WSJ : Green Energy Is Stuck at a Financial Red Light

Green Energy Is Stuck at a Financial Red Light
Rising interest rates are just one of many factors that could throw a wrench in wind and solar developers’ plans

After years of uncertainty, last year’s Inflation Reduction Act finally gave America’s renewable-energy industry a long, green signal. Now the economy is blocking the road.

The wind and solar industries have always suffered from the short-term nature of subsidies, with federal tax credits often extended in nail-biting one-year increments. Last year’s climate bill changed that, giving the industry subsidies that last at least a decade. But just as policy winds blow in their favor, two critical growth drivers—interest rates and equipment costs—are moving in the wrong direction.

Wind and solar projects are especially sensitive to rates because debt can comprise as much as 85% to 90% of capital expenditures. Renewable developers have known only low rates for most of their history. Nearly all U.S. utility-scale solar facilities and 85% of onshore wind farms were installed since 2009, during which period the target federal-funds rate was close to 0% in eight out of 13 years. Not any more: After the most recent hike, rates are the highest since 2007.

Renewable energy projects tend to be financed with floating-rate loans that rise and fall with the benchmark interest rate. Thankfully, most of those projects are well-shielded from rate risk because lenders require them to hedge at least 75% of their loans through swaps, according to Elizabeth Waters, managing director of project finance at MUFG. Most ended up hedging 90-95% to lock in low rates, she noted. But those swaps won’t help new projects. Some new solar and wind projects facing higher borrowing costs than when they were planned might not make it off the drawing board.

Borrowing isn’t the only thing that costs more. Following years of price declines thanks to technology and economies of scale, equipment is getting more expensive too. Trade policies aimed at Chinese manufacturers have caused delays and shortages for the solar industry, which relies heavily on the country for its components. German utility RWE, an active developer in the U.S., said in its annual report released last week that imports of solar modules from Asia are now subject to “stringent checks” and said it could fall behind on its expansion plans if the U.S. continues to “impede the procurement of solar panels.”

After falling to a record low in 2020, the average price of a solar photovoltaic system rose in 2021 and then again in 2022, according to data from the Solar Energy Industries Association and Wood Mackenzie. Meanwhile, the average cost to build an onshore wind farm in the U.S. rose in 2020 and 2021 before leveling off last year, according to data from BloombergNEF. Supply-chain issues and interconnection delays already started slowing the clean power industry last year: In 2022 it installed 25.1 Gigawatts of total capacity, a 16% decline from a year earlier, according to the American Clean Power Association, which tracks solar, wind and energy storage. While that’s still enough to meet roughly half of Texas’ electricity demand, it was nonetheless below expectations–though part of the drop was driven by an preplanned phase-down for tax credits commonly used by the wind industry before the Inflation Reduction Act was passed.

Ultimately, solar and wind’s ability to absorb cost and interest-rate hikes depends on how willing utilities and corporations are to pay higher prices. Many onshore wind and solar projects have been able to renegotiate pricing on their power purchase agreements because demand is robust, according to industry executives. But cracks are showing for offshore wind, which is more exposed to rising costs and rates because it takes longer to develop. BloombergNEF estimates that the weighted average cost of capital for U.S. offshore wind projects rose to 5.25% in 2022 from 4.41% in 2020.

Developer Avangrid Renewables, for example, is trying to terminate its power purchase agreement with utilities in Massachusetts for a 1.2 Gigawatt offshore wind project after an unsuccessful attempt at renegotiating its fixed-price contract. If built, Commonwealth Wind would generate enough energy to power 700,000 homes. The company cited “historic price increases for global commodities, sharp and sudden increases in interest rates, prolonged supply chain constraints, and persistent inflation” since the project secured a contract in late 2021. Avangrid plans to bid the same project into the state’s next competitive offshore wind procurement, a spokesman said over email. Danish power company Orsted said in its annual report released February that it incurred an impairment of 2.5 billion Danish kroner, the equivalent of $369 million, on its 50% interest in the Sunrise Wind project off the coast of New York, noting that the project cost has increased substantially since its bid in 2019.

