Orion Power Holdings
Americas Restructuring Deal of the Year 2002
Orion Power Holdings
Most US-based bankers will be spending 2003 doing the rounds of work-outs and cleaning up their portfolios. They should take note of the progress made on the Orion Midwest and New York refinancings ? the cleanest solution yet found to looming debt roll-overs. This $3.426 billion deal, forced onto a new acquirer in the hardest time the industry has seen for years, will be watched carefully by other producers with a portfolio of assets and impatient lenders.
Orion Power was the start-up formed in 1998 by Goldman Sachs and Constellation Energy to capitalise on the then-booming merchant power market. It was interested in a pair of attractive disposals by Duquesne Light, and Consolidated Edison, Niagara Mohawk and US Generating (ConEd, NiMo and USGen) ? the Midwest and New York assets respectively. Orion relied upon a mixture of $375 million in high-yield bonds, and $775 million in equity (from the two founders, as well as Mitsubishi and Tokyo Electric) to fund its equity contributions to the two generating companies (gencos).
The New York assets consisted of the 105MW Carr Electric station, 68 upstate hydro plants with 650MW of capacity, and 2030MW of New York City capacity ? the Astoria, Gowanus and Narrows plants. These are located in a high load, transmission constrained area, and have been very profitable. The financing for these came from a $730 million 3.5-year loan arranged by BNP Paribas and Bank of America.
The Midwest assets consist of the Avon Lake (739MW), Cheswick (570MW), Brunot Island (234MW), Elrama (487MW), Niles (246MW), New Castle (338MW) and Ceredo (500MW) plants. These plants are largely coal-fired baseload plants that carry little dispatch risk, but high price risk. A $1.2 billion loan from Bank of America, BNP, Deutsche and Goldman Sachs funded this purchase.
Both pieces of debt marked the most impressive flowering of the mini-perm structure, one that took over from the one-year bridges that had dominated previous genco acquisitions. The merits of the mini-perm were that it was suitable to operating in the merchant market, and well within the willingness of banks to lend. The loans were traditionally 3-5 years in tenor and were to be taken out by a capital markets financing in the near future. Indeed, several spin-offs, and one or two acquisitions, did reach the bond market.
Several factors intervened for Orion, chief of which was its acquisition, for a handy premium, by Reliant Energy. Reliant, a Texas-based utility with substantial non-regulated interests. Indeed, Reliant was contemplating, and has since completed, a spin-off off the unregulated business, to better separate the often competing demands of two types of equity investor.
The acquisition, however, left Reliant with a nasty headache ? a purchase price of $5.9 billion and two mini-perms that came due in 2003. Reliant, at the time one of the bigger beasts in Houston, wanted to fund the maturing debt using corporate offerings. Marrket conditions, however, scotched this plan.
Enron, the effective shut-down in the capital markets, and overcapacity have made the second act in the mini-perm saga ? the take-out ? difficult. Indeed, at least one acquisition genco, NRG's Northeast Generation, is in default. In this atmosphere, Reliant's credit rating slid sharply. Moody's downgraded it progressively from Baa2 in April 2001 to its present level of B3. Standard and Poor's has it at B+.
Moreover, the Midwest (MW) assets have performed substantially below expectations, since they operate with very little flexibility. They are also very long in the tooth, being as much as 30 years old. An upcoming maturity would leave the banks in possession of the assets if they could not agree to an extension.
The solution, according to the arrangers, was to link the fortunes of the two gencos and emerge with a reasonably robust midway point of a credit. This was possible in large part because of the overlapping characteristics of the two bank groups, which had supported Orion Power on both deals. There were three banks with exposure only to New York (NY), and these had to be bought out.
The remainder were left with the choice of either letting both fail or sweetening one piece of exposure. But it would be unfair simply to characterise the deal simply as an elaborate piece of arm twisting on the part of BNP and Bank of America, the mandated leads. The deal also featured an elaborate, and innovative, security package, one that needed to address the fact that the sub-investment grade rating arrived just as the leads were trying to sell the deal down.
The deal features a new holding company between Orion Power Holdings and the two gencos, known as HoldCo. Cash is directed through the structure to support whichever of the two is experiencing the shortfall. This deal is designed to let the NY assets support the MW ones, although the cashflow mechanism works both ways. The deal also features a second lien over the other set of assets.
There was, of course, a sweetener, in the form of a 150bp fee for NY lenders and a 100bp fee for MW lenders. Pricing was increased, but not after the initial launch, a victory of sorts. And the deal is not highly leveraged, with the $1.58 billion of debt matched by $1.85 billion in equity.
The deal is a milestone for project lenders wondering how to deal with a looming maturity, and a sign that keeping a clear head can bring rewards to banks that must be sorely tempted to sell up below par. Next up is the $5.9 billion acquisition debt at the holding company that Reliant must refinance. As Project Finance went to press it achieved a short extension on this maturity.
