Waste Advantage Magazine

A project finance alternative: the bond market

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As many existing landfills reach capacity, local authorities and waste management companies face significant opposition to new development from property owners, municipalities and environmentalists. Rather than enduring an arduous battle, some stakeholders are pursuing a new, 21st- Century alternative. The evolution of the waste-toenergy (WTE) and waste-to-fuel (WTF) industry is accelerating as players big and small attempt to turn these growing mountains of trash and other waste products into valuable commodities. They are partnering with a robust and growing pool of technology companies to end the flow of waste to landfills and increase their bottom line. WTE or WTF projects are capital-intensive undertakings tied to long-lived assets. A common practice in the energy space is funding the construction and operation of projects with a non-recourse debt, often referred to as “project financing”. In project financings, lenders are granted a security interest in all of the assets of the project. Lenders look past the credit of the sponsor’s balance sheet and base their credit assessment on the material contracts associated with the development, construction, operation, and management of the financed assets. With limited assets securing the loan, the “art” of project finance becomes allocating the associated risks of the undertaking to a party willing and able to bear or mitigate those risks.

Although common practice for decades, securing project financing has become more challenging in recent years. The much-discussed problems in the bank market have led this traditional source of capital to become even more risk adverse and less willing to loan money to the entire spectrum of alternative energy projects. The credit profile of alternative energy project financings, lacking a claim on the sponsor’s balance sheet, often falls below where banks are willing to fund regardless of the interest rate. WTE and WTF projects, sometimes using technology that has not been as established as wind or solar, can have additional credit risks. This, coupled with the smaller pool and appetite of tax-equity investors, has led WTE and WTF developers to seek new sources of capital to fund projects. A new source of capital has been established that developers should consider for WTE and WTF project—the institutional bond market.

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