Ep331: Cost of capital: 2026 outlook

(upbeat music) - Welcome to Currents and Norden Rose Fulbright podcast. Today we bring to you another one of our annual traditions, 2026, cost of capital, moderated by my partner Keith Martin. - Welcome everyone, I'm Keith Martin with Norden Rose Fulbright in Washington. Our poll today is about the outlook for the cost of capital this year. All eyes this morning have been on Davos President Trump told business and political leaders that the U.S. will not use force to take Greenland, U.S. stock market is rebounding after a massive sell-off yesterday. The 10 year treasury bond rate is down a little over one basis point this morning to 4.28%, so far, which is the base rate used to price bank debt is in the 3.6% range down from 3.8% at your end 2025. I asked a group on New Year's Eve to predict what would be the biggest news story in 2026. At the first three weeks of the year are a guide, we are in for another roller coaster ride on the policy front. This makes it hard to know what to put in financial models. We have a distinguished group to help understand current conditions in the tax equity and debt markets. They are as follows. Jack Cargus is head of originations on the tax equity desk at Bank of America. Rubio Song is managing director and head of energy investments for JP Morgan. Bank of America and JP Morgan together have accounted for roughly half the U.S. tax equity market in recent years. Ralph Cho is co-CEO of Aptira Infrastructure Capital at a long time banker who has his finger on the pulse of the U.S. debt markets. Beth Waters is managing director for project finance of America. She's at MUFG, a Japanese bank. It is a prominent lender in the U.S. Project Finance Market. It's always interesting to talk first about tax equity volume to be able to compare years. But comparisons have become a lot harder lately because of the proliferation in deal structures and market fragmentation. There are at least five strategies for monetizing tax credits on U.S. renewable energy projects. Partnership flips or one, that's where a bank or other tax equity investor makes investment that expects to be repaid partly in tax benefits and partly in cash. There are also hybrid deals where the tax equity partnership plans to sell most of the tax credits to another company. There are preferred equity partnerships with cash investors where the partnership sells all the tax credits. There are straight tax credit sales and then sale leasebacks, which were an earlier form of tax equity are also making it come back. So let me start with Rubio. So on Rubio, break it down for us. What was tax equity? What were tax equity and tax credit sales volumes in 2025 and how did they compare to 2024? - Thank you Keith. Appreciate that opportunity. Two anti-oppression at the end of the tree and all these things meant that the market hits that he involved in a great deal over the last few years. So it became, the strategy became harder to track. But I think we have a good visibility into the traditional technology factors like when solar battery and for those, we can total tax equity including the traditional tax equity and hybrid tax equity or crypto tax equity or direct credit sales in those factors. We count about 35 billion in total. And then there's other technologies that generate credit such as 45 pounds or 45 U, or 45 U. Olds are typically transacted on the direct credit transfer market or TBK market. That market is a little bit outpaged in terms of the total transaction volume. And we estimate the roughly around 10 to 15 billion a lot here. So that quote with the total tax equity and the tax credit transfer market size at 45 to 50 billion last year. - Which is a huge increase. Do you have a sense for how large an increase that was over 2024? - Well, we estimate roughly that's about 10% to year over year increase. Certainly the overall looking at the installation of when solar battery projects, that's probably a single digit increase in 25 over 24. - Okay. Jack Cartus, what mix of solar wind and storage products are you seeing? - Keith, first allow me to say good morning towards every Cisco. Thank you for getting including Bank of America and your annual Martin Rose Fulbright Outlook call is a pleasure to be renewables development marketplace. Generally reports break down across the traditional renewable technologies, which Rubia mentioned of about a third wind and two thirds solar and solar plus storage. The tax driven financing market in response to that development marketplace broadly reflects that breakdown. - Okay, that's a lot of solar. - Yeah, the solar is grown. If I could, another interesting question in the realm of how much of the tax equity market is made up of traditional tax equity where that's just plan to keep a tax credits on their own books and how much is made up of hybrid tax equity, which transactions include tax transfer features that are either optional or obligatory. We are seeing some step statistic keepers saying that the traditional tax equity structure where there's no intended sale of tax credits may have made up as much as 30% of the tax equity market. That may have been true at 2024, but anecdotally, anecdotally would think that that was a rather slender proportion in 2025. It is very hard as Rubia said to put a fine number and on any of these statistics anymore because of the presence of the various transaction types that you described with the time it was gone. So maybe the surprising thing was one third when given the efforts by the Trump administration to make it harder to build one project. Also, I think most people think most tax equity partnerships these days are hybrids. You're suggesting that that wasn't true in 24%, 30%. Well, still most, but 30% is a stupid number. We're not hybrids, but it's smaller percentage in 25 that we're not hybrids. That tax rate in the sale market seems interested in all types of tax credits, but not all tax credits lend the sale to tax equity structures. Rubio had a list of some that are just direct sales. What tax credits besides the traditional credits on power products, do you think are getting the most traction in the tax equity market, any? Well, you're right. So we're a solar plus battery. We end early lemon sell to tax equity partnership structures and our wide use. We think structurally similar tax credits can also work with tax equity partnerships and are achieving some traction. Things like standalone storage obviously is vent manufacturing, vein hydrogen, chair 45X and 45V, carbon capture, which is 45Q. All of those are potentially available for tax equity partnerships. So you're open to those. Did you see any 45V is