North American Merchant Power Deal of the Year 2001
Syndication heads learned quickly that the easiest way to pitch a
portfolio deal in the latter part of 2001 was to compare it to
TECO-Panda. Seasoned borrowers such as PSEG and PG&E NEG all
saw their deals recast in the mould of the first borrowing from
TECO Energy's TECO Power Services (TPS) affiliate. The buzz
surrounding the deal in the market was so great that co-arrangers
were speaking in confident tones about an award back in August
2001.
It is not hard to see why the deal attracted so much admiration ? this $2.175 billion financing had a tight, simple structure and generous fees. Its closing in June 2001 represented something of a watershed in the US power syndicated bank market. Construction revolver and intricate synthetic lease structures were out, apparently, and project finance faces began talking about the ?new simplicity? in US power financings.
The deal brings together two sponsors from either end of the spectrum: Panda Energy is an old-style privately-held developer, of which few remain, whilst TPS is the new merchant development vehicle for TECO Energy, formerly Tampa Electric Company. Panda, has been here before. It developed the Odessa and Guadelupe power plants in a joint venture with PSEG Global.
The deal backs construction of what are billed as the largest merchant power plants ever built in the US. The first, Union, is a gas-fired combined cycle plant constructed in two phases, of 2260MW and 500MW. Union is located in Union County, Arkansas, and was a site acquired by Panda from a smaller developer. Gila River is located at Gila Bend, Arizona, and is a 2300MW combined cycle facility. The plants use GE7F technology and are configured so that the various blocks of turbines at each site can work independently of each other.
The plants are well-located ? Gila River is within the Western Power Pool and conveniently located for a number of growing load pockets. California ? in particular Palo Verde ? Nevada and Arizona are all markets and all are experiencing rapid population growth. Even after the apparent stabilisation in the Californian markets and the introduction of price caps and state-backed contracts there is still money to be made in the region. Union sells into the SERC (Northern Entergy) region.
Nevertheless, merchant plants have been much more affected than their contracted cousins by lender wariness. There is an incentive to place some of the output under contract, if only to maintain an investment grade that allows for equity distributions. The aim is to eventually have around 50% of the plant's output contracted.
The arrangers ? Citigroup and SG ? have included within the structure cash flow coverages above 3.4x and a cash sweep system. The distribution test stands at a historical and projected 1.25x. And the deal is not particularly highly leveraged ? at about 59% it is well within the tolerance limits for merchant lenders.
The total financing breaks down into a $1.7 billion construction loan of five years and a $475 million equity bridge loan designed to cover the necessary infusions of sponsor equity during construction. The latter is full recourse. Pricing on the loan starts at 160bp over libor and ramps up to 200bp over the life of the loan.
Most of the loan is provided to each of the two facilities, rather than the TECO-Panda Generating Company L.P. Union's take is $784 million, whilst Gila River's is $868 million. The deal carries complex cross-default provisions that differ a little from the standard default language in a power deal. Taking security upon the other plant in the event of a default at its alter depends upon whether the alter has experienced a small or large event. Some participants say this was one of the most demanding parts of structuring the deal.
The aspect of the financing that the arrangers are most proud of is the syndication effort. It is easy to see why ? several other deals in the market at the time were struggling. Mirant pulled a construction revolver, NRG faced off scepticism by hefty relationship pull, and ANP was radically restructured to take account of technology and market risk.
TECO-Panda underwent a lengthy market read as well as a soft launch to potential co-arrangers familiar with either of the sponsors. The result was that some concerns about hold positions, underwriting fees and ancillary business could be allayed. Moreover, these banks were inclined to feel more proprietary about the deal than would normally be the case in wholesale syndication.
21 banks were approached about taking co-arranger titles, and 15 did so ? an unprecedented number for this tier. Co-arrangers had their fees linked to hold positions and were able to demand that financial close was dependent upon them reaching within $20 million of their target. WestLB, Abbey National, Bank of Tokyo-Mitsubishi, HypoVereinsbank, Nord LB, Royal Bank of Scotland, RBC, TD, CIBC, BNP Paribas, Scotia Capital, UBS, Dexia, Barclays Capital and Mizuho committed at this level.
It is fortunate that this tier came in with a 71% hit rate ? the arrangers had correctly surmised that participant interest was shallow, as had been threatened all year. Nine banks out of a possible 30 came in at general syndication. Senior managing agent commitments were better, at around 70%. The Frankfurt bank meeting, 2001's must-do syndication step, was held to snare the landesbanks. The arrangers are keen to point out the dedication on the part of the sponsor's finance teams in getting the deal sold.
This 36-bank financing closed successfully on 13 June 2001, and had one more obstacle to clear that could have affected drawdown ? Enron. Enron guaranteed the obligations of its construction arm, NEPCO, and when Enron went into Chapter 11 the deal was in technical default. It is a tribute to the commitment of TECO to the deals that it was willing to step up and guarantee these obligations.
TECO has plans to be a regular borrower and has already launched another deal for its Dell and McAdams plants. This transaction has also been Enron-ed, but banks are already looking forward to a steady stream of business, especially in the less overbuilt south-east, as a result of the blowout financing.
TECO-PANDA Generating L.P.
