IFM acquisition of Con Ed north east US power plants
When Industry Funds Management (IFM) reached financial close on its US$1.477 billion acquisition of north east US power assets from Con Edison in June, the deal bucked two trends.
First, while Australian funds Babcock & Brown Power and Allco had run into trouble due to their over-leveraged status, pension fund IFM showed it was still able to complete big deals unhindered with a conservative structure.
Second, while other big US power acquisitions have struggled to get away large chunks of debt - witness Arcapita's purchase of the Bosque power plant or the Puget Energy deal - lead bank Barclays was able to pull off a successful and over-subscribed syndication on the Con Ed transaction.
IJ Online Power reporterChaminda Jayanetti looks at a deal that survived the withdrawal of a co-sponsor to reach financial close with relatively little fuss.
Backstory:
When the acquisition [Transactions Database], which closed at Libor +525bp due to its heavy merchant risk.
The high-yield market still has appetite for well-structured energy transactions, but the first and second lien leveraged loan market that previous acquisitions targeted has seen a reduction in its investor base amid the credit crunch.
Instead, the IFM acquisition financing was structured to target two separate investor pools - the commercial bank market for the senior secured bank debt, and the high-yield investor market for the senior unsecured bond.
High-yield investors in the unsecured notes will benefit from the tightly structured senior secured facility ahead of them, coupled with a strong covenant package.
Conclusion:
Withdrawal of a co-sponsor often throws a deal into chaos; but in this case IFM progressed smoothly towards financial close as sole purchaser.
The conservative debt structure was in keeping with the pension fund's overall investment strategy - but it certainly played well in the debt market, with syndication proving that appetite remains in the debt market for well-structured deals that recognise market conditions and adapt to them.
The project at a glance
| Project Name | IFM acquisition of Con Edison power plants |
| Location | US (Maryland, Massachusetts, New Hampshire, New Jersey) |
| Description | Acquisition of Con Edison's 1,700MW northeast US gas-fired and hydro asset portfolio by Industry Funds Management |
| Sponsors | Industry Funds Management, via SPV - North American Energy Alliance LLC |
| PPA | Most of the portfolio's capacity is sold under seven-year PPAs and hedging agreements |
| Total Project Value | US$1.477bn |
| Total equity | US$727m |
| Equity Breakdown | IFM - 100 per cent |
| Total senior debt | US$750m, plus US$120m unfunded facilities |
| Senior debt breakdown | US$425m seven-year term loan US$325m eight-year unsecured bond US$80m five-year letter of credit facility (unfunded) US$40m five-year revolving facility (unfunded) |
| Senior debt pricing | Libor +275bp |
| Debt:equity ratio | 50:50 |
| Mandated lead arrangers |
Barclays |
| Participant banks | First tier syndicate banks - Cobank, Commonwealth Bank of Australia, Dexia, GE, ING Bank Second tier syndicate banks - Caterpillar Finance, CIT, Erste Bank, LBBW, PT Bank Negara Indonesia, SE Banken, Siemens, Trust Company West, US Bancorp |
| Legal Adviser to sponsor | Shearman & Sterling |
| Financial Adviser to sponsor | Barclays Capital Merrill Lynch |
| Legal adviser to banks | Simpson Thacher & Bartlett |
| Legal adviser to seller | Paul Hastings |
| Financial adviser to seller | Morgan Stanley |
| Date of financial close | 23rd June 2008 |
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