Invictor hydrogen deals last year? - We have seen interest in them, but we don't think there's a large swallowing of transactions at the moment. - Let's say Rubio, same answer on 45V is Invictor. No deals last year. - No, we haven't seen any deals this year. And I would just add two text comments on the one solar battery breakdown. And we couldn't see, you know, when they became, they became so lucky after the isolation in the US. It's becoming a challenge, right? And then, you know, Rob say seven gig watts you have here. This means the total windfall of tax equity storage, the share job, the assembly gig watts. So that's in return around 10% of the information in the US. Of course, all the one projects are still, I think attracting a lot of investor interest. In the tax equity phase, IGT options, which is so similar to now. And they're receiving a lot of interest for running this because it's kind of cheaper than the side portfolio you bring. So that's a new solar. I installed it to become a diamond in that. - I will come back to wind because I want to drill down into repowerings. But Rubio, sticking with you, how was 2025 for you? And what do you expect this year? - Yeah, 2025 is a very big year for us, executing over $7 billion in tax equity and hybrid tax equity and the direct time for space for our clients. So we've done the 2020, that momentum continue to 20, 20, 20, 20, so we've seen a very strong pipeline for 26 million. - Beyond many 20, 20, 27? - Yes, you know, we're looking at a 20, 27 financing clients. I mean, these projects that we know takes a long time to build and then so the financing needs to put tax equity and that's probably the finance, of course, and it's being an AT club even installed, but thanks. - Okay, Jack Cargus, I was 20, 25 for you and what do you expect this year? - Keith, I'd like to mention that did we address at Bank of America, the Riddle Electric Finance Market with three different groups. The one that I'm in, there were no water to connect group, which is basically tax equity for utility-scale projects and residential solar. And we also have a group known as Global Infrastructure and Sustainable Finance Group, which is a strong market leader in the development and execution of bespoke structures across the world and across these platforms. And then we have a deeply capable tax credit transfer desk, which we set up directly after the passage of the IRA, which is also a market leader in that particular specialty. And the reason I mentioned them all is because it was a busy year for all three of our groups that directly participate in these tax-drowing markets. So all three of the groups saw a rush to start construction and get some deals done at the end of the year. And we also noted that some market participants, including some of our employees, this the end of 2025 is their busiest year and ever in terms of projects, dollars raised, et cetera. Some of the sponsors and also the third party providers, such as the engineering firm, no offerings and financial advisors were severely stretched. And we expect more of the same in 2026 than quoting probable rush to start construction by July 3rd this year in order to lock in that four-year construction time frame. So we expect another Trump pipeline in this year. - Okay, so it's exhausting. Rubio, last year most deals involved legacy tax credits on projects that were under construction by the end of 2024. Those projects in which technology neutral tax credits will be claimed were just starting to come to market later in the year. Will the market roll forward into technology neutral financings with the same momentum or have we now turned into a road with a lot of speed bumps on it? - I'll say key to that, you know, the way you find it, and I think as always being a bumpy road from my 30 plus years, experiencing that state by the weather, the tax neutral credits financing can go to less bumpy, I mean, that really depends on the treasury initial guidance. We are, we are hearing that initial guidance that can come out anytime now. So a lot of questions hopefully will be answered by the initial guidance, certainly in the full regulation, you know, what is going to take longer. And we hope and believe, you know, that the recovery guidance will address a lot of the questions that they're not financing parties and raised the state social, transparent and actionable. - I think both of the 2026, even 2027 projects without the today, you know, under the legacy credit. - FIOC stands for foreign entity of concern. We'll come back to that as well. Rubio tax equity has accounted historically for about 35% of the capital stack, plus or minus 5% in ITC investment tax credit deals, and 65% plus or minus 10% in PTC production tax credit deals. What are the percentages today? - I, when we are saying, you know, we looked at probably over 50 U2D scale when small battery projects last year, and we're saying, you know, the percentage of tax actually financing property centers around 45%. You know, most of them are 2040 and the 50%. Either RTC or PTC. I mean, most of the projects, I'll say, nearly 80% of the projects you're evaluating today, choose the ITC. And most of them are 25% so while the two adders, I'm gonna call for both adders, right? That's the ITC percentage at 40% and some are at 50%. So let's translate to roughly around 45% in the capital structure. I get given you run up in project cost. Relations, parrots, etc. So I'm saying the tax act could be finite to think of the total capital stack. It's been dropping. And yeah, we don't see much of the projects and always all of them, because then, time I think by the tax act, very cheap. - Okay. Let me give a little more background. As Jack said, there was a rush to start construction of all types of projects by the head of 2025 to avoid new fiat limits on the amount of Chinese equipment that can be used in projects. There will be another rush to start construction of wind and solar projects by July four this year to lock in four years to build. Otherwise, wind and solar projects have to be finished by the end of 2027 to qualify for federal tax credits. Jack Cargis coming back to you. Most developers have been relying on work on main tower transformers as a start of construction. Do you have any benchmarks for what you need to see to treat such work as a start of construction? - Generally most market participants, sponsors and investors and their respective law firms would say that building MPTs qualifies with physical work as a significant nature, which is the term of art. However, it must be specialized custom engineered project specific equipment. It cannot be standard stock inventory. Also the