NEW YORK, Dec 17 (IFR) -The bank acted as joint lead bookrunner (lead-left and structurer) and joint lead arranger on the innovative, 22-year amortizing package, which financed the Shepherds Flat Wind project in Oregon, the world's largest wind farm. The transaction, which closed yesterday, is the first broadly distributed offering of its kind supported with a partial US Department of Energy loan guarantee.
Citi was engaged to structure and execute the transaction in November 2009, and also acted as DOE lender-applicant for a US$1.3bn semi-guaranteed loan. The project, an 845-megawatt wind generation facility located in eastern Oregon, is sponsored by Caithness Energy, LLC and GE Energy Financial Services, and will feature 338 new high-efficiency GE 2.5-megawatt wind turbines. The wind farm is the first in North America to deploy these turbines, which have been used in Europe and Asia.
According to the DOE, the project will produce enough renewable energy to power more than 200,000 average California households and avoid over 1 million tons of carbon dioxide, and will directly and indirectly create hundreds of jobs for the local economy.
An 80% guarantee from the DOE's loan-guarantee program ultimately allowed the project to access a wider pool of capital; for example, some investors said this was their first project-level investment in wind energy.
At the outset, however, the 80% guaranteed structure presented Citigroup with a quandary. While a deep pool of buyside demand existed to buy government risk, and a separate pool existed to buy pure project-finance risk, there was not a significant investor base for transactions that are only partially guaranteed by a US agency. "Eighty-percent guaranteed paper is neither fish nor fowl," said Nasser Malik, a managing director at Citigroup. "It's a square peg in a round hole. Lenders and investors are not accustomed to buying or seeing it.
"So we recommended that the DOE permit a process whereby we 'strip' the guarantee into component parts through intermediary grantor trusts, using securitization technology. This way we were able to create true pieces of homogeneous risk (government risk and pure project risk), size demand more appropriately, and reduce extension risk for the client."
In order to optimize the cost of funds for the large capital raise, Citi suggested accessing multiple markets including the bank market, private placement bond market, and ABCP conduits.
But Citi had to employ some nifty structuring in order to appropriately tailor the offering to each of these specific markets.
First, the transaction was split into fixed- and floating-rate pieces, mainly to minimize negative carry (when cost of financing is greater than income generated) over the course of the two-year construction period. Then each of those pieces was further split into two: 80% of the fixed-rate piece would benefit from a 100% government guarantee, while 20% would be completely unguaranteed, and the floating-rate piece would be divided, 80/20, in the exact same way.
So a US$675m, 14-year, fully amortizing floating-rate tranche of "bank debt" was stripped as follows: 80% (or US$540m) of grantor-trust certificates benefitted fully from the DOE guarantee, while 20% (or US$135m) of pure project trust certificates were completely unguaranteed.
The floaters were placed in this way: 60% of the US$540m guaranteed portion was structured for and placed into Citi's own Govco ABCP conduit, while the remaining 40% was purchased by the Bank of Tokyo-Mitsubishi, one of the joint arrangers on the deal. The US$135m unguaranteed floater was syndicated to the project finance bank market.
Separately, the US$525m of fixed-rate, 17.9-year average-life bonds were divided in a similar way: 80% (or US$420m) had a full government guarantee and was sold as a so-called "delayed draw" into the US private placement market, while 20% (or US$105m) of unguaranteed notes were sold into the project-finance market.
"In a project, you draw down funds over a span of time," said Stuart Murray, a Citi banker overseeing the trade. "So you don't need all the cash up front. Sponsors get the benefit of the 'delay draw' afforded by the private placement market, which is more economical than having the funds sitting in escrow."
Twenty-five percent of the fixed-rate, private placement portion was immediately funded when the transaction closed last Thursday; 50% more of the fixed-rate piece will fund in three weeks. The remaining 25% will fund in early May 2011.
"By our estimate, the DOE guarantee reduced the credit spread on the transaction by almost 200bp," Malik said. "This is the real value to the sponsors."
Additionally, US$231m in letters of credit were issued, a portion of which is 80% guaranteed by the DOE. The LOC were syndicated to the project finance bank market.
Besides Citi, the other joint arrangers on the deal were Bank of Tokyo-Mitsubishi, RBS, and West LB.
The fixed-rate, private placement portion, rated 'BBB-' by Fitch, priced with a 4.97% blended coupon and a 166bp spread, and was 2.5x oversubscribed.
Citi underwrote almost 50% of the floating-rate facilities and LOC. Bank-market syndication was approximately 2x oversubscribed, resulting in clean, unguaranteed project exposure to Citi of approximately US$8m.
The Shepherds Flat wind project started construction this year and is expected to finish in mid-2012.
