Sources of Available Project Financing: Term Loan B Facilities

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Resource ID: w-014-0345

Sources of Available Project Financing:

Term Loan B Facilities

PRACTICAL LAW FINANCE WITH MICHAEL T. REESE,

PILLSBURY WINTHROP SHAW PITTMAN LLP

A Practice Note discussing how Term Loan B

(TLB) facilities, a loan product geared toward

the non-bank investor market and designed

to provide borrowers more ﬂexibility than

commercial bank debt, are used to ﬁnance

projects on a limited recourse basis. This Practice

Note includes information on the types of

projects these loans ﬁnance, the investors that

typically provide this type of ﬁnancing, and the

effect of these facilities on US project ﬁnance.

The development and construction of large-scale projects such as

pipelines, mines, natural gas liquefaction facilities, and thermal

power plants typically require significant capital that usually cannot

be obtained from a single financing source. As a result, sponsors

of these projects may seek capital from several different sources

to complete the financing package, including commercial bank

syndicates, institutional investors, and the capital markets. Where

appropriate, financing may also be provided by export credit

agencies (ECAs), bilateral and multilateral institutions, tax equity

investors, and under municipal, state and federal government loan

and grant programs. This Note focuses on one of these sources, Term

Loan B (TLB) facilities.

The sources project sponsors use to finance their projects depend on

several factors, including the project’s risk profile, the lenders’ risk

appetite, and the degree of funding and operational flexibility the

project sponsor requires (see Practice Note, Project Finance: Sources

of Available Financing: Factors Affecting the Availability of Different

Sources of Financing (8-422-4846)). For more information on the

other sources of capital that may be used to finance projects on a

limited recourse basis, see Practice Notes:

 Sources of Available Project Financing: Project Bonds

(9-548-8227).

 Sources of Available Project Financing: Tax Equity (3-601-6606).

 Sources of Available Project Financing: The International Finance

Corporation (3-527-6445).

 Sources of Available Project Financing: The Overseas Private

Investment Corporation (3-603-6746).

DEFINING TLBs

TLBs are syndicated loans typically made to companies that are

below investment grade. They are a hybrid of high-yield bonds and

Term Loan A(TLA) facilities, with some similarities to both products.

Like high-yield bonds, TLBs are rated instruments that are bought

and sold on the secondary market, although the TLB investor pool is

a smaller and more restricted group of domestic and international

investors than high-yield debtholders. They also have fewer financial

covenants that restrict the borrower’s operation of its business. Like

TLAs, TLBs are generally senior debt secured with a first priority lien

on the borrower’s assets. The mechanics for requesting a loan under

a TLB facility are also akin to those of a TLA facility, including the

timing for making loan requests, the amount and type of the loans

that may be requested, and how interest on the loans is determined

and calculated.

However, there are significant differences between TLBs and these

other debt instruments that make these loans a unique financial

product. The primary distinction between TLBs and these other

instruments is that TLBs amortize more slowly. TLBs typically have

scheduled amortization of 1% per year with a balloon payment for the

remaining principal at maturity. By contrast, TLAs would generally

require more amortization, with regularly scheduled principal

payments that result in either payment in full by scheduled maturity

or a reduction of the principal to a level that would more easily

accommodate a refinancing with project bonds (see Practice Note,

Sources of Available Project Financing: Project Bonds (9-548-8227)).

In a project that is financed with both TLAs and TLBs, the TLBs also

generally mature after the TLAs.

While they incorporate some of the attributes of high-yield debt,

including allowing borrowers to access a wider investor pool, TLBs

are not public debt. As a result, borrowers do not have to comply

with, or incur the costs of, the registration requirements of the

Securities Act or the reporting requirements of the Exchange Act

(see Practice Notes, Registration Process: Overview (7-380-8736)

Sources of Available Project Financing: Term Loan B Facilities

and Periodic Reporting and Disclosure Obligations: Overview

(7-381-0961)). Borrowers also have more control over the holders

of their TLB debt. TLBs typically include provisions that allow the

borrower to disqualify or exclude certain institutions from holding

their debt (see Practice Note, Assignments and Participations of

Loans: Eligible Assignees (8-381-8532)).

