A Bright Future For Alternative Energy Debt?

June 5, 2008

Let’s take a look into my crystal ball, into the future to a debt market with a new breed of issuer—energy companies. But not the oil and gas and energy services types that have lately been streaming onto the high yield bond primary market, companies that specialize in nuclear power, or solar, or electric cars.

Certainly, oil and coal companies currently provide quite a tidy profit for investors, and fossil fuels won’t run out tomorrow. Moreover, our dependence on them will likely take a generation to change. But there seems little doubt that we do need to find sustainable alternatives, and, more and more, people appear to want change. We just need a little motivation, because as altruistic as we may long to be, it’s the wallet that marks the spot where we require kicking. This is why I agree with Andrew Spitzer, head of the energy and power group at middle-market investment bank Harrison Williams, who said Tuesday that “$125 a barrel oil might not be a bad thing.” Despite the short-term pain it causes the average consumer.

Spitzer spoke at a luncheon hosted by the firm, and he noted that for progress to come, alternative energy needs financing behind it, not just big dreams. And $4 a gallon gas, along with increasing coal prices, has become the perfect catalyst to build the public support that will propel alternative energy companies. (Coal prices, despite a currently solid supply, will logically remain high as worldwide demand increases with the growing middle class in populous India and China.)

Of course, new industry begins with equity. And savvy venture capitalists have already begun to smell the opportunity. Rockport Capital Partners just announced the latest in a trend of new clean technology funds, saying it has raised more than $450 million to invest in solar power, water, green-materials and electric car companies.

Since many companies in burgeoning industries begin small, the middle market will see the first M&A deals. Indeed, Spitzer said Harrison Williams is working on three nuclear deals and one solar deal as we speak. And while equity will likely continue to drive these deals for some time, if we continue down the alternative energy road, these companies will grow and eventually become part of the mainstream economic landscape, which means their deals will grow and at some point contain significant debt components. So it doesn’t seem so far-fetched that sometime in the future the debt markets might see, for example, a $1 billion plus deal from the buyout of the Southwest’s largest solar power company. And this would represent a pretty good deal for everyone.