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Why Corporations Like SunEdison Sponsor Yieldcos

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Not just about investors

In the last part of this series, we learned about the benefits of yieldcos and other similar securities for investors. But why would sponsors float yieldcos only for the investor’s benefit? As you might expect, there are great advantages for the sponsors as well.

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Cost of capital

Renewable energy projects are costly affairs. Although the cost of solar (TAN) photovoltaics has come down substantially in the last few years, so have the revenues per watt of installation. Selling shares of yieldcos helps the sponsor company raise capital at a lower rate than debt financing.

NRG Yield (NYLD), promoted by NRG Energy (NRG), has a dividend yield of 3.17%, and Abengoa Yield (ABY) has a dividend yield of 3.22%. This range is much lower than the cost of debt financing for such companies. Most of the debt on a company’s books costs between 6.25% and 8.25%.

Value proposition

Since renewable energy investments are capital intensive, financing costs have a big impact on valuations. By lowering financing costs, corporations can increase their valuations substantially. Companies like SunEdison (SUNE) and First Solar (FSLR) expect to unlock substantial value with yieldcos.

A win-win situation

Basically, yieldcos offer advantages to investors as well as to the corporations that are sponsoring them. What are some precautions investors should take before investing in yieldcos? We’ll cover this in the next part of our series.

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