For more information on these differences and similarities, see:

 Practice Note, Lending: Overview: Classifications of Bank Loans

(0-381-0295).

 Article, Term Loans and High Yield Bonds: Current Status of the

Convergence (3-577-7447).

 Standard Clause, Loan Agreement: Borrowing Mechanics

(3-383-6717).

TLB LENDERS

Most investors in the TLB market are institutional or non-bank

lenders, including:

 Collateralized loan obligations (CLOs), the largest segment of the

TLB market representing about 60% to 65% of TLB deal volume.

 Hedge funds.

 Private equity funds.

 Insurance companies.

 Mutual funds.

 Prime funds. These are money market funds that primarily invest

in corporate debt securities.

 Pension funds.

 Business development companies (BDC). As defined in the

Investment Company Act of 1940, a BDC is a domestic closed-

end company that operates to make investments in certain

specified securities and, with limited exceptions, makes available

“significant managerial assistance” with respect to the issuers of

these securities and has elected BDC status. For more information

on BDCs, see Practice Note, Business Development Companies

(9-584-8625).

These institutions are involved in the US project finance market to

varying degrees. Private equity and hedge funds are very active in

the US power sector. US power projects are also attracting Asian

investors, most notably from South Korea and China, increasing the

diversity and depth of the lending market. This is especially the case

for projects that sell power into deregulated electricity markets like

the PJM Interconnection (PJM) and the Electric Reliability Council of

Texas (ERCOT). Several commercial banks also operate in this market.

The large number of institutional investors and banks operating in

the TLB market has resulted in significant liquidity for US project

financings which has not yet been fully absorbed. This liquidity has

increased competition among TLB investors for projects and resulted

in more borrower-friendly terms. For more information on Term B

Lenders in the project finance market, see:

 Current State of the Market.

 Effect of TLBs on Traditional Project Finance.

 Article, US Project Finance: Key Developments and Trends from

2012 and the Outlook for 2013: Return of the Term B Loan Market

(0-523-1991).

 Article, US Project Finance: Key Developments and Trends from

2017 and the Outlook for 2018 (W-013-0120).

TLBs generally attract investors that are looking for yield and are thus

principally focused on the loan facility’s key economic terms. They are

ordinarily less concerned about the borrower’s operations (including

ongoing compliance with financial covenants). They are also usually

not set up to monitor compliance with financial covenants.

But this is where the Term B Lenders’ similarities end. Unlike

commercial banks, which generally have similar approaches to loan

underwriting, costs of funds and regulatory requirements, there is

considerably more diversity among Term B Lenders. A CLO is quite

different from a pension fund and a BDC. All have different risk

appetites, costs of capital, time horizons, and investor mandates.

Asa result, the specifics of the types of projects in which they invest,

the requirements they impose and the financial terms they need vary.

In project finance transactions, some Term B Lenders (for example,

BDCs) are willing to accept construction risk while others (for

example CLOs) limit their investments to projects in operation, with

the effect that they are essentially lending only to fund refinancings

of construction debt. Similarly, some TLB lenders prefer single asset

financings while others are willing to finance project portfolios.

Certain Term B Lenders (for example, loan funds) are also more

willing to participate in covenant-lite or covenant-loose deals (see

Practice Notes, Covenant-Lite Loans: Overview (4-507-4687) and

What’s Market: Covenant-Lite Loans (8-506-5054)).

HOW TLBs ARE USED IN US PROJECT FINANCE

Funds advanced under TLB facilities can be used to finance a

wide array of businesses and for a variety of purposes, including

acquisitions, refinancings, general corporate purposes, and dividend

recapitalizations. Starting with the 2012 financing of Panda Power

Funds’ Temple I project—a 758 MW natural gas-fired combined cycle

electric generating facility in Texas—TLBs are also being used to

finance greenfield projects on a limited recourse basis.

WHY TLBs WERE NEEDED

US project finance has historically been dominated by European

commercial banks interested in financing projects that have

long-term fixed-price offtake agreements with a creditworthy

offtaker (for example, power purchase agreements (PPAs) with

a utility). These banks rely on the revenues earned by the project

company under these agreements to service the debt and to pay

the other obligations of the project company (see Practice Note,

Project Finance: Overview (7-382-7004) and Practice Note, Offtake

Agreements: Issues and Considerations (W-001-5216)).

