To fully become an independent power producer, the community solar and energy storage developer Encore Renewable Energy needed to find the right strategic partner for financing. So entering 2024, the company was on the hunt.
In 2023, it had secured an equity investment from Swiss asset manager SUSI Partners, which took a controlling equity stake in the company. The next step, Chris Clement, Encore’s chief financial and investment officer told Latitude Media, was securing non-dilutive funding.
The company’s portfolio is made up of grid-connected projects ranging from three to 10 megawatts, distributed across around a dozen of states — which are different kinds of projects to finance from utility-scale projects.
“The key hurdle for us is that we need velocity and efficiency and enough flexibility to be able to finance projects across [our] diverse portfolio,” Clement said. “We needed a lender… that could underwrite to all of those different states, but then also bundle the financing in a manner that allows us to flexibly manage capital across varied construction and development activities.”
It was ultimately Brookfield Asset Management’s infrastructure debt and platform — from which Encore recently secured a $389 million financing solution — that was fit to purpose. The multi-faceted offering includes a classic construction-to-term loan, a growth capital solution for the company’s late-stage pipeline development activity, a tax equity bridge, and a tax equity partnership.
While none of the package’s elements are new, their combination is both creative and novel, Clement said; they are allowing Encore to access non-dilutive funding and are streamlining the financing process by tying it to a sole lender.
As it stands, the structuring of this particular solution could become a point of reference for distributed asset developers looking to secure financing for their portfolios. As far as both Encore and Brookfield are aware, it hasn’t been implemented anywhere else yet — and for Clement, who first started thinking about it and then elaborated it further with Brookfield, it is “self-evident that this type of capital solution could be highly-attractive for groups like [Encore].”
In the financing weeds
The initial financing is tied to a 25-project portfolio distributed across five states, and is structured so that, subject to Brookfield’s investment committee approval, it can be scaled to cover additional projects as they move forward. Encore has 75 upcoming projects in its pipeline, in addition to some planned acquisitions.
Encore plans to use the growth capital solution part of the financing package for projects at the development stage in its pipeline. Once development of those projects is done, they will move on to the construction phase, which is covered by the construction-to-term loan part of the package.
“There are instances where one source of Brookfield capital gets paid back by another source of Brookfield capital,” Clement explained. For example, if Encore were to spend $1 million dollars to fund the development phase of a project, it would take the money from the growth capital loan. It would then move the project to construction, taking out $15 million from the construction loan part of the package, then use $1 million of that $15 million to pay back the growth capital loan.
Brookfield is both the provider of the tax equity bridge loan and the tax equity investor in the tax equity partnership part of the package. That means that Brookfield is providing a bridge solution for a future sale of the investment tax credits, while also committing to buy part of those same tax credits — with the option of then transferring them to a third-party buyer.
“Similar to the development capital to the construction side of things, the bridge loan also gets partially paid back by the proceeds from the tax equity commitment when those projects are sold into that partnership,” Clement said.
‘One-stop shop’
This financing structure creates an ideal situation for a company like Encore, with Brookfield becoming a “one-stop shop partner,” in Clement’s words.
“It gives us both the ability to mitigate some of the risk allocation between the lender and the tax equity investor, which is typically a major point of negotiation between those parties and can lead to a lot of friction and inefficiency in getting the deals done and managed,” he said.
Aside from smoothing out the potential frictions that come from involving more than one partner in the transaction, tying everything to Brookfield has the advantage of making the asset manager as involved as possible — despite the non-dilutive nature of the funding.
“There’s a level of alignment that we have that has Brookfield collaborating with us and supporting us in a way that is equity-partner-like,” Clement said.
Meanwhile, for Brookfield the deal provides the advantage of diversification, given that Encore’s projects are distributed geographically, while also allowing them to do repeat deals that scale easily, and get into the relatively untapped potential of distributed generation solar, which has been notoriously difficult to finance in an efficient way.
But the deal comes with caveats that may make it complicated to replicate. It took six months for the companies to put the financing in place once they started exclusively working with one another, and in Clement’s experience there are not many investors out there with the “wherewithal and sophistication… to provide all these forms of capital from the same place, not even separate funds.”
The structure “is an obvious place for the market to go,” Clement said. “But it is only for the larger and more sophisticated private credit funds out there, because it takes a lot.”
