CIT has completed the refinancing of the BRSP generating portfolio, even as its own future hung in the balance. The $290 million deal, led by Barclays Capital, marks a return to life for the US institutional loan, or B loan, market. It then suffered a ratings downgrade within weeks of closing, as doubts over the viability of CIT mounted.

BRSP is the holding company for CIT's interests in two combined-cycle gas-fired power plants. CIT took full control of the plants following the bankruptcy of their lessee, Calpine. B loan lenders are more likely to be inconvenienced than badly harmed by any CIT bankruptcy. But CIT, according to recent reports, might be able to stave off filing for protection – at least for now.

The two plants are Broad River and South Point. Broad River is an 850MW peaking power project located in Gaffney, South Carolina, that uses GE 7F/FA turbines and runs in a simple-cycle configuration. It sells power to Progress Energy subsidiary Carolina Power & Light under a long-term power purchase agreement. The first three of its units went online in 2000, and a further two arrived in 2002.

South Point is a merchant plant, located in Bullhead City, Arizona, that dispatches into the WECC power pool and came online in June 2001. It has a capacity of 520MW, runs in a combined cycle configuration, and uses Siemens turbines. Moody's, in its B1 rating of the BRSP portfolio, notes that "while South Point has historically exhibited high capacity factors, these are difficult to explain from an economic standpoint."

Neither plant has an unblemished operating history, and both have suffered from outages and high operations and maintenance costs. South Point, located in an area with excess gas-fired generating capacity, has a high heat rate, or measure of the amount of fuel required to produce a given amount of power.

But the BRSP financing is not dependent, at least initially, on the economic performance of the plants. Both are subject to long-term leases, with Calpine-owned lessees, South Point Energy Center LLC, and Broad River Energy Center LLC. Calpine guarantees these lease payments, which are payable regardless of plant performance, and says that it has a 100% interest in the plants, though it declined to answer questions about the BRSP financing, or the circumstances by which CIT took control of the plants. Calpine acquired the plants as development properties when it acquired SkyGen, whose management went on to form Invenergy, in June 2002.

The two plants, together with a third, 520MW RockGen in Wisconsin, were financed through an $800 million leveraged lease bond issue in November 2001. CIT, during its year-long stint as Tyco Capital, provided the lease equity for a 36-year term, and Credit Suisse led the 144A bonds. This financing retired roughly $450 million in construction debt from Credit Suisse and Credit Lyonnais (now Calyon). The South Point plant is located on Native American Indian land, a factor that is understood to have led to the use of the lease.

Calpine filed for bankruptcy in December 2005, and thus defaulted on its obligations under the leases. The lease bond debt, secured over a pledge of the lessors' interests in the plants, also went into default. CIT bought the lease bonds associated with the Broad River and South Point, and reached an agreement with Calpine in June 2006 to restructure the debt. CIT had been spun off from Tyco in July 2002, while Tyco's senior management became embroiled in accounting and other scandals.

CIT took out a $266 million loan from Lehman Brothers, which entered bankruptcy protection in September 2008, to fund the acquisition. This loan is believed to have had a three-year maturity. Few issuers will have been as motivated as BRSP to try and re-open the B loan market. Barclays Capital, which acquired Lehman's US operations and has been trying to build up its leveraged finance activities, picked up the mandate to run a $275 million loan.

The loan was priced at 450bp over Libor, has a five-year term, and was pitched to investors at a 6% discount to par. It attracted enough market interest to allow CIT to increase the loan to $290 million, before the financing closed in late June. The base rate for the loan is fixed at 3%. Standard & Poor's rated the loan BB-, initially, and Moody's assigned it a B1 rating.

The deal's credit is best understood as a blend of Calpine risk and CIT risk, with Calpine the most important element. In the event that Calpine defaulted, lenders would be able to pursue Calpine for more than the year's payments typical for a lease deal, and would need to be comfortable with the plants' economics. The debt per kW, level, at $210, is below other Calpine plants, and replacement values, and will be as low as $150 when the debt matures in 2014. A cash sweep would see the lenders repaid by 2019, and S&P was comfortable in assigning its 1 recovery rating to the deal.

Less well covered, at least initially, was the CIT risk. S&P clarified this on 14 July when it downgraded the debt by four notches, saying that BRSP, as a wholly-owned subsidiary that was not ring-fenced from CIT, could not be rated at a higher level than the owner. A day later, CIT said that its discussions with the US government about assistance in rolling over its debt were at an end.

A day after that, Moody's put the BRSP loan on review for downgrade, noting that while the lessors did not have directors independent of CIT, they did have independent managers. CIT, believes Moody's, would be unlikely to put the borrower into bankruptcy if this allowed Calpine to terminate the lease and cease making payments.

The question may yet be purely academic. CIT is set to reach a high-priced debt extension with bondholders that would keep it afloat for several months. The struggle is the latest to dog CIT since 1989 and has engulfed owners as diverse as Tyco and Dai-Ichi Kangyo (now Mizuho). At the very least, BRSP could provide leasing experts with another source of work long after the demise of the structure as a popular financing option.

BRSP, LLC
Status: Closed June 2009
Description: Holding company for two power plants with a total 1,370MW capacity
Sponsor: CIT
Debt: $290 million
Lead arranger: Barclays Capital
Maturity: 2014