physical fabrication of the transformer must have commenced with an executed enforceable finding written contract in place. Those are some of the benchmarks. - Do you have any standard for how much work you want to see before the deadline? We see a wide range of things, a conservator tech, two radiators. Conservator tech and all the radiators, transformer peer, they're different dollar amounts, different number of labor hours. Do you draw lines anywhere? - Well, as you know, there are no bright lines in the law and so we don't draw bright lines. We do it on facts and circumstances, the more of that construction, the better. - Okay. The law firms are under pressure to bless factory work on such things as medium voltage transformers, inverters, inverter skids, trackers, as a start of construction, or are you treating work on any such items as a start of construction, currently? - Well, those are challenging questions. The, we have not seen a large sort of obstacle for requests in this regard, but the same rules about non-inventory that I just mentioned with respect to MPT supply here as well. And some of the items you just listed can be viewed by the law firms and therefore by their clients, such as that standard stock as inventoryable, and therefore difficult to use as qualifying assets. - Okay, so the same question is, is it a stock item? One more construction start question for you. Many developers need more than four years to finish projects, particularly after the Trump administration throws federal pre-woolster wedded solar projects. How open are you to proof of continuous efforts on projects to buy more time? And these, just to be clear, you can only rely on continuous efforts if construction started before September 1 last year, after that it's continuous actual construction. - Yeah, again, back to the Thirkins map, and also the, you know, sorry, regulatory environment at that time will probably be made there, you know, maybe an implicit risk allocation question in your question, which parties probably are not yet in a position to address. This might not need to be answered for several years. - Okay, on the Rubio song, people listen to this call, hoping to get a sense of what to assume from the natural models about the cost of capital. What is your advice about what to put in models for the cost of tax equity this year? - I'm hoping that a nice and now that's your answer, you know, there's no single number. I think it's viable to, you know, that's a multi key to all of our goals here. I think it's foremost because you know, from the developer's answer is, you know, whether to be like TDI or ITC, it's in through that respect to those projects. And that's a needy, you know, that different sets of the investors are interested in PDC. This is ITC, and that's something we see in PDC. So how I demand in balance in the ITC, monetization market, but this is the PDC. So that-- - In balance, meaning in balance, meaning more sponsors with projects than there is tax equity or the reverse. - In the law, ITC, CTA investors. - Why is it just interesting? - As I mentioned earlier, we see in update the projects, mostly likely ITC, right, 80% of the projects. - Okay. - Today, you're lacking ITC. So that requires a lot of current year tax capacity to monetize the ITCs. Therefore, you see the huge growth in hybrid tax equity or preferred tax equity, where 99% of-- 99% of those credit accounts are to the credit buyers. God has so much more strength in the tax capacity in the market. Well, if it-- if people have a good sense of what tax equity cost last year, do you think there'll be much change this year? - There'll be a little change, I think, on the PDC monetization front. As well, the long-term interest rate remains stable. We've seen a good, a diet demand balance. You know, PDC, monetization market. The ITC, the prime estimation before, you know, due to the supply of ITC and the demand for corporate tax capacity, that in balance, probably is going to get worse. And therefore, the-- that's going to put downward pressure on the PDC price. - Okay, Trustee, Jack Cargis Sonova filed last year for bankruptcy, was a rooftop residential solar developer. Has that changed how you look at the residential solar deals? - Well, the residential solar space has had challenges in rate of years, there's no doubt about it. It gave us an opportunity to test our structure. And it just, you know, confirms that we need to be sure that our structure in our residential solar deals is right. We've been in the market for some years, I think, since 2013 in our case. And we have learned a few things recently, but we remain in the market today. And, you know, we'll continue to remain in the market. I think the reality is that, you know, this is project finance, and these transactions are structured around the project. There is no substitute for a top sponsor. But when there are difficulties, if you've structured your project financing, and you understand the inputs and the, you know, the off takes and the operation, then even in a circumstance where the sponsor has great difficulty in, you know, bankruptcy, perhaps in the hands of another. - So they still work, you're still doing them. Noted Jeffries this morning came out with a buy recommendation for Sunrun stock, speaking of booming year for Sunrun. Ruby, I'm going back to you, but feel free to comment on what Jack just said. There's been a push to wreak power existing windfars. What are your hot buttons in reparations? - Yeah, we're not being looking at the reparations. I've done, you know, part of it, the repowering on wind over the last 10 years. I think that I would, you know, focus on continuing to be, you know, both the engineering, technical, you're doing this front, you're trying to solve the technology, you know, which will say it's mandatory to use. I thought they project and the repowering. As well as the business case, whether, you know, the repowering makes business sense, you know, whether the update should generate with a bit of doors, the own end cost going forward, right? And then, you know, of course, the most critical question for the powering to qualify for the year. We start off the tax credits, where so-called 80-20 tax is critical. We like to see, you know, very solidly claim on that front to satisfy the 80-20 tax and punish quite a modicable price. So it's pretty competitive, by completion. - Okay, Jack, any hot buttons for you on repowering? - Well, I think America was in the first bank to do tax equity for repowering back in 2018. A marketplace has developed significantly since that time. As you would be have said, there are specific tax tests, which you absolutely have to