How Risk Transfer Solutions Increase Capital Access in Renewable Energy M&A Deals

How Risk Transfer Solutions Increase Capital Access in Renewable Energy M&A Deals
October 17, 2024 10 mins

How Risk Transfer Solutions Increase Capital Access in Renewable Energy M&A Deals

How Risk Transfer Solutions Increase Capital Access in Renewable Energy M&A Deals

The growing renewable energy sector is boosting M&A activity. Risk transfer solutions can help unlock capital access in these transactions.

Key Takeaways
  1. Legislation is helping fuel growth in the renewable energy sector, and that growth has led to renewables dominating M&A activity in 2023.
  2. Dealmakers seeking access to capital are increasingly taking advantage of innovative and traditional risk transfer solutions to facilitate deals.
  3. Renewable energy sector investment over the next five years will help triple the world’s renewables capacity by 2030.

Growth in the renewable energy sector led to renewables dominating mergers and acquisitions (M&A) deals in 2023.1 Despite M&A activity slowing in 2024, dealmakers can still take advantage of a variety of risk transfer options to help facilitate M&A opportunities and access to capital. 

Risk programs — including traditional property and casualty insurance, surety credit, cyber insurance, credit risk financing, trade credit insurance, parametric insurance, captives and tax insurance — can help mitigate risks, lower expenses and supply the essential capital needed to stimulate M&A activity. Legislation, including the Inflation Reduction Act (IRA) in the U.S., has provided significant tax credit incentives for clean energy growth. 

“The Inflation Reduction Act has led developers to sell tax credits and use the proceeds for future projects, eliminating the need for income from one project to fund the next, thus speeding up the process,” says Carol Stark, managing director and Renewable Energy practice leader with Aon in North America. 

Gaining Access to Capital via Risk Transfer Markets 

Balancing risk and opportunity is critical for driving returns. Renewable energy dealmakers must be more creative in how they manage capital across deal and balance sheet risks, turning to insurance capital to facilitate M&A transactions and improve deal and business outcomes.  

Effective use of risk vehicles enables companies to free up substantial capital, which can be directed toward energy transition projects. Use of these tools is essential for mitigating risks in the sector. These cost savings from efficient risk management are often considerable, facilitating greater investment in renewable energy initiatives.

“How ever an entity chooses to grow, they should work with an advisor who can foresee how insurance can play a role in the transaction,” says Audrey Rojas, M&A consulting leader with Aon. “Typically, it is around flagging their priorities. Is it an operational point of view? Is it indemnification of third parties and contractual requirements, or is it a catastrophic demand that requires you to carry insurance? How do you balance it all out? One of the things that drives these conversations is cost. And how do you manage that cost effectively?” 

Risk Capital Solutions to Help Unlock Liquidity  

Looking ahead to 2025, elevated capital costs may compel smaller developers to sell their projects, presenting M&A opportunities for established renewable energy companies. Federal programs and corporate investments will likely play a crucial role in shaping the future of the renewable energy industry. 

Tax Insurance

Tax insurance figures heavily in some of the evolving M&A strategies businesses are implementing in response to emerging trends and changing market needs. Tax insurance is a potential solution to tax complexity, transferring the risk of successful tax authority challenges to a tax insurance market. Its usage has grown in M&A as a precaution against unexpected tax assessments and potential clawbacks of anticipated tax benefits and future cash outlays. Tax insurance was designed to help protect businesses in the event a position fails to qualify for its intended tax treatment, and can be used to mitigate risk in a variety of transactional situations, including as a: 

  • Strategic financial tool: Tax insurance can benefit a seller looking to cover its indemnity obligation for pre-close tax exposures or allow a buyer to insure itself against a heightened tax issue rather than seek a special indemnity that can hinder the deal. 
  • Financial planning tool: This can provide a backstop should a tax position fail to qualify in the tax authority’s perspective by covering assessed amounts (additional taxes, potential interest, possible penalties, and contest costs, all subject to a gross up) to make the policyholder economically whole. 

Under the IRA in the U.S., roughly $370 billion in tax incentives and renewable energy tax credits are available to developers and owners of renewables, including but not limited to wind farms, solar farms, green hydrogen and carbon capture.2 “It’s really been a catalyst for renewable energy growth because it lowers overall project costs and encourages investments in emerging technologies, like green hydrogen,” says Stark. 

The IRA in the U.S. is having a profound global impact on transactions, including M&A deals. Since the law was passed in August 2022, $110 billion has been poured into clean energy projects — 60 percent of which came from foreign companies. 

These results are increasing other countries’ appetite to implement regulation with similar levels of inbound investment. It’s possible that tax credits — now more accessible under the IRA — will become a global phenomenon.  

The transfer of tax credits enables corporations to purchase tax credits from renewable energy sponsors and developers through simple purchase and sale agreements. “Tax credit insurance is helping get deals done,” says Corey Lewis, co-head of Aon’s North American Tax Insurance practice and Tax Credit Insurance practice leader. "It encourages investments and the purchase of credits, especially where clients are looking for additional certainty.” 

