Babcock & Brown (B&B) has completed the $505 million financing for the Trans-Bay Cable project. The wrapped bank loan element of the package, at construction plus 30 years, is probably the longest dated bank loan in the US power sector ever. Nevertheless, the financing comes during a difficult time for credit markets, and the loan's progress through syndication will attract considerable attention.

That the deal should attract attention at all is remarkable, since the financing of a transmission project is typically its least onerous element. Transmission projects, so long as they can gain permitting and line up strong, regulated revenues, can command very attractive financing terms. Babcock & Brown's aggressive approach to the financing, in the wake of the US subprime crisis, will challenge lenders.

The financing breaks down into a $267 million senior loan to operating company Trans Bay Cable LLC, arranged by BayernLB and wrapped to AAA/ Aaa (S&P/Moody's), a subordinated loan of $188 million to holding company Trans Bay Holdings LLC, also from BayernLB, and $50 million in equity from Babcock & Brown. The senior loan, but not the junior piece, carried a wrap from Ambac, although the junior debt, which gained an indicative rating that was just investment grade, might have qualified for a wrap.

The junior loan will be refinanced at completion with equity. The sponsor says that it chose the wrapped bank loan over numerous alternatives, including a private placement, which the sponsors of the last undersea transmission cable financing – 2005's Neptune – successfully closed.

The lead arranger is believed to be pitching the senior debt to potential participants on the basis of pricing of roughly 50bp over Libor, and the junior debt at 150bp. The levels would ordinarily look reasonable for triple-A and triple-B debt, but some participants in the syndication market have been sceptical.

The deal originally had two leads, but Royal Bank of Scotland withdrew in the weeks before the deal closed, as the dimensions of the US credit crisis grew more ominous. The reasons for this withdrawal encompass a mixture of the difficulty attached to placing triple-A bank debt, as well as the low pricing on the junior debt, which RBS wanted increased and B&B, successfully, maintained.

Trans-Bay is close to becoming a story credit, the sort that ordinarily would be a prime candidate for a wrap. The story, however, is the financial condition both of the monoline insurers and the buyers of wrapped debt. The monolines have endured a torrid summer, as equity analysts questioned how robust their model was in the face of delinquencies in mortgage and CDO debt.

Among the main buyers of wrapped bank debt have been conduits sponsored by commercial banks. These conduits have been able to buy bank loans wrapped to triple-A, on the understanding that they will be able to replace their own short-term lenders. Banks have often gained benevolent regulatory treatment in connection with their sponsoring of such conduits, but many have had to step in to provide liquidity to these conduits as they have struggled to maintain the credit quality of their assets and avoid liquidation.

At its heart, the syndication revolves around the long, slow decline in bank margins on US power deals, a slide that the pause in B loan market activity has arrested, for now. Banks are likely to dominate syndication, however.

The Trans-Bay Cable has a revenue stream that is regulated by the Federal government. The 53km cable, which winds its way from the city of Pittsburg in the eastern part of the Bay Area, to the western side of the city of San Francisco, has its tariffs set by the Federal Energy Regulatory Commission. Babcock & Brown made the cable subject to FERC's jurisdiction by making it the nominal property of the City of Pittsburg, and Trans Bay Cable, the borrower, operates the cable under contract with the city.

The payments to the operator for the asset, a high-voltage transmission cable buried under San Francisco Bay, reflects the full recovery of costs and a fixed return on equity. It therefore produces stable and predictable cashflows and an underlying rating that lends itself to a leveraged financial structure. Lenders have full security over receivables and assets, including the transmission system rights assigned to the cable, even though the operating company does not own the project after construction.

The HVDC cable option was selected after a four-year planning process, during which CAISO, which would supervise the project's operation, decided in 2005 that the transmission line, which allows the city effectively to access another 400MW of capacity, was the cheapest and least disruptive way to increase its reserve margins.

The project will apply to the California Independent System Operator (CAISO) for a revenue requirement that reflects its cash 90 days before operation. CAISO funds this requirement by bring a transmission access charge to utilities, which pass the cost on to their ratepayers.

The project gained approval from the city of San Francisco, the main beneficiary of the project, on 16 August, and will start construction shortly. It is set to enter operations in 2010. The construction contractor is a joint venture of Siemens and Prysmian, which is building the cable under a fixed-price contract.

The transmission sector, after several years of inaction, may finally be coming back to life. Several utilities have put forward plans for separate transmission development entities, including TXU, AEP and MidAmerican (about which see the Deal Analysis opposite), and these will be attractive assets for lenders. But banks, sniffing the prospect of higher margins, may be tempted to hold out for more. Babcock & Brown, though, says reverse inquiry interest in the debt has been substantial.

Trans Bay Cable LLC
Status: Closed 21 September, in syndication
Size: $505 million
Location: San Francisco, California
Description: 53km HVDC cable
Sponsor: Babcock & Brown
Equity: $50 million
Senior debt: $267 million, wrapped to AAA/Aaa
Junior debt: $188 million
Monoline: Ambac
Arranger: BayernLB
Sponsor legal: Skadden Arps
Lender legal: Milbank Tweed
Monoline legal: Latham & Watkins
Independent engineer: E3
Insurance adviser: Moore-McNeil