satisfy to non-off switch. And there are performance expectations, which must be achieved. And, you know, those very slightly transacting the transaction, but I think repowering is going to continue as a, you know, as a part of our marketplace. - Okay, Jack, sticking with you then, going back to FIOC, for an entity of concern. These new FIOC rules took effect on January 1 this year for projects on which technology neutral tax credits will be claimed. They limit the amount of Chinese equipment that can be used in projects in a bar use of Chinese intellectual property rights that give equipment suppliers effective control over key aspects of the US projects. Congress provided a list of 13 contract clauses that it believes are forms of effective control. So sponsors or developers need to scrub their equipment supply contracts with Chinese companies to make sure none of these contract provisions is in contracts. This seems like one area where you will just push the risk off on the developer. Is it more complicated than that? - Well, probably it's more complicated than that. It is true that there is a risk allocation question here. That's in much what we discussed earlier. But, you know, we never want to invest into a circumstance where the expectation is that, you know, you crawl upon it and damn it. Or what have you, you know, that the risk is, you know, crystallized and, you know, we need to force it upon another party. I think the entire marketplace recognized that it would benefit. We all of us players would benefit from guides from the Treasury and the IRS regarding FIAC. We do know that Congress and the regulators are very aware of that. That's not least because industry organizations have continued to make that point in Washington. And we also are conscious of the fact that guidance isn't important not only to the traditional renewable industries, but also to other technologies. Including advanced domestic manufacturing and battery storage and geothermal and hydropower and nuclear power. So, you know, it may be simple to say the risk can just be pushed off, but it will be much better for our sponsors. In particular, if we can all have a clarified view as to what that risk is. And we've been hearing that we're going to see FIAC guidance, you know, every week on a weekly basis since, I don't know, mid-December. And we are still hopeful that FIAC guidance is coming. - Perhaps by the end of January, it's apparently drafted. It's over at the executive office of the president. Treasury is getting some pushback from the White House. There's a tussle between the two, the Treasury and the White House over at. Rubio, coming back to you, some tax equity investors have moved to PAM accounting, which is it stands for proportional amortization method. Instead of the more traditional HLBV or hypothetical liquidation and book value accounting for tracking earnings for tax equity investments, I think J.P. Morgan is using PAM accounting if I'm not mistaken. What changes should a developer notice when there is such a shift? - Sure, yes. I concur that the PAM accounting that's made available of high speed to your energy crediting bastards in 22 years ago, we've seen many of the tax equity investors adopted some methodology, certainly a very thankful and compared to HLBV, it's very easy to implement in the understandable. The, I'll say the developers, probably being in large part, we wouldn't see much significant change. In a one way to qualify for PAM accounting is to limit the cash distribution to the investors 'cause there you'll know to qualify for M.A.C.C.D. and if it's from the actual investment from cash distribution has to be less than 10%, otherwise you'd say the tax credits or tax benefits has to come on and 90% of P.A.C.D. to be faster is to qualify under the PAM accounting. So that's one way you know the development will see qualified for PAM accounting and cash distribution to tax equity investors and my reviews. On the other things are changed, that's good. The development is that the, you know, some of the auditors will focus on, you know, maybe qualify under PAM accounting. The tax equity investors should not be paying the price. To be the extent, if we can't be in control, we'll be operating from the project. They have both the amount of the constant price and in the income, though, but you can use the price code where the debileterers need the tax equity and that's because it's content of doing the operation in place of the project, both the most threshold and 90 have to be revisited. - So this may be a net positive for developers, less cash going to the tax equity investor potentially and less save for the tax equity investor over operation with the project. Let me wrap up here on the tax equity segment with this question, I'll go back to Jack. What other new trends are you seeing as we enter 2026? - More in different types of transactions, as you mentioned, people, when we were talking about the difficulty of tracking volumes, there used to be a common turn vanilla tax equity which I never necessarily believed in, but now it's more like, you know, to continue the extreme analogy of 31 flavors of different types of transactions that may be an exaggeration, but the point is there are, you know, many more sort of bespoke features that are being instituted into these transactions and that's exacerbated by the plethora of tax credit types. The potential usage of some of those tax credit types in tax equity partnerships and also it's exacerbated by the electric publication of everything which we've talked about before. Also, by the man the man for power from AI and from that of Venderson, one other thing that I want to point out regarding, you know, what we're seeing in the marketplace is there was a significant acquisition of a mid-sized developer by a large tech company which, you know, could very well be a leading indicator or a well-weather of what kinds of things there could be to come in order to accommodate the demand from the tech sector. - So that was the four point peer plus billion acquisition by Google of InterSecpower that Google has tax capacity, maybe not it may take that out of the tax equity market. Rubio saw what new trends do we not mention that you are seeing as we move to 2026? - You know, I certainly agree with it. I just mentioned a picture of how far we're into the call where you mentioned the AI one. So that's the thing that I kind of continue in terms of the load growth and the electricity price increase and we saw just the recent report on the CPI inflation in about 2.7% that for 2025, the whole of the big electricity price inflation is 6.6% across the country, certain regions, we've said