Aquila: Swims with the sharks
Aquila has completed a $640 million financing as part of its protracted restructuring process. The deal, led by Credit Suisse First Boston, marks the first time that Aquila has accessed the Term B market. However, the two loans may not be the last occasion on which the embattled utility and generator is forced to look at alternative sources of cash.
Aquila is the rebranded name given to Utilicorp's regulated and unregulated business segments, and is taken from the division devoted to merchant activities. As such, it was designed to project the image of a dynamic player in the global deregulated energy markets. It owned stakes in US generation assets, tolled a number of further facilities, and controlled distribution businesses in Canada and Australia.
But Aquila, despite being one of the bigger fishes in the merchant pool, was not able to avoid the shutdown in merchant power markets that followed Enron and California. Trading operations required huge sums to be posted in collateral, banks became more wary of extending credit lines, and access to the capital markets became non-existent. Ratings agencies viewed merchant activity with ill-disguised suspicion.
But Aquila's commitment to a triple-B rating is the main spur behind its recent moves to shore up liquidity, which include asset sales and refinancings. Nevertheless, it has been unable to avoid the slide into junk territory. Its rating from Moody's Investors Service now stands at B3, and Moody's says that it is still unimpressed with the programme of asset sales in terms of their effect on outstanding debt and the ability to repay it. Standard & Poor's has the rating at B.
In this context Aquila, like many of its peers, has been forced to turn to the Term B market, the home of institutional investors which like full security and mouth-watering rates of interest. The market developed around cash-poor, asset rich corporates ? a description that applies to the distressed merchant players. This is a market populated by institutional loan and hedge funds, which are prepared to offer bond-like instruments with short maturities.
Allegheny Energy, Dynegy and Reliant have all been forced to access this market, which has been billed as a rescue option for troubled corporates. Arrangers, particularly those with muscular loan trading operations, have focused on the market's potential, but such debt provides a respite rather than a full solution. Aquila faced a number of short-term maturities, including a one-year revolver due on April 12, and some Canadian debt due on April 11.
In addition, Aquila was a common user of structured debt, including leveraged leases and partnership structures. These have not been altered by the new package, but the Term B loans do take out two synthetic leases on power plants in Illinois ? the Goose Creek and Racoon Creek peaking facilities. Goose Creek is located in Monticello and has a 450MW capacity while Racoon Creek, in Clay County, has a 300MW capacity.
This synthetic lease debt, which was largely a corporate credit that was structured so as to obtain footnote accounting treatment, had to be brought back on balance sheet. The lessors would need to be paid off, and the new package would require security over the entity that formerly held the lease structures. While a structural challenge, this was achieved, as was the use of a collateral package over the other partnership interests.
The interest over the IPPs takes the form of a pledge of shares in the holding company for a series of partnership interests. These are largely joint ventures with Calpine and El Paso, and did raise project level debt, but the structure of these ventures has made pledging the distributions simple. However, as one banker in the deal put it, "the peaker assets are just icing on the cake."
More important in terms of security are the utility assets, which contain strong regulated cashflows. Their values are much less at the mercy of power and gas prices than those of generation assets, which have been the subject of numerous write-downs in recent months. Taking a security interest over these sometimes requires consents from regulators, but two operations - Nebraska and Michigan - can be so encumbered, using a pledge of their first mortgage bonds. A first lien over the Canadian distribution assets rounds out the collateral package for the three-year piece.
There is a further one-year tranche secured over Aquila's Australian distribution assets, Multinet Gas, United Energy and AlintaGas. This is for a total of $200 million, of which $100 million has so far been drawn. The cash will be sent up to the Aquila corporate level, although the debt is non-recourse to the parent. However, a week after the deal closed, Aquila announced that the assets were to be sold to a consortium led by AlintaGas and AMP Henderson. The sale, for a total consideration (after various charges) for $445 million, will not affect the loan.
While the Term B loan was being assembled, the sponsor continued to talk with existing lenders about a refinancing, and kept a close eye on those of its peers. After observing the fraught progress of many of these it decided to go with the final package since bank terms were, if anything, more burdensome. For Aquila flexibility is the key, and it has provisions in the documentation for the substitution of collateral (to keep its options open as to what businesses to sell). The debt is known by some in the market as a "drive by" deal, in that it is executed quickly and opportunistically, with little time for complex due diligence from the hedge funds. Christopher Moore, partner at Aquila's lawyers Orrick, Herrington & Sutcliffe, says simply, "it was a very complex transaction implemented in a very short timeframe."
It also has flexibility to call the debt at any time, although there are substantial make-whole provisions (covering interest and principal) should it do so. The one-year deal is priced at and starts pricing at 400bp over Libor and is callable at par. The rate steps up 200bp every 90 days, while the larger tranche is priced at 575bp over Libor.
Finance officials at Aquila say that the market was essentially the only solution to the coming maturities. Ratings agencies have not really viewed it as a positive step, either because they had already factored in the debt, or because they feel that servicing the debt will eat up free cashflow. Nevertheless, it has further upcoming maturities, including another Canadian piece, coming due in 2004.
