North American Portfolio Power Deal of the Year 2001
NRG Energy closed a $2 billion revolver in May 2001 that by turns
impressed, shocked and bulldozed the US power finance community.
This was a deal that, in the words of NRG Energy's treasurer, Brian
Bird, ?we simply could not do in the present lending climate.? It
was a deal that several participants insisted (off the record)
would fail. That, however, is comment familiar to any arranger
working on an envelope-stretching financing, and NRG's FinCo
delivered innovation in spades.
2001 marked a decisive shift from NRG's previous acquisition-based strategy. Whilst it had been a one-off developer of power projects, it was far better known for its large GenCo acquisitions and financings. During a time of rebranding at its majority parent, Xcel, and its own partial spin-off, it quietly moved towards becoming a major merchant producer. Trading staff and construction experts were lured away by NRG to provide the necessary back up to a greenfield generation programme.
The best model in this respect was the Calpine construction approach. Calpine wanted to build up a predominantly gas-fired portfolio using flexible finance with as little drag on corporate capital as possible. The result was the construction revolving credit, and NRG developed it further.
The comparisons are inevitable, if overstated in the market. For a start, NRG went into the financing with a far larger portfolio of assets, gathered into Gencos such as the Northeast and South Central Generating companies. Moreover, it attracts a slightly more cautious investor than Calpine, if only because of its utility parent. NRG has a broad and very loyal relationship group, but to improve the construction revolver template it went to the architect of the first ? Credit Suisse First Boston.
The structure of the deal offers less in the way of comfort to banks than the 1999 and 2000 Calpine revolvers ? of $1 billion and $2.5 billion respectively. The most crucial change comes from the fact that NRG can move assets, and not just cash, out of the finance company. As Bird likes to say, ?we feel that we've put together the first true revolving credit, because of the way that we can churn the projects in the revolver.?
This means that lenders do not have massive over-collateralisation to support future draws on the deal. And this caused several of them some disquiet. Negative comment slipped out as the arrangers began to start the primary syndication. Much of this was part of the normal process of bargaining over pricing and hold levels. NRG took it in its stride, and maintained afterwards that the first proposal was a cheeky look at what the market would bear. Bird says generously, ?I think CSFB did an excellent job, but I also appreciate the efforts of the co-arrangers in shaping the financing as it developed.?
Other parts of the financing are familiar to those that went into the Calpine deals. The finance company is largely a standalone entity whose financing is dependent on the approval of a technical committee of banks, which judge whether the relevant fuel and geographical diversity tests have been met for drawdown on a new project. Peaking units are limited since they do not necessarily produce strong and stable cashflows, and nuclear plants are entirely off-limits.
The plants included in the facility are not all newbuild, however, and the portfolio was meant to be sweetened with a number of proven generating facilities. Three of the plants, Batesville, Big Cajun and Sterlington, are expansion projects, whilst two ? Bridgeport and Newhaven ? are coal, oil and gas-fired facilities, located in Connecticut, that were to be acquired from Wisconsin Energy. These sales fell through after regulatory obstacles, but other candidates, including Meriden, in the same State, have been identified.
The deal's structure encourages the sponsor to increase the levels of contracted output from the portfolio. The financing used a modified version of the borrowing base approach pioneered on InterGen's North American deals. This means the leverage on the transaction, and thereby the distributions that NRG can receive from the assets, is based upon contracted coverages. The pricing is also based on a leverage-related grid.
The trickiest part of the syndication was finding the co-arranger banks that could afford to make a $200 million commitment and potentially hold $75 million on their books. Several candidates suggested that they did not have $75 million worth of love for NRG. Bird, however, is quick to point out that those who did come in were rewarded later either with single-asset mandates or manager slots on NRG capital markets financings.
The finance company now forms the core of NRG's development plans, as a means of maintaining access to capital at a time when access to funding will be variable and expensive. Several of its competitors have announced plans to cut back on expenditure on new generation projects ? including Calpine, PPL and Mirant. Much of this has been in reaction to a softening in the forward price curve, as well as signs of a future tightening in capital access that does not justify expenditure on advanced development.
NRG has not been immune to pressure from investors and ratings agencies. Market rumour has suggested that Xcel is looking to buy back the free float on the merchant producer, and Moody's Investors Services placed NRG's debt on review for possible downgrade after it announced a $1.5 billion acquisition from First Energy. Indications are that this will be a leveraged lease transaction of some sort, although if the bond market improves a Genco bond issue might be possible.
Nevertheless, NRG has a solid lump of committed bank capital that is limited in its use only by the ability of NRG to refinance assets out of its portfolio. And given that it has said that it intends to maintain a diverse portfolio and pursue acquisition financings where appropriate, there is less reason for it to be punished by investors than its gas-focused peers. So, despite the hurdles encountered in forcing the debt through the syndicated bank market, the sponsor could be justified in saying ? albeit in hindsight ? that the end justifies the means.
There was a period toward the end of 2001 when banks launching portfolio deals were far more comfortable in comparing their offspring to TECO and Panda's financing. Revolvers from Tractebel and Mirant were, respectively shelved and cancelled. With the news that FPL Energy has mandated two arrangers for a construction revolver (neither of them, interestingly CSFB), the structure may have reached the point of becoming a standard financing tool, if only largely for sponsors with rich utility parents.