As the name implies, the Inflation Reduction Act is supposed to relieve some of these cost pressures. But it won’t feel like a bonanza without clarity on how the rules apply. Expanding the eligibility of tax credits to more technologies, for example, has spread the limited pool of tax equity investors—that is, those with both the tax burden and the know-how to use renewable tax credits—more thinly across more projects. Ironically, that has shrunk the pool of tax equity available to solar and wind in the near term. The bill tries to address this by making such tax credits transferable, but industry executives said that pool of capital will remain constrained until there is more guidance.

There are two other more recent developments worth watching: One is the plummeting cost of natural gas which, if prolonged, could impact demand for solar and wind on the margins. The U.S. benchmark Henry Hub has fallen 49% year to date. Secondly, banks’ recent turmoil could shrink their ability to lend. Ted Brandt, chief executive of clean-energy focused investment bank Marathon Capital, notes that the industry has always had cheap debt, cheap equity and “massive liquidity chasing it.” How the industry will respond to expensive capital is still an open question, he said.

It isn’t enough for policy winds to blow in the right direction for a renewable energy boom–economic headwinds need to abate too.

FT : Holidaymakers warned of disruption as Heathrow airport staff begin 10-day U

Holidaymakers warned of disruption as Heathrow airport staff begin 10-day UK strike
Industrial action starts after last-ditch talks to settle pay dispute break down

Passengers flying from London’s Heathrow airport face potential disruption over the Easter holiday after security staff began a strike in a row over pay.

More than 1,400 members of the Unite union began 10 days of industrial action on Friday after last-ditch talks to find a deal broke down. The strike will run until Easter Sunday on April 9, taking in one of the busiest travelling periods of the year.

The strike is the latest action to hit the aviation industry in recent months, and follows a series of walkouts by Border Force officials at immigration. Officials at the UK’s Passport Office have also launched a five-week strike starting on April 3.

The security staff involved work at Terminal 5, which is the home of British Airways, and in the wider airport’s cargo operations.

Unite said the walkouts would cause “severe delays”, but Heathrow said passengers would be able to travel as normal, albeit with longer queues at security.

British Airways has cancelled more than 300 short-haul flights over the 10-day period, the equivalent of 5 per cent of its flight schedule.

Heathrow also asked airlines to stop selling tickets over the strike period in order to control the number of passengers moving through the airport.

The airport is deploying an extra 1,000 staff to help passengers through departures, and will only allow travellers to take two items of hand baggage through security. It said operations were running smoothly on Friday morning.

Unite turned down an offer of a 10 per cent pay rise plus £1,150 cash payment, following a 4 per cent rise plus £2,000 one-off payment in 2022, according to Heathrow. The average starting salary for a security officer would be £27,754, including the proposed pay rise.

“We will not let these unnecessary strikes impact the hard-earned holidays of our passengers. Our contingency plans will keep the airport operating as normal throughout” the airport said.

The union said the offer represented a real terms pay cut, and that staff were “unable to make ends meet due to the low wages paid by Heathrow”. 

So far, the wave of transport strikes have not contributed to the type of disruption which hit the industry last year, when staffing shortages led to a chaotic series of queues, flight delays and cancellations.

Airport and airline executives are confident their businesses are better prepared than last year following a recruitment drive.

Heathrow has also asked airlines not to add extra flights to their schedules during the peak summer season, to try to limit possible disruption.

>>> Europe : Brokers Upgrades & Downgrades - 31st of March 2023 V2(+)

