Large, low-priced (50bp below the established US power debt price floor at the time), highly-geared and to some degree syndicated, the $1.023 billion debt financing for the 525MW Astoria II power project went against prevailing lending trends in 2009 and still closed 113% oversubscribed, despite no signs of a recovery in the bank market.

Although technically a bank club financing, the deal relied heavily on Natixis, WestLB, Export Development Canada and Calyon (now Credit Agricole CIB) providing early commitments and conducting a bookbuilding process with a transparent fee schedule. Fees were awarded on the basis of size of commitment and amount of work contributed, rather than leaving banks with the uncertainty of capturing the spread between underwritten and syndicated fees.

Astoria II is a 550MW natural gas-fired combined cycle unit located in Queens, New York. The first unit at the site, of the same size, went online in May 2006, financed through a B loan in April 2004, and then refinanced with a $725 million Calyon-led yield bond issue in May 2005.

The original Astoria I lead developer, SCS Energy, obtained a permit to build 1,000MW of capacity at the site, but only obtained a power purchase agreement from the city utility, Consolidated Edison, for 10 years for 500MW – enough for the first unit. Astoria Energy, whose shareholders, along with SCS, included SNC-Lavalin, EIF, La Caisse and AE Investor, kept the rest of the permit active while it looked to find a way of financing the remainder of its allowed capacity.

SCS subsequently sold its equity interest to Suez, which has since been renamed GDF Suez. With La Caisse passing on providing equity for the second phase, unit II's shareholders are EIF, through its United States Power Fund III (36%), GDF Suez (30%), SNC Lavalin (20%) and JEMB (a New York real estate investor, 14%).

The $1.083 billion credit facilities for Astoria II come with a tenor of construction-plus-5-years and comprise a $913.2 million multi-draw construction/term loan, a $42.2 million six-month debt service reserve letter of credit, $57.5 million of performance letters of credit, and a $10 million working capital facility. The construction/term loan will amortise according to a fixed monthly schedule starting at the end of the first complete month after its commercial operations date.

Equity is $352.2 million, with a contingent equity commitment of $130 million, and the borrower funds its share of the project costs after the construction/term loan has been fully drawn.

The loan is priced at 300bp over Libor during construction and then steps up above the 300bp spread at completion and every two subsequent years. The financing is structured with a cash sweep in years four and five and the base case debt service coverage ratio is 1.41x during the term of the mini-perm and 1.45x thereafter.

Given the illiquidity in the bank market after the Lehman collapse, the deal looked a hard sell on paper – total financing without a contingent equity LC of $1.375 billion, high leverage (72% of funded sources), a 20-year amortisation and a large balloon (94.8%).

However, the project also comes with a number of credit risk mitigants. The 20 year amortisation schedule matches a 20-year 100% tolling agreement with the New York Power Authority (NYPA), which has a credit rating of Aa2/AA-. Cashflows under the tolling agreement are also linked to inflation and there is 100% cost pass-through to NYPA for gas supply, potential emission credits, and transmission-related expenses.

The rationale for the project is equally strong. It meets an annual demand growth of 5% and will be one of the most thermally efficient sources of generation in New York. Furthermore, New York City has limited availability of suitable sites and water access, as well as an arduous location and permitting process, for power generation projects. Since Astoria was approved in 1999, it has become virtually impossible to build new generation in New York City.

Adding further lender confidence to the deal was its use of proven technology. The 550MW combined cycle natural gas-fired plant will be powered by two GE 7FA gas turbines, two Alstom HRSGs and a GE D-11 steam turbine.

The plant's construction package is also supported by SNC-Lavalin's role as a key project sponsor. However, SNC-Lavalin Constructors' contract to build the project is an EPC-M, cost-plus agreement, which potentially left lenders open to cost overrun risk.

That risk is mitigated, partly by the project cost including a 15% contingency, and by the sponsors putting up a $130 million contingent equity letter of credit to cover limited construction cost overruns as well as enough time for a 5.7-month delay in plant completion. In the event of the project coming in below the contingency, the banks and sponsors will share the benefits.

Initial work at the site began in May 2009 with sponsor equity acting as a bridge to the project financing, which closed two months after construction began.

Astoria Energy II
Status: Financial close 2 July 2009
Location: Queens, New York
Description: Financing for 550MW contracted power unit
Sponsors: Energy Investors Funds, GDF Suez, SNC-Lavalin, JEMB
Joint Lead Arrangers: Natixis, West LB, EDC, Credit Agricole CIB, Societe Generale, Bank of Tokyo-Mitsubishi UFJ, Union Bank
Arrangers: Santander, Bayern LB, Helaba, CIC, BNP Paribas, Bank of America
Borrower legal counsel: Bingham McCutchen
Lender legal counsel: Dewey LeBoeuf
Sponsor counsel: Nixon Peabody (EIF), Chadbourne & Parke (GDF Suez), Sidley Austin (SNC-Lavalin), Bingham McCutchen (JEMB), Couch White (regulatory)
Lender insurance adviser: Moore-McNeil
Independent engineer: E3
Contractors: SNC-Lavalin Constructors Inc, GE America Co, Alstom Power, GEA Power Cooling