Astoria Energy: Swimming with sharks

Astoria Energy is a deal that cleanly divides sentiment in the US power market. This $973 million project, located in an inaccessible corner of New York City, with a tiny sponsor, raised $660 million in debt by hook or by crook. It is currently looking to refinance the debt, but the April 2004 financing was highly innovative, and the first time that a sponsor has managed to raise Term B debt during construction.

Astoria has its critics – most of them at the commercial banks, which insist that they could have financed the deal at a cheaper price. Indeed, Astoria is understood to have reluctantly signed the B loan financing, which featured richly-priced first and second lien pieces.

But whether banks could have come through, and on time, and to the sponsor's requirements is less clear. Indeed, the bookrunner, Credit Suisse First Boston, maintains that the bank market did not have the capacity to raise the required debt. That the proposed refinancing would take place in the bond market lends credence to the theory.

Probably the clearest evidence for the B loan being necessary comes from the terms of the power purchase agreement for the plant. On paper, the contract looked a jewel among the dross of the post-crash power market. In December 2002, Consolidated Edison, the A-rated utility for New York City, tendered a ten-year power purchase agreement for 500MW to any developer with a suitable site.

The winner, announced on 29 April 2003, was SCS Energy, which had proposed a 1000MW project in Astoria, Queens in 1999. It received a permit from state regulators in November 2001, and was located close both to existing substations and congested parts of the city's grid. The plant may have originally been conceived as a merchant project, but by 2003, it looked like one of the tiny number of contracted assets project lenders would look at.

But the contract had tough terms – the sponsors had to get the plant in operation by 1 May 2006, and had to offer a 5% discount to the market price. Moreover, the costs of the project, at a cramped site and in a labour market as expensive as New York's, were likely to be much higher than a comparable project at a rural greenfield site.

SCS, based in Concord, Massachusetts, scaled back the project to 552MW, but stuck with using Stone & Webster, based in Boston, as contractor. S&W's parent, the Shaw Group, faced financial difficulties, and prospective lenders had urged SCS to take on another contractor. But S&W has a strong record in the city, one of the few that can navigate its Byzantine labour market, and was also interested in the project at a time when other EPC players claimed to be booked up.

Ultimately, SCS brought in additional equity from SNC Lavalin, $60 million in all, as well as SNC's wrap on construction, for a fee. Other equity investors include EIF's United States Power Fund ($50 million), CDP Capital-Americas (part of Quebec's Caisse des Depots, $100 million) and AE Investor, which combined with SCS, kicked in $73 million.

Initial indications were that Astoria Energy would issue bonds through New York State's Liberty bond programme to fund the project. The bonds are tax-exempt, backed by a dedicated $8 billion fund, and are dedicated to the rebuilding of lower Manhattan, or to office-building projects elsewhere in the city.

The Empire State Development Corporation approved the bonds and JP Morgan was appointed bookrunner. But the approval has been mired in legal challenges. The sponsor had an approval for $400 million in bonds, which do not carry any credit enhancement, but felt that the contracts would not support a high enough rating to sell cleanly. They might be used for a future 500MW expansion, and Liberty debt might form part of the refinancing proposed by Calyon. But today's financing environment is much more benign that even one year ago.

In the circumstances, a B loan issue went from being a novelty to being a lifeline. B lenders are still not very eager to finance construction, but SNC's wrap, accompanied by a number of cash sweeps, provides a little mitigation. The contract, which accounts for 10% of Con Ed's power needs, might be extended, and the prospects for a generator to make money as a merchant plant in New York's congested Zone J look good.

The senior piece, $500 million of it, has an eight-year tenor, is priced 525bp over Libor, and rated at Ba3/B+ (Moody's/ S&P). The unrated $200 million junior piece, also with an eight-year maturity, was priced at 920bp. The senior tranche has a sweep on 35%-50% of the project's cash, and 1% amortization. The junior piece has neither.

The pricing is much higher than CSFB's initial pitch, which was that the whole $700 million could be done for 450bp. And since then, other merchant deals have been done with slimmer pricing, although still none with construction risk. But the arranger maintains that the deal could only be done at that time and on those terms in the B loan market.

2004's market was dominated by the B loan phenomenon (for more, search www.projectfinancemagazine.com), and asset after asset, from coal plants to ethanol plants, have emerged as suitable candidates. And while the bank market may say in hindsight that it can do a deal like Astoria Energy, the best underwriting offer it had at the time was $300 million. Certainly, the sponsor has no hard feelings. According to Jim Croyle, partner in SCS and AE Investor, "I've been developing and lending to power plants for a long time. You're never disappointed to get a deal done."

Astoria Energy LLC
Status: Closed April 2004
Size: $983 million
Location: Queens, New York
Description: 552MW power plant
Sponsors: AE Investor, SCS Energy, EIF, SNC Lavalin,
Caisse Des Depots
Arranger: CSFB
Debt: $500 million in first lien Term B debt, $200 million in second lien debt
Margin: 525bp and 875bp over libor, respectively
Maturity: 2012
Engineer: Harris
Market consultant: Pace Global
Lawyers to the borrower: Bingham McCutchen
Lawyers to the lenders: Skadden Arps