Status: closed 13 June 2001
Size: $2.9 billion
Location: Arkansas and Arizona, USA
Description: Construction of two large merchant power plants with combined capacity of 4500MW
Sponsors: TECO Power Services and Panda Energy
Debt: $1.7 billion construction term loan and $475 million equity bridge
Lead arrangers: Citigroup and SG
Independent engineer: RW Beck
Market consultant: PACE Global Energy Services
Lawyers to the sponsors: White & Case
Lawyers to the lenders: Latham & Watkins
It is not hard to see why the deal attracted so much admiration ? this $2.175 billion financing had a tight, simple structure and generous fees. Its closing in June 2001 represented something of a watershed in the US power syndicated bank market. Construction revolver and intricate synthetic lease structures were out, apparently, and project finance faces began talking about the ?new simplicity? in US power financings.
The deal brings together two sponsors from either end of the spectrum: Panda Energy is an old-style privately-held developer, of which few remain, whilst TPS is the new merchant development vehicle for TECO Energy, formerly Tampa Electric Company. Panda, has been here before. It developed the Odessa and Guadelupe power plants in a joint venture with PSEG Global.
The deal backs construction of what are billed as the largest merchant power plants ever built in the US. The first, Union, is a gas-fired combined cycle plant constructed in two phases, of 2260MW and 500MW. Union is located in Union County, Arkansas, and was a site acquired by Panda from a smaller developer. Gila River is located at Gila Bend, Arizona, and is a 2300MW combined cycle facility. The plants use GE7F technology and are configured so that the various blocks of turbines at each site can work independently of each other.
The plants are well-located ? Gila River is within the Western Power Pool and conveniently located for a number of growing load pockets. California ? in particular Palo Verde ? Nevada and Arizona are all markets and all are experiencing rapid population growth. Even after the apparent stabilisation in the Californian markets and the introduction of price caps and state-backed contracts there is still money to be made in the region. Union sells into the SERC (Northern Entergy) region.
Nevertheless, merchant plants have been much more affected than their contracted cousins by lender wariness. There is an incentive to place some of the output under contract, if only to maintain an investment grade that allows for equity distributions. The aim is to eventually have around 50% of the plant's output contracted.
The arrangers ? Citigroup and SG ? have included within the structure cash flow coverages above 3.4x and a cash sweep system. The distribution test stands at a historical and projected 1.25x. And the deal is not particularly highly leveraged ? at about 59% it is well within the tolerance limits for merchant lenders.
The total financing breaks down into a $1.7 billion construction loan of five years and a $475 million equity bridge loan designed to cover the necessary infusions of sponsor equity during construction. The latter is full recourse. Pricing on the loan starts at 160bp over libor and ramps up to 200bp over the life of the loan.
Most of the loan is provided to each of the two facilities, rather than the TECO-Panda Generating Company L.P. Union's take is $784 million, whilst Gila River's is $868 million. The deal carries complex cross-default provisions that differ a little from the standard default language in a power deal. Taking security upon the other plant in the event of a default at its alter depends upon whether the alter has experienced a small or large event. Some participants say this was one of the most demanding parts of structuring the deal.
The aspect of the financing that the arrangers are most proud of is the syndication effort. It is easy to see why ? several other deals in the market at the time were struggling. Mirant pulled a construction revolver, NRG faced off scepticism by hefty relationship pull, and ANP was radically restructured to take account of technology and market risk.
TECO-Panda underwent a lengthy market read as well as a soft launch to potential co-arrangers familiar with either of the sponsors. The result was that some concerns about hold positions, underwriting fees and ancillary business could be allayed. Moreover, these banks were inclined to feel more proprietary about the deal than would normally be the case in wholesale syndication.
21 banks were approached about taking co-arranger titles, and 15 did so ? an unprecedented number for this tier. Co-arrangers had their fees linked to hold positions and were able to demand that financial close was dependent upon them reaching within $20 million of their target. WestLB, Abbey National, Bank of Tokyo-Mitsubishi, HypoVereinsbank, Nord LB, Royal Bank of Scotland, RBC, TD, CIBC, BNP Paribas, Scotia Capital, UBS, Dexia, Barclays Capital and Mizuho committed at this level.
It is fortunate that this tier came in with a 71% hit rate ? the arrangers had correctly surmised that participant interest was shallow, as had been threatened all year. Nine banks out of a possible 30 came in at general syndication. Senior managing agent commitments were better, at around 70%. The Frankfurt bank meeting, 2001's must-do syndication step, was held to snare the landesbanks. The arrangers are keen to point out the dedication on the part of the sponsor's finance teams in getting the deal sold.
This 36-bank financing closed successfully on 13 June 2001, and had one more obstacle to clear that could have affected drawdown ? Enron. Enron guaranteed the obligations of its construction arm, NEPCO, and when Enron went into Chapter 11 the deal was in technical default. It is a tribute to the commitment of TECO to the deals that it was willing to step up and guarantee these obligations.
TECO has plans to be a regular borrower and has already launched another deal for its Dell and McAdams plants. This transaction has also been Enron-ed, but banks are already looking forward to a steady stream of business, especially in the less overbuilt south-east, as a result of the blowout financing.
TECO-PANDA Generating L.P.
Status: closed 13 June 2001
Size: $2.9 billion
Location: Arkansas and Arizona, USA
Description: Construction of two large merchant power plants with combined capacity of 4500MW
Sponsors: TECO Power Services and Panda Energy
Debt: $1.7 billion construction term loan and $475 million equity bridge
Lead arrangers: Citigroup and SG
Independent engineer: RW Beck
Market consultant: PACE Global Energy Services
Lawyers to the sponsors: White & Case
Lawyers to the lenders: Latham & Watkins
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