Scalper1 News
When the idea of an “YieldCo” was first introduced in 2012 as an adapted version of a REIT, it looked very impressive and was expected to be a boon for the renewable energy sector (mainly solar and wind). The first YieldCo was Brookfield Renewable Energy Partners LP (NYSE: BEP ), formed by Brookfield Asset Management (NYSE: BAM ). The motive behind launching YieldCos was to help energy companies raise cheaper capital for their renewable energy projects while benefiting investors through higher distributions and yield. These projects are sold by energy companies through “drop down” transactions to publicly traded YieldCos, which develop them and generate stable cash flow by selling electricity under power purchase agreements (“PPAs”) with utilities. YieldCos distribute most of their income or cash flow (about 80%) as dividends to its shareholders, making them an attractive buy. However, the survival of this interesting vehicle of investment has come into question lately owing to a number of adverse developments. Notably, the Indxx Global YieldCo Index plunged 26.6% (as of October 12, 2015) from its mid-April high while many YieldCo stocks are trading in the red. As a result, energy companies like SunEdison, Inc. (NYSE: SUNE ) and NRG Energy, Inc. (NYSE: NRG ) have decided to either hold off selling their projects to YieldCos or pursue a limited strategy with them. Slumping crude oil prices is the primary factor for the underperformance of the renewable energy sector and consequently the YieldCos. Low oil prices reduce the demand for renewable energy. Secondly, China is the leader in the global renewable energy industry. Due to its economic slowdown, the sector outlook looks grim at this moment. Thirdly, the prospect of a near-term interest rate hike by the Fed is having a double whammy effect on YieldCos. Higher interest rates make high-yielding stocks such as YieldCos less attractive. Further, they raise the cost of financing the expansion projects for YieldCos. Lastly, YieldCos need to issue new shares (generally at higher prices than their IPOs) from time to time to raise capital for new investments as most of their cash flow gets wiped out by paying dividends. However, they are facing difficulties on this front due to depressed renewable energy stocks and an oversupply of YieldCos in the market, making investors reluctant to pay higher prices. Keeping in mind the challenging environment, we turn our attention to the recently launched ETF focused on this niche market. Global X YieldCo ETF (NASDAQ: YLCO ) Launched in May this year by Global X, the fund intends to diversify the risk of owning YieldCo stocks by tracking the Indxx Global YieldCo index. The ETF holds 20 securities with Brookfield Renewable Energy Partners, TerraForm Power Inc. (NASDAQ: TERP ) – formerly a SunEdison YieldCo – and NextEra Energy Partners, LP (NYSE: NEP ) – a NextEra Energy, Inc. (NYSE: NEE ) YieldCo – taking up the first, second and third spots with 11.75%, 8.79% and 7.62% share, respectively. The fund is highly concentrated in its top 10 holdings, which account for 68.22% of total assets. It has a global footprint with the U.S. occupying the top spot at 41%, followed by Canada (29%), U.K. (18%) and Spain (12%). YLCO has gathered a meager $3.3 million in assets and trades in a paltry volume of 4,200 shares. It charges 65 bps in annual fees from investors and has a dividend yield of 1.22%. The product was down significantly by 27.4% since its inception (as of October 15, 2015). Although the idea of investing in YieldCos looks tempting at first given its high income nature, lots of public funds pouring into the renewable energy sector and environmentalists pushing for greener energy, investors should exercise caution before hopping onto this ETF, which is thinly traded and focused on the niche market that is not yet developed and presently facing turbulence. Original Post Scalper1 News
Scalper1 News