NRG’s revolver bulldozes all
In the end, the nay-saying from participant banks was simply not
enough. In May, Credit Suisse First Boston closed a $2.5 billion
construction revolver for NRG Energy that not only constitutes the
first use of the structure by a sponsor other than Calpine, but
also removes many of the restrictions that Calpine has tentatively
tried to dispose of. As one member of the arranging team puts it,
?this stretched the envelope in pretty much every direction, and is
significantly more cutting edge than the Calpine deal?.
This was, however, a deal that excited a great deal of comment from second-tier banks, much of it negative. NRG, it was said, had gone to the market with a portfolio that was far too flexible, and asked for hold levels from co-arrangers that were too high for them too keep on their books. A 15 basis points tweak to the pricing on the loan appeared to bear this out.
The line put forward by both sponsor and arranger is that NRG knew that what it asked for was very far ahead of what the market has been used to. The initial proposal put to the market was essentially a wish-list of what the sponsor was looking at in the best possible scenario. Given that it was looking for an initial haul of $2 billion ? a sum later increased to $2.5 billion ? some element of market flex was more understandable than it would have been for a single asset deal.
The most important element of the deal is that the revolver is a fluid portfolio, where not only the cash from the projects, but also the assets themselves can be taken out when operational. Previous construction revolvers have relied upon massive overcollateralisation to make banks comfortable. Brian Bird, vice-president and treasurer at NRG Energy, says ?we view this as the first true construction revolver in the market, because we will actually turn the projects in the portfolio. We have large growth plans and want the flexibility of this structure. The existing model is great, but you pay to put ten projects through ? we should be able to use this to put twenty projects through?.
NRG is using the revolver to take care of ongoing developments, project site acquisition and some existing assets. The most important elements are the LS Power portfolio, and number of highly efficient planned and operating CCGT plants, and two purchase in the northeast ? Bridgeport and New Haven Harbor Stations in Connecticut ? which it bought from Wisconsin Energy for $325 million. The 1051MW of base-load coal-fired capacity will be a useful anchor whilst it builds out what is expected to be a largely gas-fired portfolio.
The bulk of NRG's activity to date, especially its two GenCo bond financings last year, has been acquisition-related. Whilst it has in the past done some development work, the revolver is a sign of a commitment to a vastly increased newbuild programme. And NRG does not have a proprietary construction process along the lines of the ?Calpine Construct? scheme (which meant that the construction phase carried corporate guarantees). The deal envisages that the further that NRG departs from the EPC template ? and it has laid out four different contracting strategies ? then the greater the fallback guarantees that it must provide. However, NRG Energy has been on a hiring binge recently ? Tenaska and Duke are amongst the developers to have lost crack development personnel to the colder climes of Minneapolis.
And the sponsor still has to submit development plans to a bank technical committee, which has to ensure that the conditions precedent (CPs) necessary for disbursement are met. Restrictions include a ban on nuclear development, a limit on the number of peaking units, tests for geographical diversity and an EBITDA test. The committee has seven members, and cannot withhold approval as long as the CPs have been met. The lenders also benefit from a cash-trap in years four and five, although NRG's cash equity investment into the projects is limited until the end of construction. Finally, the deal also features a $300 million turbine financing facility of which an unprecedented 50% is non-recourse.
NRG Energy has been, since its inception and the more so since its 19.9% spin-off, a merchant producer, and now has a staff of over 40 people (some of them, again, judiciously poached from competitors) for its trading floor. A merchant credit has, therefore, been taken as read in the financing, although there are some inducements for setting in place long-term tolling arrangements, in the form of less burdensome leverage requirements. Some of the assets in the portfolio are covered by PPAs, however. In the base case, around 65% of the debt is without recourse to NRG, the remainder of the facility taking the form of contingent equity, although this proportion could rise
The greatest effect of leverage is on the pricing over libor of the deal, which varies according to a grid over the five-year tenor of the debt:
Pricing Pricing
years 1-3 years 4-5
Leverage (bp) (bp)
50% or lower 140 155
50-60% 160 175
60-70% 175 190
65-70% 185 200
Leverage is capped at the 70% figure, and coverages are in the base case in the higher 2x range, or in the average at 2.75x range, a relatively healthy figure for a merchant deal.
