The first high-yield loan to fund construction of a power plant is hitting the market, according to Power, Finance & Risk, an LMW sister publication. The deal is a $690 million facility allowing Astoria Energy to build a 500 MW gas-fired plant in Queens, N.Y. Credit Suisse First Boston was set to launch the facility last Friday, according to industry officials.
High-yield loan players have avoided financing power construction up until now. "Construction risk has been privy to project banks," said Rainer Kraft, v.p. at DZ Bank in New York. But a confluence of factors is making it more palatable. Most significantly there is a supply/demand imbalance leading to a shortage of new loans, said bankers. CSFB has come up with a structure under which the entire loan is drawn at closing, but the project is profitable enough to support the added costs of the negative arbitrage.
The negative arb occurs because generally the rate a borrower can get from placing the full drawn amount in a deposit account is less than the interest rate it pays the lenders. For non-recourse bank debt, the arb doesn't occur because funds are drawn down piecemeal as needed. Term-loan "B" investors require the full drawdown because they typically do not make staggered commitments. The investors may displace banks for a while on larger deals, reflected Mike Pepe, a veteran project finance banker.
High-yield deals have already hit the market for non-recourse refinancings--such as Calpine Corp.'s CCFCI deal last year--and also for asset acquisitions--for instance, ArcLight Capital Partners "B" loan funded acquisition of generation assets from Aquila. "A term-loan "B" is more flexible than traditional project finance. It has looser terms and they don't ask as many questions," said another banker. But on the flipside, investors generally need secondary market liquidity and a rating. The current search for yield among these investors is driving the interest in the sector, argued Pepe. "However, these markets are fickle. Something changes in the capital market, then Boom, they're gone."
The bulk of the $250 million equity slug is coming from Caisse de Dépôt et placement du Québec. A rating of Ba3 is expected. A spokesman for CSFB declined comment. Calls to Jim Croyle, an official at SCS Energy which owns Astoria Energy, were not returned.