Panda Power Funds has entered into exclusive talks with a party regarding the potential sale of the general partner that controls its funds, following a months-long investment bank-run process.

The firm has selected The Blackstone Group's Kindle Energy subsidiary for the advanced talks, having previously also discussed a potential deal with Macquarie Infrastructure & Real Assets and Hartree Partners, say sources familiar with the situation.

Blackstone is still conducting due diligence ahead of a possible "advanced bid," says a person briefed on the matter.

A change of ownership of the Panda G.P. would require several regulatory approvals as well as consent agreements with a wide range of counterparties.

A spokesperson for Blackstone in New York, officials at Kindle in Princeton, N.J., and Bill Nordlund, a partner at Panda in Dallas all declined to comment.

“Any deal would require consent from nearly every party in the organization [Panda Power Funds]—every potential lender, equity investor and L.P. co-investor is going to have to consent,” says a restructuring expert. “It’s a sprawling organization so it’ll be tough.”

A prospective buyer would expect to make revenues from management fees the funds are generating, a cut of the profits made by the funds, and fees from management services Panda provides to most of the plants held by the funds, says the restructuring adviser.

As Panda’s financial adviser, Evercore has been running the G.P. sale process since last year (PFR, 1/17). Senior managing director Rodney Reid is leading the deal team. Latham & Watkins is Panda’s long-time legal adviser.

Project debt

Some of the generation assets developed by and financed by Panda and held in its funds have come under financial pressure in recent years.

“They’ve had one bankruptcy at Temple and they’re looking at others,” says a private equity official, referring to the 758 MW Temple I combined-cycle gas-fired unit in Bell County, Texas, which is now owned by a consortium of its former creditors (PFR, 4/30/18). “They were very aggressive with debt,” the investor adds.

Project debt on several other Panda assets was trading below par earlier this year, while the process involving the G.P. has brought project financing and M&A activity to a halt. The debt associated with one Panda project, the 829 MW Liberty gas-fired facility in Bradford County, Pa., was trading at 85 cents on the dollar in February.

Deal watchers have been tracking the performance of the project finance deals in secondary trading as a proxy for market sentiment around Panda Power more generally.

“It looks like the market is not optimistic to the view of being taken out by a new G.P.,” an infrastructure credit investor said in May. “Otherwise you’d see secondary term loan B buyers buying that debt.”

But a power and utilities investment banker also points to the fundamentals of the Liberty project, in particular, as another factor in the performance of its debt in the secondary market.

“Because it was the first one done with Marcellus gas, lenders had also forced Panda into a not-terribly-attractive gas contract, so it’s a little higher priced than it should be,” the investment banker says. “Generally speaking you can fix those problems, it’s just that I don’t think anyone at Panda can really do much until they sell themselves.”

The uncertainty surrounding Panda has also put the development and financing of its 990 MW Mattawoman project in Maryland on ice. Project finance bankers had been enthusiastic about its prospects after last year’s higher-than-expected capacity auctions (PFR, 5/25/18).

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