These were the figures that emerged after approaching potential co-arrangers and participants. The sell-down process was exhaustive, unusually so, given the current syndications environment. Credit committees have been struggling to reassess their exposure levels after the bankruptcy of Pacific Gas & Electric, and Basel II rules on project finance (including its hybrid derivatives, such as this) have yet to be finalised. NRG has been fortunate in the depth of its relationship pull, and fortunate that CSFB made so many firm friends whilst it sold down the last Calpine deal in Europe. Nevertheless, one participant close to the deal confessed that he fielded calls from institutions that he had not encountered before in 15 years in the market.
The final hold positions for co-arrangers were below $95 million, just about enough to bear for serious relationship banks, and CSFB is thought to have kept a sizeable amount of debt, possibly over $200 million, on its own books. Co-arrangers were ABN Amro, BCI, BNP Paribas, Bank of America, Bank of Tokto-Mitsubishi, CIBC, Citibank, Deutsche Bank, Fortis Bank, Hypovereinsbank, Kreditanstalt Fur Wiederaufbau, WestLB, Royal Bank of Scotland and TD Securities. Participant banks were: Abbey National, Bank of Scotland, Barclays, CoBank, Credit Agricole Indosuez, Landesbank Schleswig-Holstein, the Export Development Corporation, Sumitomo Bank and Credit Lyonnais.
NRG also looks to finance its projects ultimately using corporate debt. This action is less likely to take place at a holding company level than at the level of the regionally-based gencos which have their roots in the acquisitions of 1999-2000. New gencos will be erected as and when a strong enough presence exists in a particular market, and should help shield NRG from the effects of a future breakdown in any particular market. Its ability to raise long-term capital is unquestioned ? it recently raised $690 million in notes (with orders for $4 billion) ? and its paper, along with PSEG, is now regularly used as an IPP benchmark.
Single-asset deals will continue to emerge, especially where NRG is involved in a joint-venture development. One of these, part of a joint venture with Steag and Avista, is the Brazos Valley plant in Texas. The 633MW merchant plant, in which NRG has a 49% stake, has a $210 million financing, led by ABN Amro, in the market right now. And more newbuild financing will probably be called upon. Says Bird, ?We want to be at 50GW by 2004, with the identified and known projects accounting for 30GW. If we turn all the projects in the revolver that we can, we could add another 10GW to that?.
This was, however, a deal that excited a great deal of comment from second-tier banks, much of it negative. NRG, it was said, had gone to the market with a portfolio that was far too flexible, and asked for hold levels from co-arrangers that were too high for them too keep on their books. A 15 basis points tweak to the pricing on the loan appeared to bear this out.
The line put forward by both sponsor and arranger is that NRG knew that what it asked for was very far ahead of what the market has been used to. The initial proposal put to the market was essentially a wish-list of what the sponsor was looking at in the best possible scenario. Given that it was looking for an initial haul of $2 billion ? a sum later increased to $2.5 billion ? some element of market flex was more understandable than it would have been for a single asset deal.
The most important element of the deal is that the revolver is a fluid portfolio, where not only the cash from the projects, but also the assets themselves can be taken out when operational. Previous construction revolvers have relied upon massive overcollateralisation to make banks comfortable. Brian Bird, vice-president and treasurer at NRG Energy, says ?we view this as the first true construction revolver in the market, because we will actually turn the projects in the portfolio. We have large growth plans and want the flexibility of this structure. The existing model is great, but you pay to put ten projects through ? we should be able to use this to put twenty projects through?.
NRG is using the revolver to take care of ongoing developments, project site acquisition and some existing assets. The most important elements are the LS Power portfolio, and number of highly efficient planned and operating CCGT plants, and two purchase in the northeast ? Bridgeport and New Haven Harbor Stations in Connecticut ? which it bought from Wisconsin Energy for $325 million. The 1051MW of base-load coal-fired capacity will be a useful anchor whilst it builds out what is expected to be a largely gas-fired portfolio.
