From Power Finance & Risk
The first loan to include a fee covering the risk associated with a borrower being on negative credit watch was wrapped up in syndication late last week, after being strongly oversubscribed.
The $1 billion NRG Energy revolver features an additional 25 basis-point fee while the borrower is on negative watch, and as syndication closed last Friday, allocations had to be pared back after $1.35 billion was committed. The enthusiastic response could lead to a spate of copycat deals by embattled power companies looking to close financing quickly in the current jittery market.
"The fee gave us a headwind," says one syndicate official. "It got certain banks looking at this deal on the basis of economics, not relationships." The base drawn pricing is LIBOR plus 150 basis points, but while NRG is on negative watch it pays an extra 25 basis points. The Minneapolis-based IPP agreed to the fee as a way to oil the syndication process. "The 25 basis points makes it bank friendly and encourages them into the facility," says an NRG spokeswoman.
While many lenders enthused about the new structure, some are questioning how many borrowers will agree to pay up the extra premium. "It's almost a double ding if the borrower gets downgraded," says one syndicator, noting that pricing on standard deals already steps up when ratings slide.
One power banker not connected with the deal describes the innovation as a great concept, but has doubts about whether it will take-off across the market simply because a lot of borrowers may balk at paying up. But on a deal-by-deal basis it may make sense for companies with uncertain ratings that need to set up facilities in short order, he adds.
Citibank and ABN AMRO, who jointly came up with the additional credit watch fee idea, led the revolver. In the final 19-strong bank group, ABN and Citi took $79 million each, Bank of America, Barclays Capital, Credit Suisse First Boston, HypoVereinsbank, ING, J.P. Morgan, Royal Bank of Scotland, Société Générale and Westdeutsche Landesbank drew down $65 million, and the remaining eight lenders took smaller pieces.
NRG is rated Baa3 and was put on watch by Moody's Investors Service Dec. 4 because of fears about the financing plans for its $1.5 billion purchase of four coal-fired power stations from FirstEnergy. The agency is also looking at the liquidity picture for NRG in the event that it is downgraded, according to a report issued Feb. 15. A downgrade would take the IPP into junk territory. The pricing grid on the revolver shifts to LIBOR plus 250 if the company slides below investment grade.
An added wrinkle to the deal is the possible rating fillip for the IPP if Minneapolis-based Xcel Energy, which owns 74% of the company, sees through its plans to buy back the company (PFR, 2/25).