But in 2008, in the immediate wake of the global financial crisis, the

US project finance market started to change. This shift was driven by

several notable developments:

 The imposition of more stringent capital requirements on banks by

government regulators.

 Diminished confidence in the financial integrity and viability of

many European banks.

 The introduction of Basel III, which established new liquidity ratios

to encourage banks to hold higher levels of unencumbered, high-

quality liquid assets and imposed new capital requirements.

Sources of Available Project Financing: Term Loan B Facilities

For more information, see:

 Practice Note, What’s Market: Increased Costs from the Dodd-

Frank Act and Basel III (3-504-6666).

 Article, The Eurozone Crisis and Loan Agreements (2-515-8268).

 Article, Basel III: Overview and Implementation in the US

(6-503-9909).

 Article, Basel III and the New US Capital Framework Proposals

(2-519-9023).

As a result, many European commercial banks began pulling back

from the US project finance market (see Article, US Project Finance:

Key Developments and Trends from 2012 and the Outlook for

2013: Continued Retreat of European Commercial Bank Lenders

(0-523-1991)). Around the same time, however, project sponsors

were still developing projects to take advantage of certain market

trends, including:

 Increased demand for new generation in certain markets.

Many state public utility commissions, Regional Transmission

Organizations (RTOs) and Independent System Operators

(ISOs) were predicting load growth in the markets under their

jurisdictions requiring new power plants to be built.

 The need for a more diverse generation mix. Many load serving

entities (LSEs) sought to source more of their electricity from

renewable sources in response to new regulatory requirements

(for example, renewable energy incentive programs). Somewhat

counterintuitively, the quick growth of wind and solar farms in the

US at the beginning of the 21

century led to additional natural

gas-fired plants being built to address the intermittency of wind

and solar power generation.

 The rapid pace of coal-fired plant retirements. In the last 10 years

many coal-fired plants have been retired because of low natural

gas prices and emissions regulations that are rendering coal

generation uneconomical in some areas.

For more information on these issues, see:

 Practice Note, Power Dynamics: Forces Shaping the Future of Coal

in the United States (W-000-7118).

 Practice Note, Renewable Energy: Overview (US): Wind Energy

(4-518-1338) and Solar Energy (4-518-1338).

 Article, Update on the US’s “All of the Above” Energy Strategy.

 Legal Update, Renewable Energy Update: Renewable Portfolio

Standards 2016 Review (W-005-3456).

The unabated pace of development by project sponsors, despite the

retreat of the European commercial banks, created a financing gap

for some large projects. While some of this gap was closed by new

banks entering the project finance market (for example, Canadian,

Japanese, and US regional banks), they too are subject to regulations

that limit the types of projects in which they can or want to invest.

These banks also typically require long-term offtake agreements to

support the financing.

For natural gas-fired plants in the US, however, PPAs have become

difficult to secure. Low natural gas prices caused by new methods

of extracting abundant natural gas have depressed electricity

prices in some US markets (see Practice Note, Understanding

Hydraulic Fracturing: Issues, Challenges, and Regulatory Regime

(8-518-4410)). As a result, many utilities are unwilling to enter into

long-term PPAs for natural gas-fired projects for fear that they will

be locked into prices that are significantly higher than prevailing

market prices. Without a reliable and steady revenue source,

many commercial banks are unwilling to finance these so-called

“merchant” projects.

Still in need of new sources of capital, investment banks and

project sponsors turned to institutional investors. While many of

these investors were initially unfamiliar with project finance paper,

they were attracted to its stable returns and low default rates.

Moody’s Investors Service conducts an annual study on default and

recovery rates for project finance bank loans globally. According to

its findings, these default rates are consistent with a speculative-

grade rating during the project’s construction phase and tend

towards a low investment grade rating after the project has been

operational and generating revenue for a number of years. For the

most recent survey, see Moody’s, Default Research: Default and

Recovery Rates for Project Finance Bank Loans, 1983-2016 on the

Moody’s website.