NRG Finance Company I LLC
Status: closed May 2001
Location: United States
Description: portfolio construction revolving credit facility that forms the core of NRG Energy's greenfield generating capacity addition strategy
Sponsor: NRG Energy
Debt: $2 billion
Arranger: Credit Suisse First Boston
Tenor: 5 years
Lawyers to the borrower: Skadden Arps Slate Meagher & Flom
Lawyers to the lenders: Latham & Watkins
Independent engineer: Stone & Webster
Market consultant: Pace Global Energy Services
2001 marked a decisive shift from NRG's previous acquisition-based strategy. Whilst it had been a one-off developer of power projects, it was far better known for its large GenCo acquisitions and financings. During a time of rebranding at its majority parent, Xcel, and its own partial spin-off, it quietly moved towards becoming a major merchant producer. Trading staff and construction experts were lured away by NRG to provide the necessary back up to a greenfield generation programme.
The best model in this respect was the Calpine construction approach. Calpine wanted to build up a predominantly gas-fired portfolio using flexible finance with as little drag on corporate capital as possible. The result was the construction revolving credit, and NRG developed it further.
The comparisons are inevitable, if overstated in the market. For a start, NRG went into the financing with a far larger portfolio of assets, gathered into Gencos such as the Northeast and South Central Generating companies. Moreover, it attracts a slightly more cautious investor than Calpine, if only because of its utility parent. NRG has a broad and very loyal relationship group, but to improve the construction revolver template it went to the architect of the first ? Credit Suisse First Boston.
The structure of the deal offers less in the way of comfort to banks than the 1999 and 2000 Calpine revolvers ? of $1 billion and $2.5 billion respectively. The most crucial change comes from the fact that NRG can move assets, and not just cash, out of the finance company. As Bird likes to say, ?we feel that we've put together the first true revolving credit, because of the way that we can churn the projects in the revolver.?
This means that lenders do not have massive over-collateralisation to support future draws on the deal. And this caused several of them some disquiet. Negative comment slipped out as the arrangers began to start the primary syndication. Much of this was part of the normal process of bargaining over pricing and hold levels. NRG took it in its stride, and maintained afterwards that the first proposal was a cheeky look at what the market would bear. Bird says generously, ?I think CSFB did an excellent job, but I also appreciate the efforts of the co-arrangers in shaping the financing as it developed.?
Other parts of the financing are familiar to those that went into the Calpine deals. The finance company is largely a standalone entity whose financing is dependent on the approval of a technical committee of banks, which judge whether the relevant fuel and geographical diversity tests have been met for drawdown on a new project. Peaking units are limited since they do not necessarily produce strong and stable cashflows, and nuclear plants are entirely off-limits.
The plants included in the facility are not all newbuild, however, and the portfolio was meant to be sweetened with a number of proven generating facilities. Three of the plants, Batesville, Big Cajun and Sterlington, are expansion projects, whilst two ? Bridgeport and Newhaven ? are coal, oil and gas-fired facilities, located in Connecticut, that were to be acquired from Wisconsin Energy. These sales fell through after regulatory obstacles, but other candidates, including Meriden, in the same State, have been identified.
The deal's structure encourages the sponsor to increase the levels of contracted output from the portfolio. The financing used a modified version of the borrowing base approach pioneered on InterGen's North American deals. This means the leverage on the transaction, and thereby the distributions that NRG can receive from the assets, is based upon contracted coverages. The pricing is also based on a leverage-related grid.
The trickiest part of the syndication was finding the co-arranger banks that could afford to make a $200 million commitment and potentially hold $75 million on their books. Several candidates suggested that they did not have $75 million worth of love for NRG. Bird, however, is quick to point out that those who did come in were rewarded later either with single-asset mandates or manager slots on NRG capital markets financings.
The finance company now forms the core of NRG's development plans, as a means of maintaining access to capital at a time when access to funding will be variable and expensive. Several of its competitors have announced plans to cut back on expenditure on new generation projects ? including Calpine, PPL and Mirant. Much of this has been in reaction to a softening in the forward price curve, as well as signs of a future tightening in capital access that does not justify expenditure on advanced development.
NRG has not been immune to pressure from investors and ratings agencies. Market rumour has suggested that Xcel is looking to buy back the free float on the merchant producer, and Moody's Investors Services placed NRG's debt on review for possible downgrade after it announced a $1.5 billion acquisition from First Energy. Indications are that this will be a leveraged lease transaction of some sort, although if the bond market improves a Genco bond issue might be possible.
Nevertheless, NRG has a solid lump of committed bank capital that is limited in its use only by the ability of NRG to refinance assets out of its portfolio. And given that it has said that it intends to maintain a diverse portfolio and pursue acquisition financings where appropriate, there is less reason for it to be punished by investors than its gas-focused peers. So, despite the hurdles encountered in forcing the debt through the syndicated bank market, the sponsor could be justified in saying ? albeit in hindsight ? that the end justifies the means.
There was a period toward the end of 2001 when banks launching portfolio deals were far more comfortable in comparing their offspring to TECO and Panda's financing. Revolvers from Tractebel and Mirant were, respectively shelved and cancelled. With the news that FPL Energy has mandated two arrangers for a construction revolver (neither of them, interestingly CSFB), the structure may have reached the point of becoming a standard financing tool, if only largely for sponsors with rich utility parents.
NRG Finance Company I LLC
Status: closed May 2001
Location: United States
Description: portfolio construction revolving credit facility that forms the core of NRG Energy's greenfield generating capacity addition strategy
Sponsor: NRG Energy
Debt: $2 billion
Arranger: Credit Suisse First Boston
Tenor: 5 years
Lawyers to the borrower: Skadden Arps Slate Meagher & Flom
Lawyers to the lenders: Latham & Watkins
Independent engineer: Stone & Webster
Market consultant: Pace Global Energy Services
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