GE EFS recently wrapped a $550 million financing backing Competitive Power Ventures’ 725 MW St.Charles combined cycle project in Waldorf, Md. “What we found in sitting down with CPV, and deciding how broadly to go out to the market, was that a lot more financial institutions expressed interest in looking at the transaction. A number of the investment banks that usually don’t play in these types of deals have some liquidity,” said Don Kyle,senior managing director of GE Capital Markets, of working on the quasi-merchant deal. Kyle and Carl Peterson, head of debt origination at GE EFS sat down with PFR Editor Sara Rosner to discuss the market for structuring and financing gas-fired generation.
PFR: Can you describe the St. Charles deal? Challenges overcome, the structuring process, sponsor relationships, innovative elements?
Peterson: From a financing perspective, it’s a $549 million senior secured loan executed in thebank market for a new construction, partial merchant project that will be selling power in PJM. In terms of structuring, size, location, etc., it is the second transaction of this nature that GE-EFS has successfully led for a long-standing customer Competitive Power Ventures in the last 12 months. In terms of challenges overcome or innovative elements, working on the hedge structure to provide the right coverages, and residual debt level at maturity, were some of the challenges. Innovative elements included a cash flow sweep structured to account for potential variability in energy margins over the loan tenor.
Kyle: The hedge was a little different in structure from the CPV Woodbridge deal, but the two deals were substantially similar in approach and structure. With Woodbridge, there’s a heat-rate call option, while St. Charles used a revenue put.
PFR: What is your outlook on arranging hedges for gas-fired projects? And how will that element shape deals going forward?
Peterson: Compared to other markets, such as interest rate or commodities such as oil & gas, the market for hedging power is not as liquid and can therefore present unique challenges. Additionally, that hedging market is probably been getting less liquid as large financial institutions exit the space. What this means is that sponsors have to be more diligent and more flexible on their hedging strategy as they work to meet requirements for the lenders and investors.
PFR: You both mentioned the Woodbridge deal. The financing backing St. Charles is similar to the Woodbridge transaction. However, we’ve heard that there were differences, including more participating lenders and tighter pricing in St. Charles. What do these two deals say about the evolution of the project finance market in the last year?
Kyle: These two deals reflect that more traditional project finance lenders are now open to doing the necessary work to get comfortable with the structure. Woodbridge set the stage. What we found in sitting down with CPV, and deciding how broadly to go out to the market, was that a lot more financial institutions expressed interest in looking at the transaction. A number of the investment banks that usually don’t play in these types of deals have some liquidity. Some of the other commercial banks, in addition to traditional project finance banks, did the work. Between St. Charles and EIF Newark, it probably broadened the universe of participants by a half-dozen. In cases of the deals we financed, they are using the most current and most efficient GE turbine technology, which, when you do the analysis, suggests the plants are going to actually run and generate cash flow.
Some of the increased interest is simply due to supply and demand in the bank market, stemming from strong project sponsors with experience and track records and advanced capital structures. Banks have taken a lot of comfort in this, and today’s thermal deals happen to have this type of profile, so I expect that this interest is going to continue. Many people have asked me ‘How are these quasi-merchant deals different than the last time merchant deals in power were getting financed and experiencing problems?’ I’d say, the biggest difference is that there is a lot more equity in these transactions than there was back when we had the last merchant meltdown. The capital structures are very different; and the sponsors are familiar with the markets, so there is a lot of scrutiny as to how that specific asset is going to perform.
Of the deals in the pipeline of a similar structure, I don’t think they’re all going to get done, but with the success of St. Charles and of EIF Newark this year, more project finance lenders are going to take interest.
PFR: You touched on the fact that there are a number of similarly structured projects potentially coming up for financing. What in your mind will distinguish the assets that achieve financing and operation from those that do not, in the near-term?
Peterson: From a financing perspective, being alongside an experienced sponsor, in a project that has a competitive position in its market, with ability to raise additional equity if needed, is what’s going to distinguish the deals that get done from the deals that don’t.
Kyle: The other thing is just going to be timing. For any sponsor and their lead banks, it will be important to be aware of competing financings. These deals take a lot of staffing. Some of these deals are in similar markets. To get the deal done, you want to make sure you’re not going head-to-head with one or two other transactions where your due diligence indicates those other deals have lined up certain other banks. It’s about the sponsor being smart on timing, being out early in getting their banks lined up, so that the banks are familiar with it. It’s on their pipelines, and when you’re actually ready to come to market with the deal, you’re not going to hear from banks that they’re already tied up in dedicating their resources to one or two other transactions.
PFR: Is there any sense that there may not be enough lending capacity to get qualified projects financed? That maybe there isn’t going to be enough liquidity?
Peterson: We think that on the financing side, there is enough breadth in the market, enough liquidity, enough interest to get the deals done. As Don mentioned, if they all come on at once, perhaps there could be an execution or timing problem. However, the more pressing question is not the debt for some projects but more of an equity question. The equity for new construction can be more of a challenge because those valuations may not be as compelling as investing equity in an existing operating asset.
Kyle: Both in the case of St. Charles and EIF Newark and initially Woodbridge, we were very oversubscribed, and we didn’t even go out as broadly in the market as we could have. I think the bank market will be somewhat self-policing. I’ve seen these various lists that have between 15 and 20 transactions in various stages of development. I don’t think they’re all going to get done. I think the markets will do their job, both the equity markets, in looking at which of these projects they choose to invest in, and the debt market, for all the reasons we talked about, are going to allocate the capital to the deals that deserve it. I don’t think it’s a liquidity situation as we sit here today. In the traditional capital finance market, the Term B market, while less desirable for construction projects—and while it’s backed up a little bit today, in recent weeks—has been extremely liquid and attractive for players like Panda, who have done five deals in that market.
PFR: You mentioned the Panda deals, and earlier you mentioned the geographic factor as an important indicator of which of these projects will actually make it to the finish line. What is your outlook on project development and financing in PJM and ERCOT? Will these areas continue to be the hot spots for gas-fired development and financing? Are there other regions of interest in the Americas?
Peterson: They’re the near-term hot spots. In ERCOT, it’s one of the few areas in which you have growing power demand, due to their strong and growing economy. PJM has an established and transparent capacity market and auction process, and some growth. We are also looking at transactions and evaluating opportunities in New England and occasionally we see interesting opportunities in the Midwest.
Check back next week for the second installment of this Q&A, when Kyle and Peterson discuss the depth of the project financing market for gas-fired generation and GE EFS’strategy in the near-term.