The bulk of NRG's activity to date, especially its two GenCo bond financings last year, has been acquisition-related. Whilst it has in the past done some development work, the revolver is a sign of a commitment to a vastly increased newbuild programme. And NRG does not have a proprietary construction process along the lines of the ?Calpine Construct? scheme (which meant that the construction phase carried corporate guarantees). The deal envisages that the further that NRG departs from the EPC template ? and it has laid out four different contracting strategies ? then the greater the fallback guarantees that it must provide. However, NRG Energy has been on a hiring binge recently ? Tenaska and Duke are amongst the developers to have lost crack development personnel to the colder climes of Minneapolis.
And the sponsor still has to submit development plans to a bank technical committee, which has to ensure that the conditions precedent (CPs) necessary for disbursement are met. Restrictions include a ban on nuclear development, a limit on the number of peaking units, tests for geographical diversity and an EBITDA test. The committee has seven members, and cannot withhold approval as long as the CPs have been met. The lenders also benefit from a cash-trap in years four and five, although NRG's cash equity investment into the projects is limited until the end of construction. Finally, the deal also features a $300 million turbine financing facility of which an unprecedented 50% is non-recourse.
NRG Energy has been, since its inception and the more so since its 19.9% spin-off, a merchant producer, and now has a staff of over 40 people (some of them, again, judiciously poached from competitors) for its trading floor. A merchant credit has, therefore, been taken as read in the financing, although there are some inducements for setting in place long-term tolling arrangements, in the form of less burdensome leverage requirements. Some of the assets in the portfolio are covered by PPAs, however. In the base case, around 65% of the debt is without recourse to NRG, the remainder of the facility taking the form of contingent equity, although this proportion could rise
The greatest effect of leverage is on the pricing over libor of the deal, which varies according to a grid over the five-year tenor of the debt:
Pricing Pricing
years 1-3 years 4-5
Leverage (bp) (bp)
50% or lower 140 155
50-60% 160 175
60-70% 175 190
65-70% 185 200
Leverage is capped at the 70% figure, and coverages are in the base case in the higher 2x range, or in the average at 2.75x range, a relatively healthy figure for a merchant deal.
These were the figures that emerged after approaching potential co-arrangers and participants. The sell-down process was exhaustive, unusually so, given the current syndications environment. Credit committees have been struggling to reassess their exposure levels after the bankruptcy of Pacific Gas & Electric, and Basel II rules on project finance (including its hybrid derivatives, such as this) have yet to be finalised. NRG has been fortunate in the depth of its relationship pull, and fortunate that CSFB made so many firm friends whilst it sold down the last Calpine deal in Europe. Nevertheless, one participant close to the deal confessed that he fielded calls from institutions that he had not encountered before in 15 years in the market.
The final hold positions for co-arrangers were below $95 million, just about enough to bear for serious relationship banks, and CSFB is thought to have kept a sizeable amount of debt, possibly over $200 million, on its own books. Co-arrangers were ABN Amro, BCI, BNP Paribas, Bank of America, Bank of Tokto-Mitsubishi, CIBC, Citibank, Deutsche Bank, Fortis Bank, Hypovereinsbank, Kreditanstalt Fur Wiederaufbau, WestLB, Royal Bank of Scotland and TD Securities. Participant banks were: Abbey National, Bank of Scotland, Barclays, CoBank, Credit Agricole Indosuez, Landesbank Schleswig-Holstein, the Export Development Corporation, Sumitomo Bank and Credit Lyonnais.
NRG also looks to finance its projects ultimately using corporate debt. This action is less likely to take place at a holding company level than at the level of the regionally-based gencos which have their roots in the acquisitions of 1999-2000. New gencos will be erected as and when a strong enough presence exists in a particular market, and should help shield NRG from the effects of a future breakdown in any particular market. Its ability to raise long-term capital is unquestioned ? it recently raised $690 million in notes (with orders for $4 billion) ? and its paper, along with PSEG, is now regularly used as an IPP benchmark.
Single-asset deals will continue to emerge, especially where NRG is involved in a joint-venture development. One of these, part of a joint venture with Steag and Avista, is the Brazos Valley plant in Texas. The 633MW merchant plant, in which NRG has a 49% stake, has a $210 million financing, led by ABN Amro, in the market right now. And more newbuild financing will probably be called upon. Says Bird, ?We want to be at 50GW by 2004, with the identified and known projects accounting for 30GW. If we turn all the projects in the revolver that we can, we could add another 10GW to that?.
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