Recently, TerraForm Global, a YieldCo sponsored by the US renewable energy major, SunEdison, raised $742 million through its IPO. A notable feature of TerraForm Global is that all of its assets — operational wind and solar plants — are in the emerging markets of India, China, Brazil and South Africa. Nasdaq-listed TerraForm Global owns 1,292 MW of wind and solar plants created or acquired by SunEdison in India.
YieldCos, companies created by hiving off operating assets with long-term income visibility for the purpose of giving dividend yields to investors, with an unspoken understanding that the dividends would be high and growing, have emerged in the US market in the last couple of years.
Their success could have an echo in India because of Infrastructure Investment Trusts, the regulations are similar in nature to YieldCos.
Pasupathy Gopalan, who heads SunEdison’s operations in Asia-Pacific and South Africa, was deeply involved in TerraForm Global’s formation and listing. He spoke to BusinessLine about the YieldCo and what it could mean for SunEdison’s operations in India. Excerpts:
What makes YieldCos attractive to investors?
YieldCos are asset-owning vehicles that give the public an opportunity to invest and receive dividend yield. The assets are all de-risked — the assets are all operational and hence, there is no construction risk or regulatory risk. So, the public is stepping into a de-risked portfolio of assets, with visibility of what the portfolio is, the cash the portfolio would generate and how much cash would come back to the public as dividend yield.
The yields will grow because the size of the asset portfolio will grow. For example, let us say a YieldCo raises $100 from the public to buy assets and assume it pays $8 as dividend in the first year. The expectation is that the dividend may grow 20 per cent, i.e., to $9.60 in the next year. To generate this additional $1.6, the YieldCo will need to have more assets, for which it will need to raise fresh resources. The YieldCo may borrow, say, $50 to buy the next assets. Broadly, till the overall portfolio gets leveraged by about 70 per cent, the YieldCo’s rating will not be affected,; so the borrowing will not be expensive. Inherently, value gets generated because the projects are generating certain returns.
YieldCos have emerged in the last couple of years and they seem to be renewable energy-centric. What’s happening?
The concept of giving dividend yields to investors has been around for many decades. There have been REITs, MLPs and BTs (real estate investment trusts, master limited partnerships, business trusts) — they are all a similar class of vehicles. They have the advantage of tax pass-through.
If you look at the history of renewable energy, many projects got built in Europe. But the yield vehicles have been more or less a US phenomenon. Somebody had to borrow the concept and apply it to renewable energy. It has started happening now. It could have been done with the wind sector even earlier.
What does the successful IPO mean for your India operations?
We have close to 250 MW of operational assets and a little over 1 GW of assets under development or under construction in TerraForm Global.
We have made a commitment to the Prime Minister of 15.2 GW in India. We believe that listing YieldCos from assets being contributed out of India will give us the necessary scalability of capital and we will be able to march towards building our portfolio and meeting the commitment made to the Prime Minister.
Do you see India-incorporated YieldCos happening anytime soon?
In India, the regulations of Infrastructure Investment Trusts are in place. The InvITs can mimic what the American YieldCos are allowing us to do.
Even though our YieldCo is listed on the Nasdaq, it is a pioneering effort to list Indian assets as part of a public dividend-paying vehicle. The concept and strategy now has existence proof and hopefully it will pave the way for InvITs in India.