anything, but probably the increase in electricity price. So that's going to continue, I think hopefully that's the tailwind to continue to support the devoutment of WLVNG projects. One other thing we've seen and we already discussed some of those and that is going to need the tech developer to devout tax credit by your market. I mean, we see the block growth over the last three years, but that growth need to continue to bring more credit to public buyers that's not what it's really saying. You know, there's a supply commanding balance on the ITC side and you know, it's equationally, you know, the thing is besides the VC that projects the ITC that will hire many more buyers to come into the market. And I think anything that's straight up the whole is doing a good job, you know, to educate the culture of the experts, and the coverage of the ITC that will give our sponsor partners their corporate clients financially off-pakers and other suppliers to these projects, and evaluate their tax capacity. And they're going to be able to bring all buyers to the market or we call it three-year-old buyer. And they'll not be able to do that well. >> Okay, rapidly growing market need more tax capacity to service it. Let's move to Dad. That was Jack Cargis from Bank of America and Rubio Song from JB Morgan. Please stick around as we may have time for audience questions at the end. Moving to Dad, Ralph Chow from Aptera and Beth Waters from UMUFG, starting with Ralph, what was the volume of North American project finance bank yet in 2025 compared to 2024? >> Good morning, everybody. Thanks again for having me here. Hopefully, hopefully I don't lose like I did a lot of product to do that. >> Sure. >> But to answer your question, Keith, where we're basically at 10-year highs, right? As the bank goal is not busy, we're going to deal with last year. I'm not sure what they'll work. According to Refinitive, 2025 volumes in North America came out just a little bit and you're 260 billion, and that was spread across almost 500 deals. And if you think about it, that's like a trading Uber, right? And that's like a quarter of a trillion dollars. Basically, every sector that we saw was on fire, whether you're talking about LNG, renewables, digital, like everything was contributing significantly to support that Uber. We even saw like a $1 billion dollar green-filled TCT close, and we had seen a construction like that for natural gas in a couple of years. So, anyway, more importantly, not just North American buying sure up, but globally buying sure up over 500 billion. And if you look at volumes in the B-Low and bond market, private credit, they're all at highs. And just to put the context on how high we are in North America, we compare it year-to-year, we're up 41%. And so, to tell you, human capital for sure was short. This year, it was really short. Definitely extended use of support from AI this year. The key thing is going. So, did I hear that correctly? 41% in North American project finance debt. Is that dollar amount or just deal volume? Number of deals. Dollar volume. Dollars, OK. And then how many active lenders were there in 2025? And was that a change from the year before me out? So, I know you was asking that, you know, personally, I always have a keen interest in seeing what new lenders come into our markets, both banks and non-banks. So, with that said, in 2025, we call a host of new lenders into the market. Some of our banks I've never heard of. Some of our banks that had been in the market stopped and now they're coming back to the PF desk. We call real estate investors coming in, ABS lenders. And, of course, all my favorites, were newly formed private credit shops, also raised in capital for deployment. Not too many new lenders focus on renewables, so it's because that sector is very, very competitive. But we said it only saw like new lenders visible in the LNG and digital assets. Regarding the actual number, there's no shortage, right? But people playing in the space, like the term alone in a market, has over like a hundred plus infrastructure lenders. And they are already unavailable to review deals across the credit sector, some more active than others. But more important than the number of lenders, I would say that the actual liquidity in the market runs seem post-super-D. And, you know, when you look at banks, like these mega banks taking super low tolls, and you look at these retail lenders, all grounds for like under debt, you can really tell that there is a huge and not a capital out there. Irony, if there's even in a year where you have very, very high volumes, lenders are still all short paper. Looking to buy assets. I can tell you personally, our team looked into buy funded assets at the end of last year and we found it very difficult to get any meaningful amount of paper out of people's hands in the secondary market. So, anyway, if you have paper, maybe we're definitely buyers. - Okay, interesting. Beth, I have a longer question for you. What effects are the troubling policies? They need frequent changes in tariffs of freeze on federal approvals for wind and solar projects, and expectation that short-term interest rates will fall once a new Fed Chairman takes office in May, and mass deportations. To what effect, how are these contributing? I'm sorry, let me rephrase that. There are four policies I'm focused on. One is frequent changes in tariffs. Second is a freeze on federal approvals for wind and solar. Third is the expectation short-term interest rates will start falling in May once a new Fed Chairman takes office, and then the last is mass deportations that are contributing to a shortage of construction workers. What effects are these having on the ability of developers to finance projects? - Keith, can you hear me, okay? - Yes, perfectly. - Okay, it's funny because I think there are some who have been affected, like offshore wind, the banks are not open for financing for offshore wind, and then you have the new world onshore wind and solar on federal land, so that's not having impact. But every other aspect of the business, I think they are there. As Ralph did said, there's a tremendous amount of liquidity. I think what we're seeing is a lot of due diligence going on. Fiat, you know, it's not only the equipment that came up for me this past few months was the fact that when clients are concerned about Chinese lenders, so Chinese are no longer going to be financing of these transactions. I'm also seeing developers are shifting to source their solar in the US market, and it's a little more tricky and they're using US assemblers. And then again, a lot of due diligence on the tariffs and fiat for the banks. And