Aquila Secured Refinancing
Status: closed 12 April 2003
Size: $630 million
Description: refinancing of synthetic and corporate debt maturities in the Term B market
Sponsor: Aquila
Debt: $430 million three-year piece and $200 million one-year piece
Arranger: Credit Suisse First Boston
Lawyers to the lenders: Dewey Ballantine
Lawyers to the borrower: Orrick Herrington & Sutcliffe
Aquila is the rebranded name given to Utilicorp's regulated and unregulated business segments, and is taken from the division devoted to merchant activities. As such, it was designed to project the image of a dynamic player in the global deregulated energy markets. It owned stakes in US generation assets, tolled a number of further facilities, and controlled distribution businesses in Canada and Australia.
But Aquila, despite being one of the bigger fishes in the merchant pool, was not able to avoid the shutdown in merchant power markets that followed Enron and California. Trading operations required huge sums to be posted in collateral, banks became more wary of extending credit lines, and access to the capital markets became non-existent. Ratings agencies viewed merchant activity with ill-disguised suspicion.
But Aquila's commitment to a triple-B rating is the main spur behind its recent moves to shore up liquidity, which include asset sales and refinancings. Nevertheless, it has been unable to avoid the slide into junk territory. Its rating from Moody's Investors Service now stands at B3, and Moody's says that it is still unimpressed with the programme of asset sales in terms of their effect on outstanding debt and the ability to repay it. Standard & Poor's has the rating at B.
In this context Aquila, like many of its peers, has been forced to turn to the Term B market, the home of institutional investors which like full security and mouth-watering rates of interest. The market developed around cash-poor, asset rich corporates ? a description that applies to the distressed merchant players. This is a market populated by institutional loan and hedge funds, which are prepared to offer bond-like instruments with short maturities.
Allegheny Energy, Dynegy and Reliant have all been forced to access this market, which has been billed as a rescue option for troubled corporates. Arrangers, particularly those with muscular loan trading operations, have focused on the market's potential, but such debt provides a respite rather than a full solution. Aquila faced a number of short-term maturities, including a one-year revolver due on April 12, and some Canadian debt due on April 11.
In addition, Aquila was a common user of structured debt, including leveraged leases and partnership structures. These have not been altered by the new package, but the Term B loans do take out two synthetic leases on power plants in Illinois ? the Goose Creek and Racoon Creek peaking facilities. Goose Creek is located in Monticello and has a 450MW capacity while Racoon Creek, in Clay County, has a 300MW capacity.
This synthetic lease debt, which was largely a corporate credit that was structured so as to obtain footnote accounting treatment, had to be brought back on balance sheet. The lessors would need to be paid off, and the new package would require security over the entity that formerly held the lease structures. While a structural challenge, this was achieved, as was the use of a collateral package over the other partnership interests.
The interest over the IPPs takes the form of a pledge of shares in the holding company for a series of partnership interests. These are largely joint ventures with Calpine and El Paso, and did raise project level debt, but the structure of these ventures has made pledging the distributions simple. However, as one banker in the deal put it, "the peaker assets are just icing on the cake."
More important in terms of security are the utility assets, which contain strong regulated cashflows. Their values are much less at the mercy of power and gas prices than those of generation assets, which have been the subject of numerous write-downs in recent months. Taking a security interest over these sometimes requires consents from regulators, but two operations - Nebraska and Michigan - can be so encumbered, using a pledge of their first mortgage bonds. A first lien over the Canadian distribution assets rounds out the collateral package for the three-year piece.
There is a further one-year tranche secured over Aquila's Australian distribution assets, Multinet Gas, United Energy and AlintaGas. This is for a total of $200 million, of which $100 million has so far been drawn. The cash will be sent up to the Aquila corporate level, although the debt is non-recourse to the parent. However, a week after the deal closed, Aquila announced that the assets were to be sold to a consortium led by AlintaGas and AMP Henderson. The sale, for a total consideration (after various charges) for $445 million, will not affect the loan.
While the Term B loan was being assembled, the sponsor continued to talk with existing lenders about a refinancing, and kept a close eye on those of its peers. After observing the fraught progress of many of these it decided to go with the final package since bank terms were, if anything, more burdensome. For Aquila flexibility is the key, and it has provisions in the documentation for the substitution of collateral (to keep its options open as to what businesses to sell). The debt is known by some in the market as a "drive by" deal, in that it is executed quickly and opportunistically, with little time for complex due diligence from the hedge funds. Christopher Moore, partner at Aquila's lawyers Orrick, Herrington & Sutcliffe, says simply, "it was a very complex transaction implemented in a very short timeframe."
It also has flexibility to call the debt at any time, although there are substantial make-whole provisions (covering interest and principal) should it do so. The one-year deal is priced at and starts pricing at 400bp over Libor and is callable at par. The rate steps up 200bp every 90 days, while the larger tranche is priced at 575bp over Libor.
Finance officials at Aquila say that the market was essentially the only solution to the coming maturities. Ratings agencies have not really viewed it as a positive step, either because they had already factored in the debt, or because they feel that servicing the debt will eat up free cashflow. Nevertheless, it has further upcoming maturities, including another Canadian piece, coming due in 2004.
Aquila Secured Refinancing
Status: closed 12 April 2003
Size: $630 million
Description: refinancing of synthetic and corporate debt maturities in the Term B market
Sponsor: Aquila
Debt: $430 million three-year piece and $200 million one-year piece
Arranger: Credit Suisse First Boston
Lawyers to the lenders: Dewey Ballantine
Lawyers to the borrower: Orrick Herrington & Sutcliffe
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