Q&A: Stuart Murray at Citigroup
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Q&A: Stuart Murray at Citigroup

MidAmerican Energy Holdings’ subsidiary Solar Star Funding upsized its 144A bond offering backing the 579 MW Antelope Valley solar facility to $1 billion from $700 million on strong investor appetite last week. Citigroup is left lead on the deal, which is the largest bond to back a renewable project in the U.S. Senior Reporter Nicholas Stone chatted with Stuart Murray, managing director, project & infrastructure finance, at Citi in New York on how the deal went down and the state of the project bond market.

Power Finance & Risk: Can you tell us a bit about the closing of the most recent MidAmerican deal and some of the details?

Stuart Murray: The deal closed on Thursday, June 27. It priced on Thursday, June 20. The deal went out at $700 million and was upsized to $1 billion. If you are familiar with the Topaz transaction, the financing structure and strategy were similar to what was used there. The issuer looked to raise the project finance debt in two or potentially more tranches during the construction period. This transaction is tranche one. The total amount of debt that is expected to be raised--and that was rated Baa3 (by Moody’s Investors Service), BBB- (by Standard & Poor’s) and BBB- (by Fitch Ratings)--is approximately $1.275 billion. The company decided to do $1 billion now, and they have about $275 million that they can do later in the construction period.

PI: What was the thinking behind the upsizing now?

SM: This is a construction financing for a project that will be built over almost a three-year period. The project is about six months into that construction period now, with about two and a quarter years left. The primary logic for tranching it was to access the capital as they need it. The issuer wouldn’t want to incur the negative carry associated with funding all $1.275 billion upfront, so the idea is to tranche the offering and access the next tranche when it is required to fund construction costs. As it turned out, the demand for the bonds was incredibly strong and the issuer liked the pricing, so they were inclined to do more than they initially planned.

PI: Because of that demand they were able to bring the pricing down?

SM: That’s right. The price guidance was in the 5.5% area, and shortly thereafter it was tightened to 5.375%, where it finally priced.

PI: In terms of how it worked at the negotiating table, who were the major players?

SM: The joint book runners for the transaction were Citigroup, Barclays and Royal Bank of Scotland. I led the efforts for Citi, Chris Yonan for Barclays and Matthew Wade for RBS.

PI: What are the advantages of using project bonds?

SM: The advantages for a project like this are that the issuer can access fully amortizing debt, long-term. This facility has a 20-year contract with Southern California Edison. The bonds are 22-year bonds, so the bonds will amortize over the length of construction plus almost the length of the contract. There is no balloon maturity in the middle of that amortization period and no refinancing risk. If you were looking to raise this size financing in the bank market, you would be hard pressed to find it for 22 years on a fully amortizing basis. The absence of refinancing risk is a big benefit.

Demand for project bonds in the bond market continues to be exceptionally strong. It continues to be a very deep market. The result of that is the attractive pricing, like you saw here. The 5.375% coupon translated to a 296 basis point spread over the 10-year Treasury. That is an incredibly attractive spread for 22-year money. From a pricing perspective, for long-term money like that, it is incredibly attractive when compared to the bank market.

PI: Can you tell us a bit about the type of investors you are seeing for that paper?

SM: It is primarily insurance companies and also investment managers and investment funds.

PI: Over the past year, dual tranche deals have become quite popular for developers. Why would you go with a purely bond deal over a dual tranche deal?

SM: It is a simpler execution going all bonds. Rather than going to two markets, going just to one is easier.

PI: What do you think the capacity of the project bond market is?

SM: The capacity is very strong, as evidenced by this deal. This was the largest renewable bond deal completed to date. A billion dollars got done at attractive pricing, and I think that speaks to investor demand for this paper. That is in part a function of the continuing low-yield environment that we are in. Despite the turbulence over the past couple of weeks, fixed-income yields are still at incredibly low levels in a historical context. In our experience, a lot of investors are allocating more funds to longer term, structured, project bond paper in a reach for yield. So we see capacity for this type of deal to be quite strong.

PI: That being said, how many more project bond deals can we expect to see in the coming 12 months?

SM: I would say that the pipeline for additional project bonds is quite healthy.

PI: Do you see more developers looking into project bonds?

SM: Yes. I think the portion of the project finance market that the project bond market is taking up is increasing, relative to the bank market. It has been increasing over the past couple of years. I think that is a function of a lot of factors; there is a lot more money being allocated to project bonds in the investment community, which is making for strong demand and attractive pricing, so developers like the option. On the other side of the coin, you have continuing liquidity issues in the project finance bank community, exacerbated by implementation of Basel III. This means that bank tenors have come in and pricing on a swapped equivalent basis is equalizing between the bank and bond markets.

PI: Speaking of the market in general, can we talk briefly about the recent announcements by Ben Bernanke. What kind of impact do you think that will have on the project finance market in general and the project bond market?

SM: It is a little early to tell, but I think we all hope that it is going to be a relatively short period of volatility.

PI: Anything else you would like to add?

SM: Just that the market for project bonds is deep and pricing is attractive—comparable to bank financing. Project bonds have been soaking up an increasing portion of the project finance market and we expect that to continue for those reasons. This MidAmerican deal is just the latest example of those themes. It is a very large deal, with good pricing and it priced during a volatile period in the capital markets.

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