Edison Mission Energy (EME) is offering first- and second-lien tranches in its upcoming $2 billion debt refinancing, highlighting an emerging trend among financially stretched power companies to dice their refinancings into bank friendly first-lien paper and riskier second-lien debt targeting institutional investors, according toPower Finance & Risk, a LMW sister publication.
Institutional money managers' apparent appetite for subordinate tranches is assuaging many lenders' initial fears that the wave of looming debt maturities at EME, Calpine Corp. and the like would prove tough to refinance. "Edison will definitely find takers for the second [lien]," said one lender tracking the deal. Calpine's recent $2.4 billion refinancing of its CCFC II revolver was another senior-subordinate, multi-tranche deal that took out a pure bank facility.
The EME package, which is being set up by subsidiary Midwest Generation, is still being pitched to investors, so firm pricing has yet to materialize. One industry official said a $700 million first-lien, seven-year loan has price talk of LIBOR plus 31/4%, but pricing is unclear on the other $300 million tranche of the first-lien loans that will take the form of a revolver. The balance of the deal consists of $1 billion of second-lien notes due 2034.
The security on the refinancing, as with several earlier multi-tranche deals, is strong, said one observer. The deals are secured against Midwest Generation's fleet of Midwest coal plants. Those plants are in locales that would sustain the debt even when their contracts expire, he added.
Citigroup, Credit Suisse First Boston, Lehman Brothers and J.P. Morgan are leads on the financing and are looking to close the deal quickly.