Graham Smith recognized the trend of institutional interest in utility-scale solar in the UK. The recognition that non-residential solar is underserved and under-banked in the United States led him to shift to New York to launch Open Energy Group (OEG).
Technology brings down cost of financing by 66%
The company has leveraged proprietary technology to bring down the cost of financing. If a project’s financing cost used to be 30 cents per watt, the start-up aims to take it down to 10 cents per watt. The lenders on its platform are institutional investors who are looking for assets which have long-term viability. Its first project was with a European developer doing a project in the state of Georgia.
The company had signed a 15-year power supply contract with an AA rated entity, making it a profitable underwriting opportunity for the young platform. It plans to focus on attracting institutional capital due to the education costs involved in attracting retail investors. The company aims to securitize solar loans in the same manner as has been done for auto loans, consumer loans, credit cards etc.
How to build a niche financing start-up
Alternative lending has started finding roots in more niche market areas like solar project financing with the emergence of start-ups like OEG. Graham Smith (CEO), Alistair Potts(CTO) and Michael Blomquist (COO) are the founders of the New York-headquartered company. Previously, Graham had founded a renewable energy advisory business, Greenworks Capital which secured $75 mil in financing for one of the first utility-scale solar projects in the UK. OEG was founded in 2013 to provide non-recourse debt financing for solar projects. Its sweet spot is $0.5 mil to $10 mil range and its USP is the ability to close a deal within a month as against the norm of 6 months for traditional lenders. It employs a 100% online and automated application process and is able to save 70% on total transaction costs as compared to brick and mortar financiers.
The company has been able to raise $1.25 mil in seed from GLI Financials. The fund has also provided the start-up with a $10 mil line of credit. It has already lent $5 mil and will close $10 mil within the month. The start-up has 7 members in its team from companies like Morgan Stanley, Google, Citigroup and Lazard. OEG has on-boarded Cortland Investment Servicing as an independent primary loan servicer, Loeb and Loeb as its lawyers for due diligence and securitization and Moody’s for credit rating. The strategy is to create a best-in-class team which would provide a well-packaged platform for institutional investors to lend to commercial solar projects.
Product and underwriting details
OEG has two products currently, a fully amortizing term loan over a period of 10-15 years, with an APR of 6-7.5% and loan-to-value (LTV) up to 60%. The other product is the construction loan for the duration of 6-9 months, at an APR of 8-10% and LTV up to 85%. The start-up has based its underwriting on making the Power Purchase Agreement (PPA) the prime element in analysing cash flows. So it prepares its financial models by discounting the cash flows to be generated through the PPA and only considering 80% of the EBITDA as available for loan servicing.
The company also analyses the wattage, insurance costs and land lease to have a margin of safety. Another big advantage to the lender is that it has an additional 30% as tax credits available which can usually be liquidated at 90 cents on the dollar. The founders believe that the scare resource in the solar industry is the sponsor who is willing to risk his equity, find a business/utility partner for a PPA and execute the entire project. They only allow funding to projects which are being executed by bonded constructors as it provides additional insurance to the project.
The renewable finance ecosystem
The company has had no default yet and would have to sell the asset in the secondary market to liquidate its investments. The secondary market is yet to be fully developed due to few defaults occurring in the sector. The start-up hopes to securitize its loan portfolio at a premium, adding a revenue stream to the existing revenue model of borrower origination and servicing fees. This highlights the difference in its approach as compared to its competitor, Mosaic. Though both companies are peer-to-peer platforms for solar projects, Mosaic supports an investment of even $25 whereas OEG is only focused on accredited investors and institutional money. Mosaic also has started catering to residential projects whereas OEG wants to specialize in non-residential exclusively. OEG also offers more products versus the plain vanilla senior secured debt by Mosaic.
The Open Energy Group has been formed by experienced professionals who understand the nuances of both the financial and the technology world. Peer-to-peer is the need of the hour in the solar industry as banks cannot fund the aggressive expansion due to their depleted balance sheets. Solar debt securities are asset-backed and have strong cash flows which are usually independent of the economic performance and/or financial markets. A commercial project can run for 30 years, making it an ideal asset for insurance companies. OEG has been able to develop a strong niche for itself by focussing only on commercial projects on the demand side and institutional investors on the supply end. With securitization opportunities in the future, the young start-up has the latitude to tap the capital markets for very large financing volumes.