on the low end.
- [51:19]
Ralph Cho
I would say something back on My notes of what we were quoting for spreads last year Keith and think about how they've kind of changed over the last year. And I would say I said it's moved by an eighth maybe on the low end and the wide end. I have to tell you that I don't know why you guys are beating each other up like that. I guess ultimately it's good for all the borrowers but definitely there's been some tightening and maybe it's just because everyone's just trying to beat each other up to when business out there.
- [51:46]
Keith Martin
Let's close out the debt part here. Just ask you each about other noteworthy trends as we enter 2026. Beth Waters starting with you Ralph touched.
- [51:56]
Beth Waters
On this a bit that the demand for power from data centers is huge. We have been actively financing deals where at least one of them I know and you see more of them where it's a combined data center financing and power. Otherwise it is you're we're seeing financing for the power to be provided to the data centers and reciprocating engines. Is that the right terminology that you have on that? Enter that instead because we know the gas turbines aren't available yet.
- [52:22]
Rubio Song
Right.
- [52:22]
Beth Waters
So this client, the developers are using the engines on the data sites and you know you can throw in solar or battery storage in those because the hyperscalers still do like renewables you just need to get something they want power so however somebody can get it to them and then if it converts to renewables in a combination with back stuff from gas that's that's good for them. Right. So you're seeing a little mix of everything. I also think you know to continue to see lots of interest for pre NTP facilities. Our bank is not crazy about doing those but we are helping out clients where we have do equipment financing. We have another team who would do that or we do something on the corporate side you're seeing constraints with respect to getting solar panels that aren't fiat. So that's coming up more and more. I expect to see continued delays in construction timelines. Projects aren't moving as quick. They're very very sophisticated clients. They can get the deal turned out. But other deals I feel that just they're taking longer to close. Increased due diligence by lenders on tariffs, on fiat, on adders. You know it definitely takes a lot more time to work on the deals and then we've been seeing the monetization of fair market value step ups with press equity. So we recently closed with a cluster of things like back Leverage, press, equity, investment in projects. So that was interesting and we're starting to see more of that.
- [53:41]
Keith Martin
That is interesting. Ralph, what new trends for you?
- [53:44]
Ralph Cho
Lots of trends, but I'll limit it to four that I think are pretty, pretty key. I think you touched on this before, Keith. I think this year the market's going to be really busy with renewables.
- [53:54]
Rubio Song
Right.
- [53:54]
Ralph Cho
All these developers are pushing their projects to get through really ahead of the tax rate cliff. Many of our larger developers have safe harbor their assets, but it's always good to get deals done asap, right? You want that buffer. The second trend I'll say is I talked about this before that natural gas. I see a lot of this activity on the front lines. I think Greenfield is going to be a little bit tough, right? Just because it's very hard to secure turbines right now. But with all the valuation it's going to move. The Belo market has been hot, as I mentioned on volumes. Belo has been taking a lot of these gas fired assets that were financed by the bank market, offering higher leverage, better pricing, dividend recap, refi. Everyone's doing this, rent to wash, repeat over and over again. I expect to see more use, maybe even some acquisition financings in the Belo market. If this continues to eat up all this, all these assets, I don't really see anything disrupting that for now. I think third point I'll say is that all these Greenfield assets that we've been financing between LNG and renewables and data centers, I think at some point it's creating like a wall of supply of opportunity for all these private placement guys to go out and take that down. I know for us we have a life insurance bucket of capital so we could participate in that, but there's a lot of fixed rate demand. I know market picture splits have been, I'm sure waiting for a disruption over the last few years. Nothing seems to be impacting it. So at this point I'm thinking everyone's capitulating and driving spreads tighter. It's kind of like, you know, if you can't beat them, you join that way. The last point I'll mention, and I know everybody loves stuff like this, but with all this activity going on in infrastructure, even with people, right. And I think the demand for human capital is going to stay like white hot. If you have good, if you have like good infra talent, you got to hold on to them. I know we've been hiring at every level and it's very hyper competitive. That's it.
- [55:53]
Keith Martin
Okay. Lots of good trends there. I guess the overall theme is another extremely busy year. People were exhausted last year. Shortage of human capital will mean a lot of us will be looking for ways to harness AI during the year to fill in some of the gaps. And of course, the unpredictability on the policy front in Washington is always a cloud potential cloud over the market, although it did not relieve the exhaustion from last year. I'd like to thank our panelists Jack Kargis, Head of Originations on the Tax Equity desk at bank of America Rubio Song, Managing Director and Head of Energy Investments for JP Morgan Ralph Cho, Co CEO of Aptera Infrastructure Capital and Beth Waters, Managing Director for Project Finance Americas at mufg. I'd like to thank the audience for patching in. We will put out the audio in the next day or so as a podcast and then an edited transcript sometime next week. Thanks all for patching in so long.
- [56:55]
Podcast Host
You can find us online at www.projectfinance.law or send us an email at currentsordonro Rose fulbright.com Please rate, review and subscribe on Apple Podcasts, Spotify or your preferred podcast app. Our show today was produced by Emily Rogers.
- [57:11]
Keith Martin
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