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La Paloma Refi Closes with Novel Hedge

Posted with permission from SparkSpread

August 26, 2011, by Victor Kremer

Bank of America Merrill Lynch and Macquarie Capital yesterday closed a refinancing of the 1,022 MW La Paloma power plant in California, in a deal that includes a first-of-its-kind sparkspread hedge.

SunTrust Robinson Humphrey acted as co-manager on the deal on behalf of owners EIG Global Energy Partners (formerly TCW Energy & Infrastructure Group) and Rockland Capital.

The credit facilities consist of a $302 million first-lien with a tenor of six years; a $15 million revolver; and a $110 million second-lien with a tenor of seven years, as first reported by SparkSpread on July 25.

The first-lien tranche is priced at LIBOR plus 550 basis points and the second-lien is priced at LIBOR plus 875 basis points.

Both tranches have a 1.5% LIBOR floor and an original issue discount of 95.

The transaction includes heat-rate call options in 2013, 2014 and 2015 executed with EDF Trading on two units at the La Paloma plant; and sparkspread put swaptions on two units in 2014 and 2015 executed with BAML.

The sparkspread put swaption, believed to be the first of its kind, is designed to provide the La Paloma plant with a floor against a backdrop of uncertain future carbon prices in California, according to an industry source.

The new hedging arrangements complement existing physical tolling agreements on three units of the plant with Morgan Stanley.

Morgan Stanley also has an option to extend the toll on one unit through 2017.

As part of the deal, EIG Global Energy Partners and Rockland Capital are putting some $67 million in additional equity and $20 million in contingent equity into La Paloma.

A lender group led by TCW in 2009 foreclosed on a loan to La Paloma’s prior owner, Complete Energy Holdings (CEH), resulting in the transfer of CEH’s equity interest in the plant to TCW and a unit of Morgan Stanley.

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