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Innovative Spark-Spread Protection Used For Calpine Refi

09 Aug 2003

San Jose, Calif.-based Calpine has incorporated a spark-spread hedge into a $750 million power plant refinancing package, a feature that ensures debt interest will be paid even if generation margins deteriorate for the gas-fired generation portfolio, according to sister publication Power, Finance & Risk. Bankers said the power plant financing is likely the first of its type to strip out commodity price risk through the use of a spark-spread floor.

The spark-spread derivative is being used to enhance part of a $750 million package of first- and second-lien term loans and floating-rate notes placed by Goldman Sachs in the institutional debt market late last week, said bankers. "It's a way to provide additional assurance that debt payments will be made," noted John Woodley, managing director at Morgan Stanley, which also has been pitching this type of deal.

Katherine Potter, spokeswoman at Calpine, said the company is not commenting on the deal because of its private placement nature. Officials at Goldman Sachs did not return calls. The logic of the structure runs that while merchant gas-fired plants can always sell their power, their ability to operate profitably and cover any associated debt depends on their being able to source gas at considerably cheaper levels than they can sell their output. Employing a spark-spread floor means borrowers can ensure there should be enough cash to cover interest payments.

The new deal will refinance Calpine's landmark construction revolver Calpine Construction Finance Corp. I, which is set to mature in November and is secured against CCFC I's seven natural gas-fired generating facilities. The IPP has a diverse portfolio of power supply contracts, but none are specifically attached to those plants. Precise details of the hedge structure could not be ascertained, but one financier said the hedge ensures revenues will be sufficient to cover the LIBOR plus 6% spread on the $385 million six-year loan component of the new financing package. Financiers note the structure could be used in other mini-perms, of which commentators estimate there is $30-50 billion maturing over the next three-four years.

09 Aug 2003