>>> Up
* Air France-KLM Raised to Buy at Deutsche Bank; PT 2.30 euros
* Cibus Nordic Raised to Buy at Pareto Securities; PT 130 kronor (+)
* H&M Raised to Hold at HSBC; PT 145 kronor (+)
* H&M Raised to Buy at Bryan Garnier; PT 185 kronor (+)
* IAG Raised to Buy at Deutsche Bank; PT 200 pence
* IAG Raised to Overweight at Barclays; PT 170 pence (+)
* Ceres Power Raised to Buy at HSBC; PT 440 pence
* Genus Raised to Buy at Stifel; PT 3,200 pence
* Lufthansa Raised to Buy at Deutsche Bank; PT 14.50 euros
* Pearson Raised to Outperform at Exane; PT 1,050 pence
* Spire Healthcare Raised to Buy at Jefferies; PT 250 pence
* Storebrand Raised to Buy at Kepler Cheuvreux; PT 96 kroner (+)
* Thule Raised to Buy at SEB Equities; PT 260 kronor
* Zimmer Biomet Raised to Hold at Jefferies; PT $130

>>> Down
* Andritz Cut to Accumulate at Erste Group; PT 75 euros
* Bankinter Cut to Underperform at KBW; PT 6.78 euros
* CaixaBank Cut to Market Perform at KBW; PT 4.97 euros
* DSV Cut to Neutral at JPMorgan; PT 1,270 kroner
* HGears Cut to Hold at Hauck & Aufhaeuser; PT 7 euros (+)
* JD.com ADRs Cut to Hold at Loop Capital; PT $49
* Jonix Cut to Hold at Bestinver; PT 80 euro cents
* Pets at Home Cut to Add at Peel Hunt; PT 400 pence
* Terna Cut to Neutral at Grupo Santander; PT 8.20 euros

>>> Initiation
* Alfa Laval Reinstated Buy at HSBC; PT 430 kronor
* Ariston Rated New Buy at HSBC; PT 14 euros
* Belimo Rated New Hold at HSBC; PT 476 Swiss francs
* DiscoverIE Rated New Hold at Liberum; PT 105 pence
* Equasens Rated New Hold at Stifel; PT 85 euros
* Nexus Rated New Buy at Stifel; PT 72 euros
* Nibe Rated New Buy at HSBC; PT 134 kronor
* Sectra Rated New Sell at Stifel; PT 125 kronor

>>> Call
* Berenberg Strategists Prefer UK Equities Over US Peers (+)
* KBW Remains Positive on Iberian, Italian Banks; Raises BBVA (+)
* IAG, Lufthansa, Air France-KLM Raised to Buy at Deutsche Bank (+)
* Citi Strategists Raise US Stocks, Cut Europe on Economic Risks (+)
* CITI STRATEGISTS RAISE GLOBAL TECH STOCKS TO OVERWEIGHT
* CITI STRATEGISTS CUT GLOBAL FINANCIALS STOCKS TO NEUTRAL
* Citi Optimistic on Building Materials; CRH and Holcim Top Picks
* Goldman’s Rubner Sees Stocks Primed for Further Gains in April
* Mining-Equipment Growth Potential Underappreciated, RBC Says
* Nemetschek Sits at Attractive Entry Point, Berenberg Upgrades
* Nibe, Ariston, Alfa Laval Among HSBC’s Preferred Heat-Pump Plays

>>> Stoxx 600 Pre-Market Indication

  • Nemetschek (NEM TH) +2.5%
    • Nemetschek Sits at Attractive Entry Point, Berenberg Upgrades
  • Nibe (NJB TH) +2.3%
    • Nibe, Ariston, Alfa Laval Among HSBC’s Preferred Heat-Pump Plays
  • Lufthansa (LHA TH) +1.6%
  • IAG (INR TH) +1.6%
    • IAG Raised to Overweight at Barclays; PT 170 pence
  • Aroundtown (AT1 TH) +1.5%
  • WPP (0WP TH) +1.3%
  • Delivery Hero (DHER TH) +1.1%
  • Vonovia (VNA TH) +1%
  • Deutsche Post (DPW TH) -0.9%
  • SocGen (SGE TH) -1.1%
  • TUI (TUI1 TH) -2.4%