Orion Power Holdings
Most US-based bankers will be spending 2003 doing the rounds of work-outs and cleaning up their portfolios. They should take note of the progress made on the Orion Midwest and New York refinancings ? the cleanest solution yet found to looming debt roll-overs. This $3.426 billion deal, forced onto a new acquirer in the hardest time the industry has seen for years, will be watched carefully by other producers with a portfolio of assets and impatient lenders.
Orion Power was the start-up formed in 1998 by Goldman Sachs and Constellation Energy to capitalise on the then-booming merchant power market. It was interested in a pair of attractive disposals by Duquesne Light, and Consolidated Edison, Niagara Mohawk and US Generating (ConEd, NiMo and USGen) ? the Midwest and New York assets respectively. Orion relied upon a mixture of $375 million in high-yield bonds, and $775 million in equity (from the two founders, as well as Mitsubishi and Tokyo Electric) to fund its equity contributions to the two generating companies (gencos).
The New York assets consisted of the 105MW Carr Electric station, 68 upstate hydro plants with 650MW of capacity, and 2030MW of New York City capacity ? the Astoria, Gowanus and Narrows plants. These are located in a high load, transmission constrained area, and have been very profitable. The financing for these came from a $730 million 3.5-year loan arranged by BNP Paribas and Bank of America.
The Midwest assets consist of the Avon Lake (739MW), Cheswick (570MW), Brunot Island (234MW), Elrama (487MW), Niles (246MW), New Castle (338MW) and Ceredo (500MW) plants. These plants are largely coal-fired baseload plants that carry little dispatch risk, but high price risk. A $1.2 billion loan from Bank of America, BNP, Deutsche and Goldman Sachs funded this purchase.
Both pieces of debt marked the most impressive flowering of the mini-perm structure, one that took over from the one-year bridges that had dominated previous genco acquisitions. The merits of the mini-perm were that it was suitable to operating in the merchant market, and well within the willingness of banks to lend. The loans were traditionally 3-5 years in tenor and were to be taken out by a capital markets financing in the near future. Indeed, several spin-offs, and one or two acquisitions, did reach the bond market.
Several factors intervened for Orion, chief of which was its acquisition, for a handy premium, by Reliant Energy. Reliant, a Texas-based utility with substantial non-regulated interests. Indeed, Reliant was contemplating, and has since completed, a spin-off off the unregulated business, to better separate the often competing demands of two types of equity investor.
The acquisition, however, left Reliant with a nasty headache ? a purchase price of $5.9 billion and two mini-perms that came due in 2003. Reliant, at the time one of the bigger beasts in Houston, wanted to fund the maturing debt using corporate offerings. Marrket conditions, however, scotched this plan.
Enron, the effective shut-down in the capital markets, and overcapacity have made the second act in the mini-perm saga ? the take-out ? difficult. Indeed, at least one acquisition genco, NRG's Northeast Generation, is in default. In this atmosphere, Reliant's credit rating slid sharply. Moody's downgraded it progressively from Baa2 in April 2001 to its present level of B3. Standard and Poor's has it at B+.
Moreover, the Midwest (MW) assets have performed substantially below expectations, since they operate with very little flexibility. They are also very long in the tooth, being as much as 30 years old. An upcoming maturity would leave the banks in possession of the assets if they could not agree to an extension.
The solution, according to the arrangers, was to link the fortunes of the two gencos and emerge with a reasonably robust midway point of a credit. This was possible in large part because of the overlapping characteristics of the two bank groups, which had supported Orion Power on both deals. There were three banks with exposure only to New York (NY), and these had to be bought out.
The remainder were left with the choice of either letting both fail or sweetening one piece of exposure. But it would be unfair simply to characterise the deal simply as an elaborate piece of arm twisting on the part of BNP and Bank of America, the mandated leads. The deal also featured an elaborate, and innovative, security package, one that needed to address the fact that the sub-investment grade rating arrived just as the leads were trying to sell the deal down.
The deal features a new holding company between Orion Power Holdings and the two gencos, known as HoldCo. Cash is directed through the structure to support whichever of the two is experiencing the shortfall. This deal is designed to let the NY assets support the MW ones, although the cashflow mechanism works both ways. The deal also features a second lien over the other set of assets.
There was, of course, a sweetener, in the form of a 150bp fee for NY lenders and a 100bp fee for MW lenders. Pricing was increased, but not after the initial launch, a victory of sorts. And the deal is not highly leveraged, with the $1.58 billion of debt matched by $1.85 billion in equity.
The deal is a milestone for project lenders wondering how to deal with a looming maturity, and a sign that keeping a clear head can bring rewards to banks that must be sorely tempted to sell up below par. Next up is the $5.9 billion acquisition debt at the holding company that Reliant must refinance. As Project Finance went to press it achieved a short extension on this maturity.
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