Report: 2.8% Of Developers Whose Entire Business Plan Relies On Securing Letters Of Credit Actually Know What That Financial Instrument Is
NEW YORK, NY - Fitch Co. has recently summarized results from a survey they conducted of over 65,000 renewable energy and storage developers whose business model relies entirely on being able to satisfy various deposits with a letter of credit. The survey asked each participant a series of questions related to what a letter of credit is and who is customarily eligible to receive one. A selection of responses follow:
“It’s a letter that a bank sends on your behalf vouching for your creditworthiness.”
“Ok right, so lets just say - hypothetically - you have no balance sheet whatsoever and no credit history to point to, and you need to satisfy a security posting….. you just get one of these! I think you just go into a local branch of your bank and fill out some paperwork. I’ve never done it, but I think that’s right. The beautiful thing is that you don’t have to come up with any cash. Which is really convenient, because I have, like, no fucking money. Ever.”
“That’s when someone wants to buy a project from you and they say they’ll ‘cover your LCs for you’ and you nod and pretend like you know what that actually means so that you don’t look dumb. Right? And then, later, they actually just cover the deposits with cash, eating into your economics a fuck-ton, and that’s a little confusing so you kind of wonder what they meant before when they said they ‘have access to LCs’, but then you decide it’s best not to come off as amateurish, so you just kind of, you know, move past it. I think that’s right?”
I’ve always just assumed it’s financial voodoo that those fast talkin’ New Yorkers can easily pull off. It’s great because it introduces absolutely zero risk for me, yet I can glean loads of economic benefit from it. Somehow that works, I guess? Life is full of stuff like that, so I’m not going to question it. Ok fine…I don’t totally understand it, but it’s a lot easier if I just assume it’s a straight forward thing and this wall street pixie dust will be there when I need it to be.”
“It’s like a really cheap loan at 1%, except you don’t have to pay it back.”
“It’s a blockchain thing. In the cloud. Cost of capital. Metaverse. Proprietary Algorithms. Green Hydrogen. Platform. Can I go now?”
“Everyone always talks about ‘LCs’ so I assume that means it’s not a big deal to get one. Right? I mean…that’s gotta be right, no?”
“The utilities created it as a way for us to satisfy their deposits without using cash, because they know developers don’t have much cash sitting around. They’re always trying to help us out.”
“It’s basically free money. These banks are so dumb. You know they misprice risk all the time….they don’t even realize what a loophole this is for us. It’s like that phrase my dad taught me: ‘if it seems too good to be true, it’s probably just you getting the better of a highly educated banker with access to a lot of data and underwriting support.”
“You see the banks know that solar development is really low risk and that all these deposits are totally refundable anyway, so they just give you a really low interest loan because it’s basically free money for them.”
“If you pinky-swear you’ll pay them back if things go awry, a bank will give you one of these and then all your problems are solved.”
“If you have no cash, no balance sheet, and no credit history, this is the perfect product for you. The bank just takes all the risk. You see, that’s what banks are there to do, so it works out well. It’s just capitalism at work, not rocket science.”