-- U.S. power generator LSP Madison Funding is proposing to remove two
key power plants (Doswell and Riverside) from its portfolio and to make other
changes to the project structure.
-- The project would pay down debt as required under the lending
document, but seeks to pay down a lower amount than currently defined, subject
to required lender approval. The $750 million senior secured term loan would
be reduced to $475 million.
-- We are affirming our 'BB+' rating and '2' recovery rating on the debt,
based on the proposed changes.
-- The outlook remains stable.
On Jan. 18, 2013, Standard & Poor's Ratings Services affirmed its 'BB+' rating
on LSP Madison Funding LLC's senior secured term loan, based on a planned
removal of two key assets and a lower debt pay-down resulting in a new debt
balance of $475 million. The recovery rating remains at '2', indicating our
expectation of substantial recovery (70% to 90%) of principal in a default
scenario. The outlook on the rating is stable.
U.S. project finance entity LSP Madison is planning to remove two assets that
provide nearly one-half of cash flow, Doswell and Riverside, from its power
generation portfolio. Based on its credit agreement, in removing the two
assets, LSP Madison must pay down specified debt amounts on each. For Doswell
and Riverside, these amounts are $200 million and $220 million, respectively.
Instead, LSP Madison is proposing to pay down a lower amount, resulting in a
revised debt balance of $475 million.
With the change to the portfolio, our primary concern is higher debt
outstanding throughout the term of the loan and weaker financial metrics.
Compared with the original deal (initial leverage at $209 per kilowatt (kW)
excluding project debt, and $321/kW including it), in the amended transaction
leverage would be $258/kW excluding project debt and $384/kW including it.
Despite the higher debt on a unit basis, we still view overall debt as modest
and, under our base case, the project pays down the term loan by maturity.
Compared with the original deal (minimum debt service coverage ratio (DSCR) of
2.42x and 2013 to 2018 average DSCR of 6.42x), in the proposed transaction,
the minimum DSCR is 1.98x and for 2013 to 2018 the average DSCR is 4.04x.
Regarding business risk, we view the portfolio as being weaker with two major
assets eliminated. However, diversification measures are similar. Compared
with the current portfolio (3,582 megawatts (MW) of gas-fired and hydro assets
across diverse markets), the portfolio after the asset removal will total
1,843 MW. Asset mix remains similar, with about one-third of the portfolio
combined-cycle gas turbines assets, 60% combustion turbine assets, and the
remaining a 139 MW hydropower asset in Pennsylvania. Contracted margins are
also similar, with about 46% of gross margins contracted. With the Doswell
removal, which had project-debt associated with the asset, encumbered cash
flow reduces to 13% (from 19% originally). As before, revenue from cleared
capacity prices, hedges, and power purchase agreements (PPA; 69% of total
revenues through 2015) provides the primary credit support for the stable
Two additional developments that support the rating through enhanced cash flow
are an extension in the Cherokee PPA through 2020 (previously, through June
2013) and a lower tax distribution cap. In the current deal, the tax
distribution cap is set at $7.5 million through 2012 and $15 million
afterward. The revised tax distribution cap is set at $5 million for each of
2013 and 2014 and zero dollars afterward.
The project's liquidity includes a six-month debt service reserve that is
backed by a letter of credit (LOC) from LS Power Equity Partner II, and is
backed by the fund's credit facility. If drawn, repayment of the LOC is an
obligation of LS Power Equity Partners II and not LSP Madison. A cash-funded
major maintenance reserve equal to 12 months of major maintenance expenses
will be put in place and replenished from project cash flow through the life
of the term loan. Currently, the project has the option to issue a $50 million
working capital credit facility after close, but this allowance is removed in
the proposed change to the agreement.
Based on the proposed changes, the recovery rating on the term loan is '2',
indicating our expectation for substantial (70% to 90%) recovery of principal
if a payment default occurs.
The stable rating outlook reflects our expectations that the project's more
stable revenue streams, consisting of PPAs, hedged power prices, and capacity
payments, will allow for significant deleveraging over the loan's tenor, even
if merchant power revenues are weak. A ratings upgrade is unlikely given the
limited asset diversity, the age of the assets, and the project's exposure to
merchant power revenue. If the assets underperform operationally, causing
energy gross margins and capacity payment revenue to fall below expectations,
we could lower the ratings. We could also lower ratings if we materially lower
our base-case assumptions, which would affect our expectations of merchant
revenue. An adverse change to the business profile or developments that would
lead to greater refinancing risk of over $100/kW or more could well lead to a
Related Criteria And Research
-- Standard & Poor's Lowers Its U.S. Natural Gas Price Assumptions; Oil
Price Assumptions Are Unchanged, April 18, 2012
-- Updated Project Finance Summary Debt Rating Criteria, Sept. 18, 2007
-- Criteria for Special-Purpose Entities In Project Finance Transactions,
Nov. 20, 2000
Rating Affirmed; Recovery Rating Unchanged
LSP Madison Funding LLC
$750 mil sr secd term bank loan BB+/Stable
Recovery rating 2
Complete ratings information is available to subscribers of RatingsDirect on
the Global Credit Portal at www.globalcreditportal.com. All ratings affected
by this rating action can be found on Standard & Poor's public Web site at
www.standardandpoors.com. Use the Ratings search box located in the left