obtained a power purchase agreement, for ten years, with the city utility Consolidated Edison, for 500MW, enough for the first unit. Astoria Energy, whose shareholders included SNC Lavalin, EIF, La Caisse, AE Investor, and SCS, 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%).

Finding a way to finance this second unit was difficult. Astoria had pursued utility requests for proposals, but was seriously considering a merchant deal with a financial hedge in mid-2007, at the top of credit markets. Given the ease with which US Power Generating closed an financing along these lines for the acquisition of an older neighbouring unit in 2006, this solution, even with the inclusion of construction risk, might have been possible.

But in September 2007, the New York Power Authority announced plans for a request for proposals for new generating capacity to replace the Charles Poletti station, an 885MW dual-fuel plant set for retirement in 2010. NYPA, a public power authority that supplies electricity to governmental bodies in New York State, has an AA- rating. Astoria decided to focus on the request for proposals, hoping that the advantage of the site would be enough to overcome competition from transmission-focused bidders.

The NYPA request for proposals went out on 8 November 2007, Astoria Energy submitted its bid on 20 December, and NYPA accepted its bid on 29 April 2008. Ten days later, Suez, the only sponsor with substantial appetite for merchant risk, agreed to buy a 30% stake in the project. The other sponsors, with a much lower level of interest in commodities exposure, probably breathed a sigh of relief.

The NYPA power purchase agreement was not only double the length of the ConEd contract, it also did not require the sponsor to provide any additional services, or allow it to make additional merchant revenues. But the contract gives lenders the benefit of a single, and very attractive, capacity payment. The project company and NYPA reached terms on the contract on 12 September 2008, three days before Lehman Brothers' collapse.

Astoria decided, despite the uncertainty, to ask roughly 12 banks to submit proposals, both to firm up the deal's structure and get an idea of whether an underwritten deal was possible. The response was not encouraging. Banks were not open to new deals for the rest of 2008, and were not interested in writing tickets that they could not hold on their balance sheet, if need be.

Astoria decided to postpone the financing and recast it as a best-efforts club-building exercise in early 2009. According to Astoria's chief executive, Chuck McCall, it spoke to roughly 12 banks to test their underwriting appetite, and found a small number of banks willing to write $125 million tickets. It started negotiating terms with five banks – Natixis, WestLB, Export Development Canada, Calyon and RBS – although RBS subsequently pulled out.

Astoria wanted a backbone of credit-approved support for the deal, a way of instilling confidence in the market, while recognising that negotiating with a club speaking for $1 billion in debt would be impracticable. Communications with the wider universe of power lenders was more sporadic, though the sponsors tried to create a transparent process for dealing with later arrivals. The package consisted of a $915 million construction-plus-five-years term loan and $110 million in letters of credit, priced at 300bp over Libor.

The four leads received a work fee, in recognition of their work on the deal, and the fact that they did not benefit from capturing any spread from underwriting. Fees and titles were fixed according to lender commitments. Of the three banks to provide underwritten commitments of $135 million, Natixis, as the earliest to provide a commitment, was the left lead and syndication agent, while WestLB and EDC shared bookrunner and co-documentation agent titles. Calyon committed $125 million, but given its familiarity with the project, and the commitment letter it provided at the time of the NYPA RFP, has the title of administrative agent.

Shortly before the four went out to the wider market, Union Bank and its parent BTM-UFJ committed with a combined $125 million ticket, and Societe General came in for $135 million, and both gained joint lead arranger titles. The deal subsequently gained commitments of $75 million for arranger titles from Santander, Bayerische Landesbank, Helaba and BNP Paribas, with BNP's ticket being scaled back, a commitment of $50 million from CIC and $25 million from Bank of America.

The group is heavy on established power finance banks, and French lenders, highlighting the draw of GDF Suez. Relationships mattered, especially with pricing at 300bp, below the established US power floor of 350bp. The financing is structured with a cash sweep in years four and five, and pricing increases after completion. The base case debt service coverage ratio is 1.41x during the term of the mini-perm and 1.45x after that.

The plant's construction package probably represented the biggest difficulty for credit committees. The first Astoria unit had a firm, fixed-price contract with a low-rated contractor, Stone & Webster, which led SNC Lavalin to come in and wrap the project. SNC now holds the EPC-M, cost-plus contract to build the second unit. Lenders to the project are comfortable with cost overrun risk partly because the project cost includes a 15% contingency, in the form of $50 million of budgetted contingency and a $130 million contingent equity commitment. In the event of the project coming in below the contingency, the banks and sponsors will share the benefits.

This level of sponsor support is a constant theme in the financing. The SNC Lavalin contract was signed on 11 July, and initial work at the site was funded through a bridge equity and letters of credit, some of which was structured as a loan, from the sponsors, amounting to $115 million in cash and $100 million in letters of credit. The project financing replaces all of these commitments, although the sponsors are still on the hook for both equity and the contingent equity commitment. Having the contractor represented in the sponsor group gives it an incentive to control construction costs. The plant is destined to come online in June 2011.

Astoria II will probably look to refinance after construction. The first Astoria unit went for a bond refinancing of its expensive B loan at an opportunistic moment, while still in construction, and arguably missed out on much better credit market conditions in the years after it went online. Given the comparatively tight pricing on the second unit's bank deal, and its ability to lock in via swaps the current low rate of Libor, its need to hit the bond market should be less pressing.

Closing a financing of above $1 billion is a significant milestone, if only because it demonstrates that banks can shift away a little from the full club towards a best-efforts process that rewards leads for the additional work that they do on a transaction. Sponsors in a variety of sectors in the US are grappling with the same issue – that banks cannot depend on capturing the spread between underwritten and syndicated fees to compensate for the uncertainty in getting deals closed. Astoria II suggests that a more straightforward approach might be merited.

Watching carefully will be the developer of the Hudson Transmission Partners transmission cable, PowerBridge. Hudson was victorious in one of the NYPA requests for proposals that Astoria lost, and shares a sponsor with Astoria, in the form of EIF. It plans to come to market with a financing shortly.

Astoria's McCall notes that "the deal was oversubscribed by 113%, which hardly matches the excesses of hotter times in credit markets. But following on from deals where sponsors had to either settle for less debt than they targeted or flex terms significantly to get to close, it is a result we take pride in and hopefully marks a turning point in market psychology."

Astoria Energy II, LLC
Status: Closed 3 July 2009
Size: $1.375
Location: Queens, New York
Description: Financing for 550MW contracted power unit
Sponsors: EIF United States Power Fund III (36%), GDF Suez (30%), SNC Lavalin (20%) and JEMB (14%)
Equity: $350 million
Debt: $915 million term loan, $110 million letters of credit facility
Initial mandated lead arrangers: Natixis, WestLB, EDC, Calyon
Arrangers: Union Bank, BTM-UFJ, Societe Generale, Santander, Bayerische Landesbank, Helaba and BNP Paribas, CIC and 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)
Insurance adviser: Moore-McNeil
Independent engineer: E3