Highstar Capital is near close on a six-year $173.5 million term loan B that helps fund its acquisition of the 530MW GWF Energy Holdings gas-fired portfolio. The term loan is part of a larger $202.9 million package, which also includes a $24.4 million letter of credit and $5 million revolver, both with five-year tenors. Barclays is lead left on the deal, alongside Union Bank. Harbert Power manages the funds that are selling the Californian portfolio to the $2 billion Highstar Capital IV fund.

The term loan B is priced at 475bp over Libor. It has an original issue discount of 97.5%, down from a targeted 99%, and a Libor floor of 1.25%. Moody’s Investors Service rated the issue Ba2. The GWF assets are subject to $294.5 million of existing project-level debt, which will be senior to the new debt at the holding company.

Highstar plans to complement the debt issue with $171 million in equity. The proceeds will fund both the acquisition and an $8.5 million, six-month debt service reserve. The financing features a sweep of 75% of excess cashflow, or enough to achieve a target deb balance, whichever is greater. The deal is slated to close in mid-December, though trading began when the deal priced 27 November.

Highstar’s Fund IV also owns the Star West Generation portfolio. “GWF is a key add-on component, which gives us real critical scale and diversity in the south-west United States – and we’re pleased to now have a California presence in particular,” says Andrew Nevin, Highstar managing director. “We fundamentally believe that flexible, responsive gas-fired generation in California, which is ground-zero for renewables in the United States, is very well-positioned long-term.” Star West staff will manage the GWF portfolio, and Highstar may try and consolidate the GWF and Star West assets into a larger entity, according to market observers.

Highstar had planned to launch the GWF-acquisition issue 31 October or 1 November – with pricing of 425-450bp over Libor. But Hurricane Sandy intervened. The storm hit closed the markets for a short period and postponed the GWF launch until 5 November. Upon launch, Highstar encountered a particularly crowded market – Sandy had postponed several deals – and a tight window to price and close, given the approaching US Thanksgiving and Christmas holidays. The US election and subsequent negotiations over looming budget cuts also contributed to softness in the leveraged loan market, argues one observer. “You saw a widening in the two weeks after the election,” they add.

Highstar signed the purchase agreement on 5 October and was not able to complete the rating andf pre-marketing process before early November. Ultimately, Highstar sweetened the margin to 475bp over Libor, which still fell within the banks’ underwriting commitment. Buyers included collateralised loan obligations, commercial banks, hedge funds, insurance companies and money managers.

The GWF deal came to market during one of the busier periods in the B loan market since the 2008 crisis. Financial sponsors used the window to make acquisitions, reprice existing loans and close dividend recapitalisations. Borrowers include IFM’s Essential Power, Energy Investors Funds’ Windsor, UBS and Teachers’ NSG Holdings, Energy Capital Partners’ EquiPower Resources repricing and Panda’s Temple and Sherman merchant construction loans.

The GWF assets consist of the 314MW Tracy combined-cycle project and the 97MW Henrietta and the 95MW Hanford peakers. The three plants sell power to Pacific Gas & Electric under long-term tolling agreements. The agreements essentially eliminate fuel-supply risk and pass through greenhouse gas costs to the offtaker.

Tracy is the most important asset in the GWF portfolio. Harbert launched an expansion of the plant from a 170MW simple-cycle project to a 314MW combined-cycle project in 2010. Moody’s estimates that more than 80% of GWF’s revenues come from Tracy, which creates some concentration risk. But Tracy’s original design anticipated an expansion, and Henrietta and Hanford are consistent performers.

“There was a view that Tracy has a disproportionate share of the cash flows, so people were focused on that,” Nevin says. “That’s mitigated by strong coverage ratios and reliable technology, but ultimately, we were satisfied with where pricing landed.”

In 2010, Harbert closed a $410 million financing for the conversion of Tracy, consisting of a $305 million loan and a $105 million letter of credit. The loan is priced at 250bp over Libor and has a tenor of construction plus 10 years. Mitsubishi UFJ Financial Group, GE Energy Financial Services, ING and Scotiabank were joint lead arrangers, while CoBank, Dekabank and Helaba participated. Hanford and Henrietta were offered as security to lenders on the Tracy expansion financing.

GWF built Hanford and Henrietta between 2001 and 2003 in the aftermath of the California power crisis. Their construction benefited from a quicker permitting process for small projects. The California Department of Water Resources, which had taken over power procurement from the state’s then-bankrupt utilities, was the plants’ original offtaker.

Before Highstar bought GWF portfolio, Harbinger Independent Power Fund II had a 40% stake, with Harbert Power Fund III owning 10.1% and Harbert Power Fund IV 49.9%. 

GWF Energy Holdings
STATUS
Priced 27 November 2012, set to close in December
SIZE
$373.9 million
DESCRIPTION
Acquisition financing for 530MW gas-fired portfolio
SPONSOR
Highstar Capital IV
EQUITY
$171 million
DEBT
$202.9 million
UNDERWRITERS
Barclays (lead left), Union Bank
BUYER FINANCIAL ADVISER
Barclays
SELLER FINANCIAL ADVISERS
Morgan Stanley and Merit Capital Advisors
BUYER LEGAL COUNSEL
Morgan Lewis & Bockius
SELLER LEGAL COUNSEL
Balch & Bingham
UNDERWRITER LEGAL COUNSEL
Milbank, Tweed, Hadley & McCloy