then one last comment I wanted to make on interest rates. Interest rates that said rate went down three times last year. I think total 75 bits. But the 20-year swap rate, which is what is used for project finance, that was unchanged by fiscal year end. It was at 4.10. And then just yesterday, I talked to Microsoft. It's at 4.25, so it went up and sanded the year. The expectation is that 20-year swap rate should go down by about 25 bits this year for settle at quarter than. Interesting. Ralph going back to you. The hottest new product in recent years has been borrowing based facilities for a developer can draw on a revolving loan facility to cover late-state and development costs. What metrics apply to such facilities? So we've been talking about free NTP needs facilities for years now, right? And we definitely talk about this for hours, right? But for our I guess finance partners, let's break it out into greening categories, right? You have the name, three NTP facilities. These are what I would consider debt service coverage ratio based, right? They're all structured at a whole co-level. Lenders for the most part, you may take collateral in the whole portfolio. Let's say the equity of the operating assets, your construction assets, your development assets. You basically take the cash flows, cut it off, your operating assets, your construction assets, and you sign this to some kind of aggressive debt size, like DSCR, that's your coverage ratio, right? And you use that cash that you raise at that level to fund over to your development assets so that the developer can have LCEs and the developers and some cash to continue to fuel their development using something cheaper than equity. These types of loans, we've syndicated billions, taken hundreds of those on our vouchee, and we priced them somewhere around 350 to four occupations points, right? This is a very efficient cost capital. The second type, what you're referring to bar and days wise, you are really looking at, like, like advancing some advanced rate, all 50%, 60%, against a late-stage development assets, right? Late-stage development assets, to me, means like no binary risk, right? You've got your PVA in a connection that like everything kind of lined up, but you're not ready to push the button. They'll describe some kind of PV, could as they can with an enterprise buy, whether you PVA, 910, whatever the institution uses, you'll advance like 50%, 60%. Sweet people are hygiene against that. Then you'll take your operating assets and you'll do something similar, and you'll have a more aggressive advance rate, maybe like 75%, 80% against that. This, these types of facilities are very capable for the developer, and because of that type of name trouble, you're actually looking at a value of the portfolio. You know, they get priced a little bit wider, I would say anywhere from 450 to 600. And that pricing spread varies based on the size of the developer experience, all that stuff. - That's a third type. - Just, the third type, I would just bug you that like what I would consider, like a gambling type of free entity facility. We don't see as many of these anymore, but there were certain specialty borrowers that would take a super early look at your development pipeline and ascribe some kind of value to it, and advance against that. Definitely more binary risk. And the developer doesn't give these assets, I mean, the lender would have to figure out what to omni-quited portfolio. We, by assume, aren't like equivalent to how you consider equity or placement. So they would price that six, seven, eight hundred, something like that. - Okay, Beth, water's going back to you. Focusing mainly on electric generating and storage facilities. What percentage of project costs can be borrowed during construction? - If you need some good clean deal, you can get 90%. - And what if not? - 90% effort. - If the percentage goes down, it all depends upon the statistics of that project. - And when you answer that questioner, are you thinking of, is it 90% combined construction loan plus some sort of tax equity or tax credit bridge law? - Yes, things cannot be told to not exceed 90%. - So let me stick with you on this next one. They're both covered and uncovered, or I think you call them naked, tax credit bridge loans. What is the difference in what metrics apply to them? - So, and it's all different ways and it's probably, right, contracted, covered, committed tax equity, that's either tax equity or investors in the tax credits or there, and they're committed to it. So in that circumstance, we give 98% advance rate and pricing should be around or about 150 bits. When it's uncontracted, uncovered, uncommitted, or naked as I said, you'll have to, and that's so that you don't have a contract with that party. Do you think you're going to have someone, but you're not sure. So the advance rate is lower on ITC at 75% advance rate, if something 90 cents on the dollar, so it next to about 67 and a half percent, versus 98% if you have committed bonds. - CPCs, I think there's different approaches lately, or one of, it might be the same advance rate as ITC, but it also could be slightly less, assuming 70% advance on 90 cents a dollar. But again, that's kind of moving around a bit and we don't see it much of that in the market, I was on a position of uncontracted TTCs. And then if the sponsor, either a sponsor knows that you are going directly to transfer creditors, it might not, right? There's a chance to be true in the two, but in any event, once they get somebody in, the lenders have already built in into the structure that needs an increase your advance rate to 98% and get the lower price being associated with traditional tax equity original, right? You should want to seriously, but if you don't have them, right? It could be pricing to be 225. That's that, it could be less on deals, but 225 is the general assumption. - That does not sound nice. - I agree with you, it changed. Well, hold on, that doesn't seem like any change from the past, is that right, Beth? - That's right. - Okay, Ralph, go ahead. - That's what I agree with all the advance rates that only I'd be a little bit more grant aggressive on, and it's like total overall leverage. I think that makes 90%. We've seen, you know, lenders go all up to 95%. I know lenders always want some skin at the game, but this market, guys, it's so aggressive that to win business, I mean, we've seen and have gone up to 95% of total construction costs. - So, press your lenders. - It might be a project credit. - Yes. I wouldn't, Ralph, I think it's a 10th of the investors, especially the larger the deal, you're not gonna get super aggressive. I don't