Structuring for scalability in C&I solar
Updated: Feb 17, 2020
We launched our first transaction in Nigeria with commercial and industrial (C&I) solar developer Daystar Power, which will mitigate over 100,000 tons of CO2e emissions annually by more than halving the diesel usage of small business end users with solar + storage.
Rim Azirar, who led the transaction for SunFunder, and our counsel Tinashe Makoni, discuss being pragmatic about structuring the debt facility of up to $4m and making it scalable.
Rim, Tinashe, congrats on the Daystar transaction. They sound like a really impressive company poised for growth.
RA: They are! There are a lot of developers and EPCs that do an amazing job all over the continent, but getting the right product from a technical and commercial point of view, as well as integrating different systems and monitoring them over time, takes a lot of different skills – from financing to engineering, commercial to legal, and logistics.
It’s rare in a developer to find all of that in one go, and to be able to do it efficiently at a cost level that makes sense for the business model. There are lots of different pieces that need to fit together, and Daystar have found a way to do it optimally.
It was our first investment in Nigeria. What were the challenges to getting started there?
RA: A key one is currency, which can be volatile. It helps that Daystar has developed a mechanism of hedging some of this risk. More generally, financing a number of decentralised sites across the country, across different regions, helps spread the risk across the portfolio. In terms of the quality of the end user, Daystar screens them well and makes sure there’s a strong value proposition of at least a 20% cost saving for their customers.
TM: We also had to be flexible. Typically a lender wants to take security over all assets but in Nigeria the cost of taking security is calculated as a percentage of the overall collateral value, so it becomes really expensive for the client. So we had to do a process of ascertaining where the real value was, and be quite surgical over which assets we took relative to the value. We also had to accommodate Daystar’s need to finance future growth.
In that sense it’s a scalable structure. What do we mean by that?
RA: We created the legal grounding for Daystar to be able to sign on new clients and add new sites, and for us to be able to continuously disburse with the same set of security package. So nothing needs to change really, just simple amendments to add new sites . It’s trying to find a structure that is both scalable, protects us from a risk perspective but is also light from the client’s perspective.
TM: For that, we developed a checklist, so the moment they submit a site to add we can ensure it meets the minimum criteria. The moment that’s done we can disburse quickly without having to restructure the legal documentation or get further approvals. It’s all been pre-cooked!
It highlights the way SunFunder is now a “one-stop shop” for solar financing.
TM: Yes. What we were able to do was bring our full set of transactional expertise in from the start in order to structure a loan facility that was optimal for the client as well as for us. For example, we were able to look at multiple jurisdictions quickly without incurring advisors fees, and work out the most cost effective and efficient security regime to take as well.
There were some moving pieces at times so we also had to be flexible when the transaction changed, and were able to restructure quickly internally without further cost and delay. We also prepared the legal documentation, which again was efficient and cost effective. This is all work that we can do internally and not outsource to advisors, which would have increased the transaction costs and the time until deal closing.
Very pragmatic. But it brought a few firsts for SunFunder, how did you get it over the line?
RA: Doing things for the first time is always tricky – and it was our first in Nigeria, our first with this structure that allows more scalability and flexibility. So there was quite a strong initial lift which at times took perseverance. But it sets us up for doing more in Nigeria and beyond with both Daystar and other C&I companies.
How do you see the potential scale and impact of C&I solar in Africa?
RA: I view the C&I solar market as one of the biggest avenues of growth for companies in general on the continent right now. It can be incredibly transformative for the economy and the environment. Nigeria is very reliant on decentralised sources of energy that are fuel-based for now, so the uptake of renewable energy solutions in this particular market will have an incredible impact. It’s both an environmental challenge for countries but will also allow them to have more reliable power and cheaper power for the long run, so from an economical point of view it just makes sense. That’s what’s exciting about C&I!
How else have Daystar positioned themselves for this opportunity?
RA: The team is really the key. Daystar has been able to build a team in an incredibly short amount of time – it has grown to 80 already – which is a healthy level of scale to be able to work on all these projects and realise their pipeline. They have a policy of growing team members from the inside, encouraging internal promotion and so on. The top management have been able to delegate quite a bit to their team, which speaks to their capacity to empower. They have gathered expertise which is quite unique, for example they have a strong finance team led by a lady, a strong legal team again led by a woman.
That’s a strong alignment with SunFunder’s own female leadership.
RA: Absolutely. Daystar has many women in senior positions – their CFO, Head of Legal and CEO in Ghana are all women. They’re really empowering gender equality throughout the hierarchy, including in the technical team. That’s important to them – they’ve done campaigns to intentionally target women engineers, for example.
Our local counsel in Nigeria was a woman too, so on some calls when Tinashe was not there it was all women! It’s a sign of our times to be able to sit around a table with only women to drive forward renewable energy in Africa.
What a great sign of the times! Thanks to you both for these insights.
An abridged version of this Q&A also appears in our 2019 Annual Review.