The $460 million credit for Coleto Creek, backing an acquisition of a 632 MW coal-fired generating facility in Gollad County, Texas, is gathering interest from institutional players and hedge funds increasingly investing in project paper. "Investors are biting and the deals are being oversubscribed pretty quickly," noted Darvin Pierce, executive director with Van Kampen Investments and associate portfolio managers for Van Kampen's senior loan portfolios. The deal hit the market last week.
Institutional interest in project loans has been picking up. In May, Credit Suisse First Boston came to market with a $350 million refinancing package for Primary Energy and a $325 million facility backing private equity firm MatlinPatterson's $475 million acquisition of Duke Energy's southeast merchant generation portfolio. Both were earmarked for institutional investors.
Pierce said when power plants were regulated, financing for them was done on a club deal basis. Deregulation and a shortage of energy and power plants have more people getting involved. "Now you have too many of them going on and [lenders] can't do club deals," he noted. "They are going out a broader group of institutions and hedge funds and they are buying them--buying them a lot faster than [they] thought they would."
Sempra Energy Partners and Carlyle/Riverstone are buying the Coleto plant, with Citibank, Goldman Sachs and J.P. Morgan leading the bank deal. Both traditional institutional project investors as well as hedge fund investors are expressing demand for the loan, noted Michael Hoffman, a managing director with Riverstone. The credit comprises a $55 million revolver, $50 million letter of credit facility, $205 million "B" loan and $150 million second-lien "C" loan. Price talk is LIBOR plus 2 1/2% on the first lien and LIBOR plus 3 1/2-3/4% on the second lien. "All the banks that we used on this deal are large players in the 'B' loan market," Hoffman said. "We ran a competitive process and this group of banks provided us with the best terms for the 'B' loan market."
The loan will be repaid with the plant's cash flow, Hoffman noted. It's not a simple industry, but investors are starting to understand it better, Pierce said. "We've done several. We've probably turned down more than we do," he noted. "We're very careful at which ones we look at and which ones we do."
A Citi spokesman declined comment and a Sempra spokesman did not return calls. Officials at Goldman and J.P. Morgan did not comment by press time.