think I've ever done 95%. I think that when you convert at COD, maybe, you know, it goes down what's there, but I would think majority of lenders really don't like going past 90%. But that's, Ralph has a different perspective than I thought. - Yeah, I would say when it converts, I think the developer or the owner is getting all their feedback maybe plus some, that's what I would say. - We've certainly seen that on God's standards. - Yeah, you know. - Beth, let me stick with you on this one. The death service coverage ratio determines how much permanent death a project can support. What are correct coverage ratios? - Sure, I'll go through, but it hasn't changed since last year. And it's always, you have to remember, I'm giving you that all the road, right? Somebody could be more aggressive. We're working on some fields in the teddy-bon, who the sponsor is and how many opportunities you have with them, you might get more aggressive. So, I'll just, the middle of the road, on contrast, if you had solar, P-5125 to 130, P-991 here, wind would be P-5135 to 140, P-991 here. Storage, 115 to 120. And then, if you take into consideration merchant, you have solar, P-5175, P-991 here, 140. Wind, P-51.8 times P-991, 140 to 150, and then storage to time. Again, these are general middle of fairway. - Okay. - Rise to the day. If you have a merchant renewable asset, keep guys, I would say, you should forget about any meaningful fit that they think I'd say. And if the man from Dunders, I've tried, and looked around, it's pretty dead. I think the nicest way I heard this the other day was strong one of our clients. I don't like telling me that any financing for their merchant batteries and our cut is on life support. You know, my guess is that you could probably get away with like, depending on the summer market, it's probably maybe 25, maybe 30%. But after that, I think, you know, no way, I don't think you'd find the steps. - This is storage. - Yeah, Ralph, I wasn't told about it. Yeah, can I just correct something? I wasn't told about 100% merchant with the same merchant. - Yeah. - So let me drill down there. That's an interesting point. So Ralph, were you talking just about storage or anything merchant in our country? - Anything merchant renewable? - Anything merchant renewable, solar, wind, battery. I would limit it to 25 to 30% max. - Okay. You can finance the part that isn't merchant, but you have 25 or 30% merchant and even that becomes difficult. - Yeah, I would say if you could buy the load and had it about 25 to 35% rely on large and cash flows, but I would not be feeling that. - Ralph, do you agree with that? - Yeah, it feels specific, right? We take a look at each transaction. It's definitely not going over 40% merchant. And you have to look at the transaction and get comfort. And then you go back and you can see back to the client based fund model what you can live with. - Okay. - But yeah, we're having a good class. And the only other out the class I would mention is Dad, the center's taking up so much volume in the market, right? Those you can size down to 1.15 times against hyper-steal contracts. - Interesting. Let's stick it with Daddy of Setters. The biggest data center developers are expected to spend 500 billion just this year on expansion. Have there been any new developments in the last year in lending to finance new data center? So start with you, Ralph, when you go to bed. - Well, if I from Lenders started to shy away from taking extension risk, I would say like four primary things can be my mind. I'd say number one, a big thing we've seen is around coral, we've risked adding coral, we've got the tenant, I think, underwriting that risk is very, very tough. Even if billions of this credit has been moved into the market, Lenders have priced it, I've seen it all over the place, like 325 to 425 spread, so it's bounced around. But you know, it's everyone's like worried right now about overbilled on data centers. I think it's become very tough to sell this credit. Maybe one path is to move the density emissions, but I think the price you have to fund in until you move. Maybe closer to where their bonds are trading and that's been very volatile. If I get big team out of today's Oracle, there is spotlight, this is interesting, because they are in investment grade entity, but they're having a tough time in the market as well, 'cause everyone's kind of clinging around you know, potential downgrades of this credit, banks have also sold around doing some of this credit into the market at around, so for plus 250, but I think right now there's some large, on underwrites out there, so this is another piece of paper that might have to go to institutions. I'm hearing like shadow, topical prices as high as 350 spreads. I think the reality is, you know, it also needs to get their structural enhancements as well just to create a good path. Third point, maybe I think I've seen developers and we've also provided financing to developers that are pooling their assets and putting, you know, portfolios together and getting hold to debt against this. We can get very aggressive. I just told you that op-code debt service coverage shows are at times 1.15. We've got as tight as like 1.05, I think it portfolios with high-price deal contracts. I think these are very good for developers just to kind of give them some money 'cause they don't have to quickly refinance with the COD and tap an ABS market, which right now, you know, cooking is the doing the lot of capacity. Last point, guys, I would say we're also seeing the increasing amount of opportunities for like behind the meter, where specifically these data centers, they're any power, right? To operate in the third yard, delaying the queue for any connection or sometimes you need delays for years and then you have to do something, right? So they've been in love for alternatives. We've talked to a number of developers that are trying to create a solution to put some kind of generation asset on-site. So those could be interest in when we put some volumes. I think we have to tell you that. - Beth, come back to you. What are current spreads above sulfur for construction debt versus permanent debt? And how do they compare to spreads a year ago? - I don't think it's really changed, but I'm constructing a lot of things. You do open about a clean deal. You'd have pricing at 150 bips. I know that some clients, some sponsors can get pricing as low as 125, 137 and a half, but that's not common. And then you can think pricing higher. If it's the longer construction period, there's a merchant, there's ERCOT, something weird about the PTA, basis risk, et cetera. And then in the term loan piece, it can