Institutional investors were more willing to assume the revenue and

demand risk uncontracted or merchant gas projects presented. The

diversity of the investor groups in this market, combined with their

different funding costs, lack of regulatory restrictions, and greater

risk tolerances enabled these investors to price the risk of these

projects in a way that commercial banks could not.

PROJECTS FINANCED IN THE TLB MARKET

TLBs are used in many different ways in the project finance market.

They are usually incurred at the project level, where the borrower is

the project company that owns the project. In this case, the TLBs are

repaid and secured by the revenues the project company earns under

an offtake agreement, market sales or other agreements. They may

also be incurred at the holding company level (the direct or indirect

parent of the project company), where the holding company or

“holdco” can use the proceeds to finance:

 The construction of a portfolio of projects.

 Dividend recapitalizations.

 Project acquisitions (whether single assets or project portfolios).

In these arrangements, the holdco lenders rely on dividend

distributions made by the project company to the holdco to repay

the loans. Holdco loans made where there is project level debt raise

several issues that are beyond the scope of this Note. But, at the

most basic level, holdco lenders need to understand:

 The conditions under which the project company may be prevented

from making cash distributions to the holdco. Project finance

credit agreements typically include dividend traps that prevent

these distributions upon an event of default (see Project Finance

Waterfall Provision Flowchart (9-500-7520)).

 That they have no direct rights to the assets of the project

company.

 That they are structurally subordinated to the rights and interests

of the project company’s lenders and other creditors.

There is, therefore, a greater risk of non-payment or default in

holdco loan transactions than in traditional project finance loans.

Sources of Available Project Financing: Term Loan B Facilities

To compensate these lenders for the increased risk, the interest

onthese holdco loans is typically higher than on similar project-

level debt.

TLB facilities are used in the US project finance market to:

 Finance greenfield merchant and quasi-merchant natural

gas-fired projects. In this context, neither “merchant” nor

“quasi-merchant” projects have PPAs, but “quasi-merchant”

projects have substitutes for PPAs. While Term B Lenders are

willing to invest in projects with riskier profiles, they nevertheless

require mechanisms to mitigate the uncertainty created by the

lack of a long term offtake agreement. These loans are typically

supported by hedges that ensure the project receives some

minimum revenue for a portion of the loan term (see Practice

Note, Mitigating Merchant Risk in Power Projects: Hedging

Contracts (5-607-8325)). Where hedges are unavailable or only

cover a portion of the loan term, TLB lenders finance projects

in markets where there is sufficient demand or support. As a

result, many new natural gas-fired projects in the US sell power

into ERCOT or PJM, mature wholesale markets with strong

fundamentals. The market forces underpinning growth in these

two markets differ:

z

In ERCOT, there is consistent load growth requiring more

generation to come online. In addition, there is significant

wind energy penetration requiring natural gas generation to

balance out supply and avoid brownouts and blackouts due

to intermittency; and

z

In PJM, the rapid pace of coal retirements has created a need for

new generation to replace these plants.

 Finance fully contracted renewable energy and other types of

projects. While quasi-merchant gas projects dominate the TLB

market, they are not the only projects being financed. Project

sponsors that require more operational and financial flexibility

are also turning to this market even when commercial bank debt

is available. They are also turning to this market where public

pressure or public relations issues are causing banks to rethink

certain projects. Following the controversy surrounding the Dakota

Access Pipeline, some sponsors turned to the TLB market to

finance their pipeline projects, including:

z

the Utopia pipeline project, a pipeline being developed

by Kinder Morgan and Riverstone Holdings to transport

ethane from the Utica and Marcellus Shale to petrochemical

companies in Ontario; and

z

the Rover pipeline project, a pipeline partially owned by Traverse

Midstream Partners that is expected to transport 3.25 billion

cubic feet per day of natural gas from the Marcellus and Utica

Shale production areas.

z

For more information on these and other pipelines, see Article,

Natural Gas Pipelines: 2017 in Review (W-011-7878).

