SteelRiver Infrastructure Partners’ Trans Bay Cable had a long slog to completion, and its funding troubles did not end at financial close. The project was fin­anced in 2007 with an Ambac-wrapped bank loan, but Ambac was downgraded successively from AAA in 2008, and its holding company is now in bankruptcy. Ambac no longer has a Standard & Poor’s rating, and Moody’s rates it Caa2. The era of monoline-wrapped bank debt is over, but not before Trans Bay’s troubles saw it in technical default.

Babcock & Brown (B&B), which developed the project for inclusion in its North American Infrastructure Fund, was placed into administration in March 2009, but the project had already changed hands, at least nominally. The managers of the fund, with financing from John Hancock, took over the management of the fund and renamed it SteelRiver Infrastructure Fund North America in 2009. This drama is now behind the project, following a $562 million bond refinancing that launch­ed and successfully closed in short order on 22 November.

The cable stretches 85.3km under San Francisco bay from Pittsburg, a suburb in the eastern Bay Area, to the eastern side of San Francisco, where it connects to the city’s grid through a new substation. The cable faced first funding problems, when lender BayernLB declared the project in technical default in June 2009, and then faced technical difficulties during testing in early 2010. The line was officially hand­ed over to the California Independent ­System Operator (CAISO) and started operations on 23 November.

The bonds, solely underwritten by Barclays Capital and co-arranged by Deutsche Bank, will mostly go towards re­payment of outstanding debt and sponsor equity. Roughly $268.7 million will be used to pay off construction debt with BayernLB and $228 million to repay Steel­River Infrastructure Fund North America’s equity con­tribution. The resulting debt-to-equity ratio should be 79:21, according to Fitch. The remaining proceeds of the bond issue will fund contingent liquidity for six months, costs accru­ed during construction and financing fees. The issue also settles any Ambac claims on the project. A balloon payment of $366 million is due on 30 June 2017, when the bonds mature, at which point the project will need to refinance.

The 6.5-year bonds have a 4.71% coupon and priced at 325bp over the five-year US treasury. The bonds closed with an average debt service coverage ratio of 1.4x, which was higher than the bookrunner’s target of 1.35x because of two mirror swaps put in place by BayernLB and the movement in US treasuries. Fitch estimates the DSCR at 1.34x. They were rated BBB- by Fitch and Baa2 by Moody’s. Orders for the bonds came from US insurance companies as well as institutional investors, including Pimco and BlackRock.

The project’s legacy financing complicated the issuance. It included two swaps, which fully amortise on 31 March 2031 and 30 March 2040, to convert the bank loans’ variable interest rate into a fixed interest rate. BayernLB put two mirror swaps into place for SteelRiver to unwind the original swaps, resulting in fixed payment streams for the term of the original instruments. When the developer refinances the bonds in 2017, the mark on one of the swaps will help hedge exposure to base rates.

Trans Bay should have been a simple project to finance. The Federal Energy Regulatory Commission (FERC) regulates the line and the California Independent System Operator (CAISO) manages its ener­gy and revenues – two factors that mitigate revenue, price and volume risk for transmission lines. In addition, the cable is a critical source of electricity for San Francisco and will replace Mirant’s 362MW Potrero Generating Station, the only remaining power plant in the city, once it is decommissioned in the next few years.

The original $505 million financing included an Ambac-wrapped $267 million senior debt tranche, an unwrapped $188 million junior debt tranche, both arranged by BayernLB, and $50 million in equity from developer B&B. The senior tranche had a tenor of 30 years plus construction, making it the longest dated bank loan ever in the US power sector, and the junior tranche a tenor of 21 years. However, BayernLB, which struggled to syndicate the deal, cut off draws under the project loan agreement after declaring B&B’s woes a technical default in June 2009. This did not affect construction, however, because SteelRiver Infrastructure Fund North America provided equity to meet all funding requirements.

Technical issues at the converter stations at each end of the line also delayed the bonds. Barclays was originally ap­proached by the SteelRiver to refinance the project in the second half of 2009 and hoped to launch the bonds during the first quarter of 2010. But when testing showed an unusually high power mortality rate at the AC converters in San Francisco and Pittsburg, both the opening and bond issuance were postponed.

The problem was in a chip malfunction in the converters that was fully covered by engineering, procurement, and construction contractors Siemens Power and Prysmian Construction Services. After repair and replacement of the converters, the line was ready to open in November. As a result of the delays, Siemens agreed to an extended warranty on the line and signed an umbrella operations and maintenance contract with SteelRiver. “It’s unfortunate that there were the delays but it ended up a more robust project as a result,” says Chip Lewis, a director at Barclays Capital.

Other changes in the project include the removing the city of Pittsburg and the Pittsburg Power Company (PPC) as physical asset owners. Originally, B&B was to transfer ownership of the physical plant and equipment to PPC while retaining the right to transmit electricity, in the form of transmission system rights. Instead, SteelRiver decided to hand over the line to CAISO after the bonds closed, putting responsibility for all dispatch and use of the line in the ISO’s hands. Under this structure, the developer will receive a guaranteed portion of total transmission fees regardless of actual use. SteelRiver still pays the city of Pittsburg a nominal fee based on its ownership under the original project structure. 

SteelRiver Transmission Company
Status: Closed 22 November
Size: $562 million
Location: San Francisco, California
Description: Refinancing of 85.3km, 400MW transmission cable
Sponsor: SteelRiver Infrastructure Fund North America
Bookrunners: Barclays, Deutsche
Issuer legal counsel: Skadden Arps
Underwriter legal counsel: Dewey & LeBoeuf
Technical adviser: E3 Consulting
Operations and Maintenance: Siemens
EPC: Siemens and Prysmian