go up. And again, this is a little fairway, but 162 and a half for 187 and a half day. That's what, so it would jump from 150 to 162 and have 287 and a half. - Okay, I see. - As merchant, it's, sorry, if you had 10% to 20% merchant, or 25%, I get 25% increase in 30%, 40% merchant, another 20%, I think. - Okay, a lot of good data here. - Yeah, I feel like the best clients get like the tightest end of the range, right? So they could probably pull it back just the right to, like around the one and three eights on the low end. I would say it goes something back, like notes of what we were coding for spreads last year. Keith, I think about how they kind of changed over the last year. And I would say, I said, it's smooth by an eighth, maybe on the low end and the wide end. And I have to tell you that I don't know why you guys are beating each other up like that. I get ultimately, it's good for all the borrowers, but it definitely has been some tightening. And maybe it's just because everyone's trying to beat each other up to win this edge out there. - Let's close out the depth part here. Just to ask you each about other, not worthy trends as we enter 2026, Beth Waters starting with you. - And Ralph cut down this a bit that the demand for power from data sensors, it's huge, we have been actively financing deals where at least one of I know, and you see more of them, whereas they combine data center financing and power. Otherwise, it is, you're seeing financing for the power to be provided to the data centers. And reciprocating engines is at the right terminology that you have on the center of that, instead because we know the gas turbines aren't available yet. So the clients, the developers, are using reciprocating engines on the gas sites. And either you can throw in solar or battery storage in those because the hybrid scale is still due like renewables. You just need to get something in one power. So however, somebody can get it to them. And then if it converts to renewables and the combination of the back stuff from gas, that's good for them, right? So you're seeing a little mix of everything. I also think, so continue to see lots of interest for pre-NTP facilities. Our bank is not crazy about doing those, but we are helping out clients where we have to do equipment financing. We have another team who would do that or we do something on the corporate side. You're seeing constraints with respect to getting solar panels that aren't COX. So that's coming up more and more. I expect to see continued delays in construction pipelines. Projects aren't moving as quickly. They're very, very sophisticated clients. They can get the deals higher up, but other deals, I feel, they're taking one of their clothes. Increased due diligence by lenders on tariffs, on fios, on adders, it definitely takes a lot more time to book on the deals. And then we've been seeing the monetization of fair market value step-ups with press activity. So we recently closed with a class of things, like fast leverage, press equity, and investment projects. So that was interesting, and we're starting to see more of that. That is interesting. Ralph, what new trends for you? Lots of trends, but all of them are four. All right, that I think are pretty cute. I think you touched on this before, Keith. I think this year, the market's going to be really good, the new three newables, right? All these developers are pushing the projects to get through really ahead of the tax rate. Of course, in many of our larger developers have a part of their assets, but it's always good to get deals done, a step right, and want that buffer. Second trend, I'll talk about this before the natural gas. I see a lot of this activity on the front lines. I think Greenfield's going to be a little bit tough, right? Just because it's very hard to set your turbines right now. But with all the valuations going to move, a deal on market has been thought, as I mentioned, on volumes. The deal has been taking a lot of these gas fired assets that were financed by the bank market, offering higher leverage, better pricing, dividend recap, refight. Everyone's doing this rich wash repeat over over again. I expect to see more of these, maybe even some acquisition financings in the below market, if this is Tantanese talk, even all these assets. I don't really see anything disrupting that for now. I think the third point, I'll say, is that all these Greenfield assets that we've been financing between Ellen G and Inivables and Data Centers, I think at some point, it's creating a wall of supply of opportunity for all these private-place spend guys to get in and take that down. I know for us, we have a life insurance bucket of capital, so we should participate in that, but there's a lot of fixed rate demands. I know market-pixets have been helping, I'm sure waiting for a disruption in the over the last few years, nothing seems to be impacting it, so at this point, I'm thinking everyone's capitulating and driving spreads tighter. It's kind of like, if you can't beat them, you can join that with it. The last point I'm mentioning, and everybody loves stuff like this, but it was all this activity going on at infrastructure, even the people, right? And I think the demand for gaming capital is going to stay like white hot. If you have good, if you have good, infrared talent, you got to hold on to them. I know we've been hiring at every level, and it's very hyper competitive. That's it. OK, lots of good trends there. I guess the overall theme is another extremely busy year. People were exhausted last year. Shortage of human capital will mean a lot of us who be looking for ways to harness AI during the year to fill in some of the gaps. And, of course, the unpredictability on the policy front in Washington is always a cloud-- potential cloud over the market, although it did not-- it did not relieve the exhaustion from last year. I'd like to thank our panelists, Jack Cargis, head of originations on the tax equity desk at Bank of America, Rubio Song, managing director, and head of energy investments for J.P. Morgan, a Ralph Cho co-CEO of Appterra Infrastructure Capital, and Beth Waters, managing director for project finance, America's at MUFG. I'd like to thank the audience for patching in. We will put out the audio in the next day or so as a podcast in an edited transcript some time next week. Thanks all for patching in. So long. [MUSIC PLAYING] You can find us online at www.projectfinance.law, or send us an email at [email protected]. Please rate, review, and subscribe on Apple Podcasts, Spotify, or your preferred podcast app. Our show today was produced by Emily Rogers. Stay ahead of the currents. [MUSIC PLAYING]