As the coronavirus crisis ripples through the U.S. economy, developers of power generation assets are bracing for a choppy project finance outlook, including potential project delays and tax equity troubles.

Michael Garland, CEO of Pattern Energy Group Inc., speaking on a March 20 webinar hosted by Norton Rose Fulbright, said he expects many renewable energy projects will be delayed, "and that means you're going to have to manage your development capital differently."

Project finance markets are already softening as lenders and tax equity investors adopt a wait-and-see approach, said Garland.

"[Demand] for capital to finance renewable energy projects in North America remains strong," Michael Falcone, CEO of MMA Capital Corp., a debt investor in renewables, said on a March 18 earnings call.

Falcone said he has not seen any "direct impact" on MMA's renewable energy investments, such as defaults or a slowdown in the firm's ability to source new investments, as a result of the coronavirus. And MMA CFO Gary Mentesana said he has not observed liquidity problems among tax-equity investors.

"Of course, as everyone knows, it's too early to predict whether the coronavirus will have any longer-term impact on our borrowers, our current portfolio or our ability to generate new assets for investment," Falcone said. "There certainly could be some disruption over the next month or so." The carrying value of MMA's renewable energy investments totaled $289.6 million at the end of 2019, according to a recent filing.

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"We're definitely well-capitalized," Longroad Energy Holdings LLC CEO Paul Gaynor said on the same webinar. "The question is, what happens to some of the smaller players in the industry and, as an industry, is there enough development capital?”

If the crisis drags on and capital constraints emerge, there could be opportunities to acquire development assets from smaller companies, said Gaynor.

Prices for bonds issued by companies in the clean energy industry have held up during the past two weeks, suggesting investors remain confident in the sector's longer-term prospects. The price of notes issued by a subsidiary of investment firm Hannon Armstrong Sustainable Infrastructure Capital Inc. that mature in 2024 has fallen 7% since March 5 to 96.5 cents on the dollar. Meanwhile, the company's stock price is down 49% during the same period.

Hannon Armstrong Chairman, President and CEO Jeffrey Eckel said index funds have driven a sell-off in clean-energy companies with stable, long-term revenue streams.

"A number of our banks have pointed out the amount of trading that has gone on in some of the index [funds] where everybody gets tarred with the same brush," said Eckel in a March 17 interview. "Most of our income comes from net investment income from long-dated, high-credit-quality investments."

"Our clients are continuing to push projects," Eckel added. "They'll get them done later than they expect, and that's just the way it is. That should not materially affect our prospects."

Meanwhile, project developers with significant merchant exposure, particularly in PJM Interconnection, ISO New England, New York ISO and the Electric Reliability Council Of Texas Inc., are also at risk of falling power prices if the pandemic leads to a prolonged economic downturn that reduces demand for electricity, Gaynor said.

"The impacts of the coronavirus pandemic, while still evolving, create risks that are far beyond what has been experienced in the infrastructure and project finance sectors in many decades," Fitch Ratings said in a March 18 note, adding that the economic impact could be "materially worse" than the 2008 financial crisis. "Contracted assets, particularly those in the energy space, are primarily exposed to the credit quality of their counterparties," Fitch said, noting the "relative historical stability of utility counterparties," while also observing that the uptick in nonutility off-takers in recent years adds risk.

Supply chain disruption could endanger tax credits

Disruptions in global supply chains are raising concerns over the timely delivery of project components like wind turbines and solar modules for projects that must be under construction and operational by certain dates to be eligible for the production tax credit or the investment tax credit.

A coronavirus-related derailment could potentially damage the tax equity financing of a facility that began construction as long ago as 2016, according to a March 18 publication from Skadden Arps Slate Meagher & Flom LLP, as developers must prove that projects have been under continuous construction within a four-year period to benefit from the incentives.

A wind project that entered into construction in 2016, for example, would be eligible for the full 100% production tax credit only if it wrapped up construction in 2020, though disruptions due to a pandemic could be deemed one of several "excusable disruptions."

It is unknown when potentially delayed project constructions and scheduled developments and new build will resume. Origis Energy Ltd President and CEO Guy Vanderhaegen, speaking on Norton Rose Fulbright's webinar, said some requests for proposals for new projects could also be delayed, potentially leading to a surge in contracting late this year and in early 2021.

Lawyers address clients' force majeure concerns

Jones Day's energy practice, in an online publication, noted that owners of power generation assets could face supply chain interruptions and "parties are increasingly invoking force majeure clauses for contractual relief in situations where the COVID-19 outbreak prevents or impedes contractual performance."

Force majeure, literally "superior force" in French, refers to clauses in contracts that can potentially exempt counterparties from liabilities associated with a nonperforming asset, according to Sidley Austin LLP, which describes the mechanism as "a contract-based risk allocation device."

"In situations where force majeure appears imminent, it is important to closely analyze the contract language and the applicable law in the governing jurisdiction to determine whether COVID-19 would likely be determined to excuse performance, particularly in circumstances where 'epidemic' or 'illness' are not specifically referenced in the force majeure provision," Jones Day attorneys wrote. "Where the impact of COVID-19 may be interpreted as a force majeure event and a potential basis for relief, it should be confirmed that the delay or failure at issue is actually related to COVID-19 rather than other unrelated issues that may have arisen."

"Typically, a force majeure event must be unforeseeable and beyond the reasonable control of the party making the claim," according to Skadden, which stated that under some contracts, an epidemic could constitute a force majeure but must be specifically listed as such in others.

Despite the mounting uncertainty in the financing world and what Skadden called the virus' "dizzying impact on M&A" across all sectors, leading to an expectation that the pandemic will "significantly [affect] every phase of the M&A process and every element of the acquisition agreement," there is still some cautious optimism at the moment.

"Everybody is taking stock this week, will take stock next week, and there will be adjustments," Eckel said. But "capital is flowing in our direction and not the alternative direction. That's a good situation."