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Pool of tax equity investors recedes as coronavirus uncertainty lingers

The coronavirus pandemic has dried up the pool of tax equity investors for renewable energy projects, leaving a smaller number of parties to survey available deals.

Developers are having difficulty raising tax equity, Keith Martin, co-head of projects at Norton Rose Fulbright US LLP, said during a July 28 roundtable webinar discussion hosted by the law firm.

Commitments for 2020 deals are difficult to secure, with lingering uncertainty over the state of the broader market making banks reluctant to sign onto deals for 2021.

Concern that investors may not be eager to invest in 2021 has prompted a coalition of energy companies, industry and environmental groups, and state regulators to urge Congress to postpone the phaseout timelines for renewable energy tax credits.

"It's making it very difficult to forecast tax liability looking out into next year, and I know that that applies for [2022] as well," Eric Heintz, director of energy finance at M&T Bank Corp., said of the prevailing uncertainty.

M&T is slowing down for the year, planning on transacting one more tax equity deal in 2020. "We're pushing around indicative pricing and hopefully going to move on the term sheet in the next couple of weeks," Heintz said.

Fifth Third Bancorp is continuing to execute tax equity deals but is reserving its capacity for existing clients, most of whom are "being conservative about what they're willing to allocate" for 2021 until there is more certainty, said Eric Cohen, Fifth Third's group head of renewable energy finance.

"We're looking for clarity on 2021," Cohen added. "We know what we've got left for 2020, and we've got a decent amount. We're looking for strategic opportunities."

Nonbank investors such as insurance companies and corporates have shown a stronger appetite for tax equity deals. Yonette Chung McLean, a managing director at RBC Capital Markets, which is a syndicator of tax credits, chalked that up to the greater flexibility those institutions enjoy compared to traditional bank investors.

"We have seen a couple of investors pull back, taking a pause at the moment, but for the most part, most of our investors continue to look at deals, mainly in 2021 at this point," McLean said. "We're currently in close-mode on a 2021 transaction. We closed a couple deals earlier this year as well."

The current situation does mean that RBC can be "a little bit more selective" in choosing its investments, according to McLean, who said the bank has capacity for two more deals this year.

Some banks have bowed out of tax equity investing for the short-term.

SunTrust Robinson Humphrey Inc., fresh from a merger with BB&T Corp. in late 2019, is stepping back from additional tax equity deals beyond what it has already agreed to. "I think we need a little more of COVID in our rearview mirror instead of our windshield" to fully understand what the bank's tax liabilities will look like post-merger, said Robert Capps, a managing director at the bank. While SunTrust has agreed to tax equity investments set to take place in 2021, it is not signing up for any new deals, Capps said.

First Horizon Bank has also hit pause on tax equity investing. B. Scott McClain, executive vice president and managing director, said the firm is "finished taking new opportunities" for this year for reasons including the coronavirus and First Horizon's recent merger with IBERIABANK.

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