July 20 (IFR) - Yield-hungry institutional investors snapped up a US$330m financing from Texas-based power company Panda Temple Power this week, the first time in six years that funds have bought into a project financing leveraged loan with construction risk.
The deal is seen as a major breakthrough for US banks, which are trying to develop institutional investor interest in taking construction risk in project finance bonds and loans, as cash-strapped lenders retreat from capital-intensive project financing.
Firms like JP Morgan, Citigroup and Morgan Stanley are trying to build a market for new project financing capital market debt instruments, after European banks cut back or exited the US project finance lending business.
Panda Temple’s six-year non-call two-year loan consisted of a US$75m term loan A priced at 700bp over Libor, and US$255m term loan B at 1000bp and was arranged by Morgan Stanley and Ares Capital, one of the principal debt investors.
The facilities will finance the development of a 758MW greenfield natural gas-fired plant in Texas along with a US$10.16m letter of credit facility provided by a commercial bank.
Panda Temple Power’s financing is the first term loan financing to carry construction risk since a Missouri-based coal plant called Plum Point received financing in 2006.
“There have been a lot of what we call project finance ‘portfolio’ term loans done in the US, but they are facilities sold by banks to institutional investors and don’t carry construction risk,” said Michael Kumar, head of project financing at Morgan Stanley.
“We believe this is only the second pure greenfield project that’s been financed in the term loan market,” he said.
The Panda Temple Power credit facilities were placed with leveraged loan investors such as hedge funds and credit funds.
The deal has been sold to institutional investors and is a loan, rather than a project finance bond, because a loan can be refinanced to lower yields after construction.
The plant is exposed to merchant energy prices. Panda Temple’s hedging structure gives credit investors downside protection, while allowing both debt and equity investors to participate in any merchant energy upside.
The four-year, 600MW hedging structure has been provided by 3M Employee Retirement Income Plan. 3M ERIP is also an equity investor in Panda Temple and Panda Power Funds.
Debt investors found comfort in the fact that equity investors have already absorbed over 55% of the total project cost, including financing costs, not to mention the blended yield of 11.3% on the deal.
The deal is also unusual as Panda Power Funds has been joined by a group of pension funds, rather than the usual private equity firms, to provide the equity in the project.
The commodity hedge is structured to provide the project with sufficient gross margin to support all fixed charges, including debt service.
At that price, the Single B rated project has priced about 50bp-60bp higher than comparably-rated ‘portfolio’ project loans without construction risk.
Hopes are high that the deal will open the capital markets up for other developers now that underwriters have identified traditional leveraged loan investors who are willing to analyze project finance structures with construction risk.
The market for project finance bonds with construction risk has been more active to date, but is largely confined to renewable deals which lack complex or long-dated construction periods.
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