Surety Credit

M&A dealmakers have long faced the need to secure bank letters of credit, which are issued as a guarantee of payment. While letters of credit have become an important aspect of international trade, they often require a substantial amount of money to be paid as collateral. Surety bonds are a valuable alternative. 

That’s because they often require less capital to secure, which can free up capital for other needs. They can also be used to replace parent company guarantees covering legacy performance obligations of a target that is being acquired. This is advantageous for a seller, as it no longer needs to hold a guarantee that relates to business activities that are being divested. A surety bond can also be used to replace existing bank guarantees on more desirable terms. 

Surety Bonds vs. Letters of Credit

   Surety  Letters of Credit
Attached to contract Yes No
Premium As low as 30 bps of principle, typically compares favorably to letters of credit    
 
 
 Typically, more expensive than ‘equivalent’ surety arrangements 
Collateral Often no collateral required  Collateral often required as security 
Claim Obligee required to demonstrate lack of fulfillment of contract to claim  ‘On demand’ 
Partner Banks Can be used to unlock borrowing with partner banks by freeing up counterparty exposure  Uses up credit limits with partner banks

Companies are using surety facilities as either their only provider of bonds or as a supplemental part of their bonding arrangements. Surety bonds can help dealmakers meet capital needs, lower their cost of capital and provide an off-balance sheet alternative. They tap into a different pool of financing, and so do not impact a company’s debt management. 

A well-designed bond program provides a more thorough risk management solution, improves corporate liquidity and optimizes working capital.

Trade Credit Insurance

Trade credit insurance has historically been used by businesses to hedge risk on what is usually their biggest asset — accounts receivables. But as we look toward continued economic volatility, companies are using trade credit insurance to reduce the cost of financing. 

When securing debt to finance deals becomes more challenging and expensive, it constrains a buyer’s ability to collect adequate capital to match vendors’ valuation expectations. Therefore, companies turn to trade credit insurance to bridge the financing gap; the credit enhances their accounts receivable and lowers their overall cost to finance deals, putting trade credit insurance to work.

Not long ago, dealmakers had sufficient funds to forego this route, as the cost to finance through banks was significantly lower. Now, firms are using trade credit insurance to insure their pool of receivables, transferring their risk to an AA/A+ rated insurance company. A bank that provides financing based on a company's accounts receivable, supported by this type of credit protection that doesn't require upfront funding, can reduce its financing costs due to favorable risk assessments. This arrangement also helps the company better manage the difference between vendor pricing and its available funds.  

Trade credit insurance can reduce post-deal volatility in several ways. Trading issues commonly identified within the scope of financial due diligence include difficulties in collecting debts or identifying high historical levels of bad debts. Including warranties in the share purchase agreement gives the purchaser certainty that they are not paying for any assets that carry no economic value.  

The identification of issues in the target’s customer base will support the strategic risk mitigation decisions required by the purchaser post-completion. Trade credit insurance therefore helps to bridge the negotiation gap between seller and buyer, adding clarity to the economic value of a business’s receivables.

Secondly, when carving out an entity, new sources of financing will be required. In those cases, buyers will often have to provide new credit lines. Trade credit insurance can help firms enhance collateral and secure additional financing from banks.

Additional Risk Transfer Solutions

Risk Solution Description Benefits Examples
Credit risk financing3 Chance of loss from a borrower not making debt payments  Safeguards banks and lending entities, adaptable policies4 Reinforces capital and risk management practices, with coverage up to two decades
Captive insurance5 Self-insurance where a corporation creates its own insurance subsidiary Protects against specific risks like pollution, spills, regulatory changes Has become a particularly beneficial partner in the renewable energy sector 
Political risk insurance Mitigates risks in developing countries Provides solid environment for investments, better access to finance War, terrorism, government expropriation

Accelerating the Transition to Clean Energy 

As the renewable energy sector continues to grow, unlocking capital liquidity through innovative financial solutions and strategic M&A activity will be crucial. By leveraging tools such as surety credit, credit risk financing and offshore captive solutions, companies can navigate the complexities of the sector and drive sustainable growth. The involvement of new stakeholders and the development of innovative practices will further accelerate the transition to a low-carbon future, making the renewables sector a key player in the global economy.

In the realm of renewable energy, tailored financial solutions are foundational to generating value. Aon’s advisors have a deep understanding of their aims and obstacles and understand how to create comprehensive plans that enable our clients to protect cash flow and secure capital.  

 

1 U.S. Renewable Energy M&A: 2023 Review and Outlook for 2024 | FTI Consulting
2 Capturing Carbon on the Critical Pathway to Net Zero | Aon
3 Credit Solutions | Aon
4 Managing Project Risks: 5 Ways Credit Solutions Can Help | Aon
5 Captive Insurance: Uptick in Use Reflects Market Realities | Aon

50%

In 2023, global renewable capacity saw a 50 percent increase.

Source: International Energy Agency

Aon’s Thought Leaders
  • Corey Lewis
    Managing Director, Co-Head North American Tax Insurance Practice, Tax Credit Insurance Practice Leader
  • Audrey Rojas
    M&A Consulting Leader, North America
  • Carol Stark
    Managing Director and Renewable Energy Practice Leader, North America

General Disclaimer

This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.

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