Blackstone, BofA broaden infra project financing’s horizons with $580m tax credit sale

The ‘first-of-a-kind’ tax credit sale – fueled by the Inflation Reduction Act – is likely to be the first of many in a budding matchmaking service between big banks and renewable tax credit buyers.

Last month, Blackstone – via subsidiary company Invenergy – reached an agreement with Bank of America to sell $580 million worth of tax credits to the bank. The funds will be used to purchase a portfolio of 14 wind and solar plants from utility American Electric Power, a deal worth 1.4GW in capacity and $1.5 billion in enterprise value.

A source familiar with the transaction says that Bank of America is not the final buyer for the tax credits, and that Blackstone is not aware of who that final buyer will be. Bank of America is rather acting as an intermediary in the tax credit transaction.

It is a novel approach for the tax credit financing industry leader to take on the role of a broker between the buyer and seller of Inflation Reduction Act-linked tax credits. And according to our source, it is likely to be the first step toward a more mature, sophisticated tax equity financing market.

“[Before the IRA] there were only four or five banks that were driving that [tax equity] market in terms of their consistent [buyer’s] appetite. And so that became a bottleneck in the industry because you needed to be able to monetise the tax attributes,” the source said.

They continued: “It was a pretty lucrative business for those banks to be in, fast forward with the IRA; it allowed for the transferability of these credits going forward. [That has allowed sellers to continue] working with the banks, but the banks don’t have to look at [the tax equity market] using their own tax appetite. Banks can retransfer these credits to clients and basically become a bank for tax attributes where they put them on their balance sheet through this transfer commitment and then they can go sell them to a corporate or potentially even to individuals or other tax paying entities going forward.”

Infrastructure Investor understands that the deal was initially hashed out before Internal Revenue Service guidance on tax credit transferability was released, but that Blackstone has issued strong guarantees to the buyer(s) of the tax credits.

Whatever’s next for the tax equity market, our source is confident that Bank of America’s foray into brokerage is here to stay, and will fall into fashion with banks of similar size and stature. Especially if interest rates go back down – “with a lower discount rate, the value of these credits in year 10 will be worth more today than if it’s a higher discount rate. And so you’re actually bringing even more value forward through this kind of commitment to purchase and then financing against it,” our source explained.

While it may not be a silver bullet, the development in the market certainly does bode well for the task at hand of closing the multi-trillion dollar funding gap in energy transition financing as a whole.

With this [tax credit] transferability [under the IRA], I think there is a broadening out of who can participate in this market,” our source said. “We may get to a point where you and I could say, I’ll buy $100 worth of these tax credits for $95 and I’ll save $5 on my taxes and I’ll have supported a renewable project… we’ll see. Fingers crossed.”