>>> TradeGate Pre-Market Indication

DAX:
  • No major mover
MDAX:
  • Delivery Hero (DHER TH) +1.9%
  • Jungheinrich (JUN3 TH) +1.7%
    • Jungheinrich FY Dividend per Preferred Share EU0.68
  • Lufthansa (LHA TH) +1.6%
    • Lufthansa Nears ITA Airways Deal as Shared Business Plan Agreed
  • Aroundtown (AT1 TH) +1.5%
  • TAG Immobilien (TEG TH) +1.1%
  • Nordex (NDX1 TH) -5.1%
    • Nordex 4Q Sales Beats Estimates
SDAX:
  • Energiekontor (EKT TH) +4.1%
  • VERBIO Vereinigte (VBK TH) +1%
  • SMA Solar (S92 TH) -1%

WWD : Michael Stanley’s New Lens on the Fashion Deal Market

Michael Stanley’s New Lens on the Fashion Deal Market
The longtime factor is taking on a new gig, teaming with William Susman at the Threadstone advisory firm.

Michael Stanley is getting a fresh view of the fashion dealmaking scene and is ready to dive in — even while the market is roiled by mismatched expectations between buyers and sellers, inflation and the threat of recession.

And Stanley has more than 25 years of close-up experience working with fashion brands to get a read on just when it’s time to take a buyout, merge or acquire.

He is a familiar face around the industry.

Stanley joined Rosenthal & Rosenthal in 1998 and rose to managing director and head of the factoring division — keeping tabs on the health of retailers, helping brands decide when it’s safe to work with stores and financing the shipment.

It was a gig that gave him a deep and real-time understanding of the behind-the-scenes finances of brands across the fashion spectrum.

Now, Stanley has transitioned to senior adviser at Rosenthal and is taking on a new role, as vice chairman of William Susman’s advisory and investment firm Threadstone Capital.

That lets him look at the industry through new eyes — and perhaps make some new connections for longtime acquaintances.

Stanley steps in at a time when there aren’t tons of deals happening, but there are plenty of companies struggling to match their finances with today’s consumer realities.

He said there was an “enormous amount of uncertainty, even before this crazy banking crisis occurred” with the “very high interest rates” the Federal Reserve is using to combat inflation.

“It certainly puts a burden on operations, cash flow,” Stanley said. “The good news is that the transportation cost, that narrowed, but as that narrowed, interest rates soared. It created a very tight credit market. Getting financing for companies in a challenged position may be much more difficult and it creates the deal market where there could be distressed opportunities out there.”

On the flip side, he said there are companies that did “extraordinarily well” during the pandemic and have “a lot of opportunities” to expand.

“There are folks that are looking to buy. Why? Because if you’re just standing still, you’re going backwards,” Stanley said. “You have to go forward. And what’s the easiest way to add on now to your platform? It’s to make an acquisition.”

Beauty brands are still commanding a premium while home goods companies are most challenged now after a big pandemic rush, Stanley said.

Designer fashion and apparel has been a tough area for dealmaking, even for brands with buzzy names.

“Why do some of these brands fail?” Stanley said. “It’s not that they don’t have momentum, but they don’t have the right financial partner or the capital structure to push them forward.

“They really need to focus on their financial capabilities,” he said. “What can they afford to do? How much inventory, how much volume can they take on? They have to have the latitude of a cushion because things happen, a supply chain problems, a banking problem…it’s not because they don’t have an order backlog. It’s because they just ran out of money and they didn’t have the right financing partner.”

Now, Stanley can help brands position themselves and connect in a new way at Threadstone, which has advised more than 150 companies on deals with a total value of more than $5 billion over the past 12 years.

Susman, who is managing director at Threadsone, said Stanley would be an invaluable sounding board.

“Michael is completely a relationship person,” Susman said. “I’m looking to close every deal I can, but early in a process, I have to decide, ‘Does this client really want to close a deal? Is this somebody we want to be doing business with? Is the moral compass pointed due north?’

“Michael is very attuned to what our client needs,” he said. “What are their capabilities? What are they good at? What are their challenges? That sixth sense of really saying, ‘Gosh, XYZ, you’ve built a $500 million business. Let’s talk about you being a billion-dollar company.’ That sixth sense comes from a prioritization of relationship and a prioritization of putting clients first.”

And that is a conversation about growth many brands are no doubt eager to have.