For the growing cogeneration industry, the Sithe
station's financing vehicle represented a significant breakthrough, according
to Richard Weissbrod, Economics Editor at World Cogeneration.
Cogenerating facilities often rely on project
financing, a strategy which results in financing a single-purpose entity
separate from its sponsors. However, bank lending, a traditional source
of project finance, has felt the pinch of belt tightening and many banks
have demonstrated a reluctance to solo in project finance.
In summary, Sithe faced the following situation:
which institution could step up and take on the largest deal ($717.2 million)
ever done by a non-utility-affiliated power project and do it quickly,
since construction was about to begin. Because of long term sales contracts
secured long term revenue and construction costs were essentially "locked
in" the enterprise earned an investment grade rating. This enabled
Salomon Brothers with Donaldson Lufkin & Jeanrete and Goldman, Sachs &
Co. to bring the deal to market quickly and to institutional buyers.
Essentially, the investment bankers attracted
qualified investment buyers or "QIB'S" through the Rule 144A
marketplace. The 144A rule permits after-market trading and therefore
provides some liquidity to these sophisticated investors. In this particular
case, the Retirement Systems of Alabama and the Wisconsin Investment Board,
as well as other pension funds moved quickly in reaching an investment
decision. Sithe's General Counsel, said the company would have gone straight
to the public markets but time problems due to renegotiation with Consolidated
Edison and related construction delays made it imperative to go the Rule
144A route. We were very pleased with the result.
Maria Richter of Salomon explained that while
the deal was sold as a Rule 144A security, the company has the option
to register the securities in an effort to reach the public market and
create additional liquidity for the QIB's. If the company fails to register
the securities within six months, the yields will increase by 50 basis
points, 1/2%. Salomon Brothers structured the deal in three branches:
$157.8 million of 7.9% 10-year secured notes; $150.8 million of 8.5% 14-year
secured notes; and $408.6 million of 9% 20-year secured notes.
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