The construction revolving credit has not been the most enduring of structures in the US power market. It has attracted few followers at banks or sponsors, and is now regarded as an adventurous relic of the US power boom. Calpine's ability to exit the Construction Finance Company I revolver - the first ever of its type - in such an elegant fashion will be an example to many portfolio sponsors with looming maturities and a less than perfect credit.

CCFC I was the first time a sponsor had worked with banks to create a non-recourse, standalone company with a debt facility that enabled it to access development cash quickly and efficiently. The $1 billion financing, through CSFB, Scotia, CIBC, TD, ING and Dresdner, carried a 2003 maturity, and pricing of between 150bp and 212.5bp over Libor.

The market in which the vehicle matured was drastically different to the optimistic atmosphere of the late 1990s. The only sponsor to copy the template - NRG Energy - was in bankruptcy, and Calpine's rating, having stood at investment grade for all of a month, was back in the single-B range.

Calpine embarked on a liquidity programme that included asset sales, convertible bond issues, and traditional project financings. Calpine did, however, become one of the first power sponsors to tap the B loan market, a group of debt providers with a heavy hedge fund presence and a different set of priorities to project lenders. To B loan participants, wobbly credits are of much less importance that a solid collateral package and generous interest rates. Several banks earned very healthy fees, and often returns, on B loans in 2002 and 2003.

Calpine had three potential options in the run-up to the debt's 30 November maturity. It could have raised corporate debt, a path made difficult by the fact that this was already earmarked for the liquidity programme. It could also attempt a senior secured 144A generation company (genco) issue, provided it could get a high enough rating. Or it could persuade banks to roll over the debt, provided it could offer them a high enough margin.

The CCFC portfolio consists of relatively homogenous gas-fired capacity, with a wide geographical spread. It includes the founder members of CCFC, and four additional plants, although two unnamed facilities were removed. The table below lists the plants in the portfolio at close.

Project name/Location/MW

Sutter Yuba City, California 543

Magic Valley Edinburg, Texas 751

Lost Pines Bastrop, Texas 280

Ontelaunee Reading, Pennsylvania 584

Westbrook Westbrook, Maine 528

Hermiston Hermiston, Oregon 642

Osprey Auburndale, Florida 609

Total 3,937

Since the deal closed, Calpine has sold the Auberndale plant, and bought out lenders to the Brazos Valley project - an NRG plant, including it in CCFC I.

Calpine retained Goldman Sachs to lead the deal, on the back of its distribution capabilities but, crucially, its commodities division. Bankers have suggested for several years that financing portfolios would require some smart enhancements. The volatility in the merchant market has only heightened the need for generating companies to provide relatively stable cashflows.

What Goldman provided was a collar for the portfolio's merchant price risk. This provided a floor for the spark spread, or difference between power prices and fuel costs, such that lenders could be assured of repayment of interest. The hedge is adjusted to the forward Libor rate to make sure that floating rate debt does not leave the hedge out of market. It is based on an average of pool prices, and based upon analysis from Henwood. Two of the plants dispatch into ERCOT, two into California, one into PJM, one into Florida, and one into NEPOOL. This diversity would have been enough to garner an investment grade rating in previous years - but now serves simply to create a collateral package sufficiently attractive to a hedge fund lender. As such the genco gained a rating from S&P one notch higher than Calpine's.

Nevertheless, unlike the Gilroy transaction (another deal of the year) the sponsor was not able to fully decouple the rating of CCFC from its B corporate rating. This is in part because Calpine owns all of the stock of CCFC, but also because the company is central to Calpine's strategy. The Term B market's lack of interest in restrictive covenants has enabled it to run its plants with a higher degree of flexibility, and move some operations and management functions in-house.

Calpine Construction Finance Company is not in the business of construction. Its portfolio is closed-ended, and it cannot keep drawing on debt for new projects. Proceeds from sales go towards paying down debt or buying new collateral. This explains why Calpine is buying in plants rather than building them itself.

The $750 million debt is split into two tranches. The first consists of $385 million in first priority secured term loans due 2009, which were offered at 98% of par and priced at 600bp over Libor, with a Libor floor of 150bp. The second tranche consists of $365 million of second priority secured floating rate notes due 2011, which were offered at 98.01% of par and priced at 850bp over Libor with a Libor floor of 125bp. The floor is designed to reassure lenders that they would not be the victims of further falls in interest rates. The discount enables loan traders to start making a secondary market as quickly as possible.

The deal is widely expected to be the template for the refinancing due this year for Calpine's CCFC II genco, a larger and less tightly covenanted vehicle. However, Calpine has not retained Goldman Sachs this time, so the sponsor may be tempted to start from scratch. Expect Goldman and the other investment banks, however, to shop the price hedge heavily.

Calpine Construction Finance Company I

Status: Closed 14 August 2003

Size: $2.35 billion

Location: United States

Description: Refinancing of seven gas-fired plants with total capacity of just under 4000MW, featuring a price hedge.

Sponsor: Calpine Corporation

Debt: $750 million, consisting of $385 million due 2009, at 98% of par, priced at 600bp over Libor, with a Libor floor of 150 basis points, and $365 million due 2011, 98.01% of par, priced at 850bp over Libor with a Libor floor of 125 basis points

Bookrunner, financial advisor and hedge provider: Goldman Sachs

Market consultant: Henwood

Engineer: RW Beck

Lawyers to the lenders: Latham & Watkins

Lawyers to the borrower: Covington & Burling; Stoel Rives