On 23 October, Boston Generating was the subject of a recapitalisation through its new owner EBG Holdings. Boston Generating consists of the Sithe Boston generating, which was the subject of a $1.25 billion financing in December 2000, led by Credit Suisse First Boston and BNP Paribas.

Despite being located near Boston, which is experiencing strong power demand, and being highly efficient, the plants have a chequered history. The three assets – Mystic 8&9, a 1600MW gas-fired plant, Fore River, 800MW of dual-fired capacity and Mystic Station, a 1005MW oil- and gas-fired plant – were to be constructed by Raytheon, and their EPC contracts were transferred to Washington Group, which was unable to perform them because of a liquidity crisis.

This delayed the construction financing until the appointment of SNC Lavalin as a replacement contractor. The financing ultimately closed in July 2001, and on November 2002, Sithe sold the portfolio to Exelon for $534 million, with Exelon guaranteeing to contribute the remaining equity to the projects.

Sithe broke cleanly with the projects, unlike Raytheon, which was still liable under various guarantees and performance bonds for the non-performance of Washington. By the time Exelon reached an agreement with Raytheon, one that ended Raytheon's claims against the projects, but also resulted in large write-offs against the contracts, it was February 2004, and Exelon had walked away from the projects in August the previous year. The banks that had come in during the relaunched syndication in 2001 now found themselves running the power plants.

The banks in turn largely sold on their debt commitments to hedge funds, which bought into the debt at below par. In September 2004, once the process was complete, the lenders put the assets up for sale. Lazard, which was running the auction, received several bids, but the price of the debt on the plants rose sharply, and by the start of 2005 the process had to be restarted.

But by April 2005, K Road Ventures, formed by former Sithe leader William Kriegel, went to the lenders/owners with a proposition that involved a small injection of outside equity, as well as a restructuring plan that would turn the diverse group of funds into formal equity owners and, in some cases, continuing lenders. The two came to terms in May 2005. K Road paid $65 million for 10% of the project's equity.

The restructuring was a complex affair, and one lawyer close to the process noted that the hardest part of the deal was gaining the relevant approval of a multitude of owners, which have attached various valuations to the assets, bought in at several prices, and have different investment objectives.

The final structure consists of a $500 million first lien facility (featuring a $70 million working capital facility, a $30 million debt service reserve facility and a $30 million letter of credit facility) and a $300 million second lien facility. The two pieces have the same covenants, and are at the same stage in the cash waterfall, but the second lien piece has a different recovery position.

The first lien piece gained a rating of B/B2 (S&P/Moody's), is priced at 325bp over Libor, and is understood to be trading at slightly above par. The second lien piece is unrated, and is priced at 630bp over Libor.

The profile of the deal, its rich pricing, as well as its history, made it a natural assignment for Credit Suisse First Boston (CSFB). An official at CSFB explained the recapitalisation as a result of the asset being the subject of too much debt, and noted that, with a financing for Calpine's Metcalfe project, it had already completed one merchant financing. The official added that the equity holders had not yet gained FERC approval for the transfer, and that a negative would force another restructuring attempt.

The portfolio's immediate prospects are cloudy. The assets do not benefit from any contractual cashflows, and their native power pool, NEPOOL, has not created strong operating margins for generators. But the projects may be formally designated as essential to system reliability and benefit from reliability must run contracts under the supervision of the New England Independent System Operator. They may also benefit from the introduction of locational installed capacity payments, which would pay generators, essentially, according to their usefulness to the system.

This type of restructuring looks like the favoured option for the most distressed assets, those located in overbuilt markets with few prospects of signing contracts with creditworthy offtakers. The most obvious candidate is the MachGen portfolio, formerly PG&E NEG's GenHoldings. But Lake Road, another northeastern gas-fired project, which has attracted attention from such names as K Road and former SG banker Jay Worenklein's US Power Generating, would be another strong candidate.

Boston Generating
Status: Closed October 2005, awaiting equity transfer approvals
Size: $1.2 billion
Location: Massachusetts
Description: Portfolio of roughly 3405MW of oil and gas-fired merchant capacity
Sponsors: group of hedge funds led by K Road Power (10%)
Debt: $800 million, split into $500 million first lien piece and $300 second lien
Arranger and adviser: CSFB
Maturity: 2010
Lender legal: Milbank Tweed Hadley & McCloy