Developers are often told to use “bankable” panels. But what if you don’t? Can you get a project funded? In helping several developers who struggled with this, Zenergy found that the answer is yes. Below we’ll explain how to make an investor comfortable with a project using newer and possibly “unbankable” technology. To do that, we need to start with a bit of forgotten context about why bankable became the common standard. After you understand that, the solution is obvious.
What is Bankable?
This is not another list of “bankable” panels. Defining bankable is as subjective as picking a favorite color. What matters instead is why investors need bankable panels. Often people try to justify a panel’s bankability by talking about technology. How well is it made? How unlikely is it to break? Even a handful of investors/bankers/lawyers think bankability is measured by panel durability. But they all miss the point.
To put it simply, bankable panels are needed because most projects have such low maintenance budgets. Developers justify that low figure by saying “well the panels carry a 20-year warranty.” A savvy investor will only accept that point if they believe that the panel maker will actually be around for 20 years to back the warranty. That’s it. Bankable really just means a panel maker that will honor their warranty over the next 20 years. Unfortunately, there is no universal checklist for determining bankability. In our experience, whether or not panels are bankable is ultimately decided by the investor on a project basis.
Of course, investors can argue that seemingly rock-solid companies have declared bankruptcy in the past (think GM). They might say, “who really knows which panel manufacturers will survive?” If they take that standpoint, then the technology durability point does become relevant. If you can convince the investors with that argument, great. If not, read on for an alternative approach.
My Panels Aren’t Bankable
Every once in a while Zenergy works with a Developer that must use “unbankable” panels. Maybe it’s new technology perfectly suited for the project. Maybe the Developer is funded by the panel maker. Maybe they are the panel maker. Whatever the reason, the question becomes: How do you fund a project that uses unbankable panels?
If the reason you need bankable panels is because your maintenance budget is so low you can’t afford to buy new panels (meaning you have to rely on the warranty being honored), then the solution is simple. Add a panel replacement reserve.
A panel reserve works like an inverter replacement reserve. It’s a cash account and is only drawn from to replace panels if the warranty can’t be honored. This reserve is funded annually from the operating revenue over the project life. How much should be set aside? It depends. The panel reserve size is ultimately whatever amount the investor feels comfortable with.
Impact on Your Model
When a panel reserve is added to the model, you’ll see two hits that ultimately drive down the Dev Fee. The impacts of the panel reserve are
1. Lower Debt Coverage Ratio
The panel reserve expense is an operating cost and lowers operating income. In projects with loan financing this reduces the debt coverage ratio (DCR). A lower DCR could reduce the permitted loan amount. That means you’ll need more sponsor equity in a Partnership Flip or a higher prepayment in a Sale Leaseback.
2. Lower Residual Cash
Funding the panel reserve means less free cash flow is available to the investor. This poses a challenge because you’ll likely need the investor to put in more capital because of the reduced loan amount. That results in either a lower IRR for the investor or the overall project cost going down.
3. Lower Dev Fee
Since getting any investor to accept a lower IRR can prove difficult, usually #1 and #2 above result in the Developer lowering their Dev Fee. Of course, that makes the bankable vs unbankable procurement decision a pretty easy math problem for the Developer. Which is more: your Dev Fee reduction or the cost savings from using unbankable panels?