Brascan NY: Merchant mixing

Brascan New York is the first significant US merchant deal to close since the troubles of 2001. The mandated lead arrangers behind Brascan Corporation's $874 million purchase of a hydroelectric portfolio from Reliant Energy were exploring territory that had not been covered for some time. Yet in the event ABN Amro and Citigroup closed a $500 million facility oversubscribed.

Says Kelly Marshall, senior vice-president, corporate finance, Brascan: "We recognized that we were coming out of the dark days but were able to convince lenders with value differentiation, and a different asset base – hydro."

This is in no small part due to the structure. The $500 million is a bridge financing, comprising three tranches, each a two-year bullet, which should ultimately be taken out in the capital markets. Each tranche services a defined portion of the overall portfolio. The Brascan New York portfolio consists of 71 small hydroelectric facilities with a capacity of 647MW, and a 105MW gas/oil-fired generation plant, all located in New York State. With the purchase Brascan becomes the largest hydroelectric producer in the state.

Without any long-term contracts in place, Brascan will use its power trading team based in Gatineau, Quebec, and will try to optimise the assets with a mix of short- and medium-term contracts and spot sales.

The portfolio is split into three tranches. The $191 million tranche A is secured on the St Lawrence River assets, the $161 million tranche B by Hudson River assets, and $148 million by Lake Ontario assets. The 105MW Carr Station, which was bought by Orion in 1999 from USGen for $17 million before Orion was sold to Reliant, is not included. Each portion is ring-fenced and thus isolated from a default at any other portion. Not that this is likely. The Dominion Bond Rating Service (DBRS), an independent Canadian ratings agency, has preliminarily rated each prospective bond tranche at A (low).

Although dividing a portfolio in this way is sometimes undertaken to group assets together according to their risk profile, so that each can achieve the lowest possible cost of borrowing, the segregation here is more a function of appetite for merchant risk. The standalone nature of each portion gives a greater degree of flexibility for the bond refinancing. It enables Brascan to adjust the size of any capital markets refinancing, and tweak the timing to accommodate demand, without altering leverage.

"Brascan is from a real estate background, which shows in this deal," explains Marshall. "Splitting the portfolio into three portions has obvious advantages: it allows individual placements to made; the deal size is smaller; and it mitigates cross collateralization risk."

The deal strikes a balance between the thawing reluctance of the banks to accept long-term merchant risk – or, more accurately, any merchant risk – and the sponsor's wish for flexibility. There are no power purchase agreements and no parental guarantees, but Brascan has obtained its desired gearing.

Of the $874 million purchase price, $500 million was met in the first instance by the bridge facility and $374 million by equity. The equity was injected using a series of holding companies, the tower structure common for Canadian companies owing US assets, for tax purposes. The structure can be easily collapsed and it is tried and tested, so its existence had negligible bearing for the lenders.

The bond refinancings will likely be complete by the end of 2005. ABN Amro and Citigroup had expected to retain much more than their ultimate hold level on the bridge deal – particularly as the debt was priced at a competitive 100bp over 90-day Libor – but their expected take was pared back following an oversubscription in syndication. They were joined by Scotia Capital at co-arranger level, and at sub-underwriting by Brascan, Comerica, EDC, Natexis, Sun Life and SMBC.

Brascan Power New York
Status: Closed 28 December 2004
Size: $874 million
Location: New York State
Description: bridge acquisition financing for 779MW predominantly hydro portfolio
Sponsor: Brascan Power
Debt: $500 million
Mandated lead arrangers: ABN Amro; Citigroup
Underwriter: Scotia Capital
Participants: Brascan, Comerica, EDC, Natexis, Sun Life,
Sumitomo
Tenor: two years
Margin: 100bp over Libor
Market consultant: Pace Global
Engineer: MWH
Sponsor legal: Weil Gotschal & Manges
Lenders' legal: Milbank, Tweed, Hadley & McCloy
Insurance: AON