Industry Funds Management has completed the first stage of its $1.477 billion acquisition of Consolidated Edison's gas-fired unregulated generation portfolio. The financing, led by Barclays Capital, and featuring Union Bank of California and HSH-Nordbank as lead arrangers, is the most ambitious use of a B loan-type financing structure since the credit crunch. It also marks IFM's first purchase in the US without an equity partner.

The financing is notable for its low level of leverage, the sponsor's willingness to hedge extensively to produce more reliable cashflows, and for incorporating a potential unsecured high-yield bond issue. The arrangers structured the debt to satisfy the twin constituencies of the ratings agencies and the commercial bank market, a much more difficult balance than it might have been 12 months ago.

Finally, IFM managed to assemble and close the financing for the plants in the face of not just the second wind of the credit crunch but also the abrupt departure of its original equity partner, Allco Finance's AllCapital. IFM's approach to infrastructure assets, in particular is attention to cashflows over asset appreciation and its conservative capital structures, will be extremely potent, particularly as long as debt remains comparatively expensive.

IFM's ultimate owners are roughly 40 Australian superannuation funds, and the funds provide the majority of its capital, though its open-ended funds are available to outside investors. As Dunia Wright, IFM's head of Europe and the US, notes, without making any explicit comparisons to its Australian peers, "we have a 30-year investment horizon, and we're not driven by fee income or solely asset appreciation to make adequate returns."

Nevertheless such an investor would not be favoured to win and consummate the acquisition of a portfolio with substantial merchant exposure. That IFM has Australian dollars to invest helps: International Power and TransCanada have both taken advantage of the weak dollar to buy US power assets in recent weeks. But the buyer has also taken care to de-risk the portfolio in a manner that few other buyers would consider.

During the JPMorgan-run auction for the portfolio, AllCapital, the US subsidiary of Australian fund management firm Allco Finance, approached IFM to provide equity for its bid for the assets. IFM was to provide the majority of the equity for the purchase, or 62.4% a much larger proportion than its other US and European purchases, but less than some of its Australian assets.

The two signed purchase agreements for the assets on 10 December, with a Japanese strategic buyer finishing a strong second in the bidding. The portfolio of plants consists of the 525MW Newington gas-fired plant in New Hampshire, 80% of the 236MW gas-fired Lakewood plant in New Jersey, 50% of the 670MW Rock Springs peaking project in Maryland, the 185MW CEEMI complex of hydro and gas plants in Massachusetts, and 330MW Ocean peaking power, in New Jersey. All except Lakewood, which sells power to Jersey Central Power & Light, are merchant.

By February, Allco was struggling under the weight of its corporate debt, the poor performance of some of its real estate and debt investments, and shareholder concern about related-party transactions. Allco planned to form a new publicly-traded infrastructure fund to hold its 37.6% stake in the plants, but as its woes mounted, its own survival, let alone the prospects for a fund launch, looked dubious.

Allco sold its stake in the acquisition to IFM, and is now providing all of the roughly $730 million in equity for the acquisition, though "sold" is something of a misnomer, since Allco is believed to have paid IFM a substantial sum to be released from its equity commitment. AllCapital remained as financial adviser, and had an opportunity to recoup some of this payment, though IFM also hired Merrill Lynch as co-financial adviser.

Throughout this period Barlcays, as lender, and ConEd as seller, remained broadly supportive of the effort. ConEd's patience is understandable, given the deteriorating conditions in equity markets and the difficulty in predicting the results of a second round of bidding. Barclay's willingness to go ahead with the original terms from the December commitment is impressive, and while it had the ability to flex the pricing on the debt it did not do so.

The financing, the first phase of which closed on 8 May, consists of an $85 million funded term loan and $340 million delayed draw term loan, both due 2015, an $80 million letter of credit facility and $40 million revolving credit facility, both due 2013, and a $325 million bridge loan due 2018. The second phase is set to close shortly after 22 June, when the terms of a synthetic lease on the Newington project allow the lease to be terminated. At this point the delayed draw term loan will be drawn. IFM is providing.

The $325 million bridge loan is designed to be refinanced with an unsecured high-yield bond issue, a process which willl take place as soon as the sponsor can produce the audited financial statements required for a capital markets issue. Demand in the high-yield market has been buoyant, even as leverage loan sentiment remains shaky, and several energy issuers have taken advantage of the window. The stapled financing offered by the seller of the Ravenswood power project in Queens is understood to have offered such a package.

The first lien secured debt is priced at 275bp over Libor, and was rated BB+/Ba1, while the bridge, which will flip into a term loan if not refinanced, was rated BB-/Ba3. IFM targeted a rating of BB or above for the transaction, which enabled it to primarily rely on the commercial bank market rather than the institutional market, where margins for debt rated below BB were believed to be in excess of 500bp at the time. It believes a later investment grade rating is very possible, and according to Wright "when the agencies get more comfortable with our story and our approach, we are optimistic that we could get the portfolio upgraded".

In the face of lender persistence and the agencies' strictures were some tweaks to the financing, including a cashflow waterfall, which should not be necessary if the lenders are sweeping 100% of available cash. Despite the blandishments of potential lenders, the sponsor avoided having to add to the list of conditions precedent for the debt to fund. According to sources close to Barclays, the commitments from lenders on the financing are due to be finalised shortly.

The hedges on the portfolio consist of a seven-year physical tolling agreemment with Shell's Coral Energy for Newington, and financial hedges for one-third of the cappacity of the Rock Springs and Ocean plants. The two CEEMI projects are not hedged, but earn capacity revenues from the New England ISO, which are bid three years in advance, and the financing is not dependent on energy revenues from these assets.

The hedges lower the risk profile of the projects to within IFM's tolerances, and make an eventual refinancing more of an eventual goal than an immediate prospect. Given the current state of debt markets, however, having a lower risk tolerance than its peers, and return requiremments in the lower rather than the upper teens, will give IFM an advantage over many funds in bidding for assets.

The best indication for where IFM wants to take the ConEd portfolio comes from one of its holdings in Australia. It bought 100% of Pacific Hydro, which owns 1,800MW of wind and hydroelectric capacity, in 2005. Pacific Hydro had already gained a formidable reputation as a developer in Australia and the Asia-Pacific region, and has since expanded into Brazil and Chile.

IFM is likely to bolster the NAES vehicle with in-house development and management expertise, and use it to pursue both greenfield and acquisition opportunities. These will each be financed on a non-recourse basis rather than at the portfolio level. Given the speed at which it moved to make the NAES portfolio bankable, and the amount of equity it can deploy, however, it could become a potent force in the US market.

North American Energy Alliance
Status: First phase closed 8 May, second phase set to close in late-June, financing in syndication
Size: $1.477 billion
Location: Maryland, Massachusetts, New Hampshire and New Jersey
Description: 1,181MW gas-fired partially contracted power portfolio
Equity: $730 million
Sponsor: Industry Funds Management
Debt: $85 million funded term loan, $340 million delayed draw term loan, $80 million letter of credit facility, $40 million revolver, $325 million bridge loan.
Lead arrangers: Barclays Capital, HSH-Nordbank, Union bank of California
Plant manager: Competitive Power Ventures
Market consultant: Navigant
Independent engineers: Sigma, P3
Lender legal counsel: Simpson Thacher & Bartlett
Sponsor legal counsel: Shearman & Sterling

NAES ownership structure