With the financing for Indeck Energy’s Niles Energy Center squared away, the next few deals for new-build gas-fired projects are just around the corner, though commercial banks may find themselves taking a smaller slice of the pie.
The 1,085 MW Niles project reached financial close on April 25, becoming the third and largest new-build gas-fired project in PJM Interconnection to wrap debt this year. But it was the only one of the three to include a term loan A for commercial banks.
The others were Fortress Transportation and Infrastructure Investors’ 485 MW Hannibal Port Power project in Ohio, which was financed with an unusual unitranche debt investment from AMP Capital (PFR, 2/20, 4/10), and Ares-EIF’s 620 MW Hill Top Energy Center in Pennsylvania, which was done in the U.S. private placement market via Morgan Stanley (PFR, 4/3).
The route taken by Ares is increasingly appealing to project sponsors, say deal watchers.
“What we’ve heard from sponsors, now that you have short-term rates effectively equal to long-term rates, is that if you’re able to get an investment grade rating, the private placement may make a lot of sense,” says a project finance banker, noting that Kroll Bond Rating Agency has been able to give quasi-merchant gas-fired projects triple-B ratings.
“I think the structure makes a lot of sense,” says another deal watcher, who points out that the investors backing gas-fired projects are increasingly strategic—rather than financial—and that they are therefore less inclined to use financial engineering and high leverage ratios to maximize returns.
“The banks better watch out, because the fixed-income market is going to eat their lunch,” he says.
Underlying the trend toward fixed-income bond financings has been the increasingly popular gas netback hedge, which can effectively guarantee spark spreads for up to 10 years, although the terms of individual contracts are often highly bespoke.
But even the Niles deal, which was supported by the more traditional five-year revenue put, had a fixed-rate component for which demand is said to have been robust among U.S. as well as Korean investors.
The final $635 million debt package for Niles comprised a $435 million construction-plus-five-year floating-rate term loan, a $150 million fixed-rate tranche with the same tenor, and a $50 million letter of credit facility.
BNP Paribas, Crédit Agricole, NH Bank and Nomura provided the floating-rate loan, which was priced with a starting margin of 300 basis points over Libor, while Korean institutions Hana Financial and NH Securities bought the fixed-rate notes, which bear a 6.75% coupon, in line with price talk reported by PFR in March (PFR, 3/5).
Whitehall & Co. advised Indeck on the capital raise for the project, bringing in Korea Southern Power Corp. (Kospo) and Daelim as equity investors.
Crédit Agricole acted as financial adviser to Kospo on its acquisition of a 50% stake in the project. Daelim, meanwhile, is taking a 30% interest, leaving Indeck with 20%.
Legal advisers on the transactions included Morgan Lewis for Indeck, Norton Rose Fulbright for the lenders and Latham & Watkins for Kospo and Daelim.
"Today marks an outstanding milestone in Indeck Energy's 35 year history of developing power generation facilities," said Bill Garth, Indeck's vice president of finance in Buffalo Grove, IIl., in an email. "We look forward to a long lasting partnership with KOSPO and Daelim and using our collective skill sets and experience to assure Indeck Niles is an unparalleled success."
The project was financed on the basis of an expected build cost of $935/kW and it is expected to be online in March 2022. As the plant’s engineering, construction and procurement contractor, Kiewit will be fitting it with General Electric H-class turbines.
Operations and maintenance, meanwhile, will be handled by PIC Group and fuel supply and energy management by Tenaska.
Officials at BNP Paribas, Crédit Agricole, Nomura and Whitehall in New York either declined to comment or did not return emails or calls by press time.