 Refinance existing commercial bank debt. Many commercial

bank loans are structured as mini perms that require the project

company to refinance the loans using project bonds or another

financing source within a few years of construction being

completed. Project sponsors use TLBs for this purpose across a

variety of industry sectors.

 Finance acquisitions of single assets or portfolios of projects.

 Finance dividend recapitalization transactions to allow project

sponsors to recoup a portion of their investment without selling

the asset.

CURRENT STATE OF THE MARKET

The project finance TLB lending market has changed significantly since

the Panda Temple project was financed in 2012. It is no longer solely

for the riskier projects that commercial banks would not underwrite.

While the commercial bank market is still the go-to financing source

for complex, single asset new construction projects with long-term

offtake agreements, project sponsors are increasingly turning to the

TLB market to finance projects that until recently would have been the

exclusive domain of the commercial banks. Thedistinction between

deals that can be financed in the commercial bank market versus the

TLB market is, therefore, blurred.This is because:

 Commercial banks and TLB lenders are both financing quasi-

merchant projects on a limited recourse basis and making holdco

loans, sometimes on the same projects.

 TLB lenders are financing fully contracted renewable energy

projects more regularly.

 The spread between commercial bank debt and TLB facilities is

narrowing as the large number of investors competing for projects

in this market puts downward pressure on pricing. In 2012, these

loans were pricing at 600 basis points (bps) to 1000 bps above

LIBOR. The high costs of financing limited the number of projects

that could be financed with TLBs. These loans are now pricing at

anywhere from 300 bps to 500 bps above LIBOR, depending on

the project’s risk profile.

The increased involvement of private equity is also changing

the project finance market. Funds have been raising significant

amounts of capital to invest in the energy and infrastructure

sectors and are bringing to the project finance market some of

the structures and features they are used to from the standard

leveraged loan market, such as covenant-lite terms (see Effect

ofTLBs on Traditional Project Finance).

For more information on the current state of the TLB lending market,

see Article, US Project Finance: Key Developments and Trends from

2017 and the Outlook for 2018 (W-013-0120).

KEY ECONOMIC TERMS OF TLBs

There can be significant variations in TLB credit agreements, and

this applies to project finance style credit agreements as well. These

loans do, however, share some common features.

CREDIT RATINGS

Broadly speaking, the target for the US project finance bank market

is a low investment grade credit rating (Baa2/BBB to Baa3/BBB-).

Companies with less favorable credit ratings generally cannot

access the commercial bank market and must seek capital in the

more expensive high-yield debt, TLB lending and mezzanine debt

markets. TLB lenders provide financing to companies rated from

B2/B to investment grade, although these loans are typically

made to borrowers that are below investment grade. In the case

of project financings, these loans are typically rated from B2/B to

Ba1/BB+. While most natural gas-fired projects that seek financing

Sources of Available Project Financing: Term Loan B Facilities

in this market are quasi-merchant and have mechanisms in place

to mitigate revenue and demand risk—for example, revenue puts

and other types of hedging arrangements—the partial reliance on

merchant sales increases the risk profile of these projects.

Ratings agencies consider several factors when rating project finance

TLB facilities, including:

 The project’s construction risk.

 The experience and creditworthiness of the project’s construction

contractor and operator.

 The extent of the project’s merchant exposure. In the case of

power projects, this includes an analysis of energy prices, capacity

factors and heat rates (or efficiency of the project in converting

natural gas to electricity).

 The level of sponsor support. The debt to equity ratio in project

finance transactions is typically 70:30 or even 80:20 for well-

structured projects, but riskier projects may have a ratio as low as

50:50 (see Practice Note, Financial Covenants: Project Finance

Transactions: Debt to Equity (DTE) Ratio (2-578-6126)).

These loans may also be assigned a recovery rating if the credit

rating is BB+ or lower. Recovery ratings (which are categorized from

1 to 6) focus solely on expected recovery in the event of a payment

default under the loan. The recovery rating is not linked to, or limited

by, the issuer credit rating or any other rating, and provides a specific

opinion about the expected recovery. A recovery rating of ‘1’ denotes

an expectation of very high recovery (for example, 90% to 100%)

in the event of a default. Most project finance TLB loans receive a

recovery rating of ‘2’, which denotes an expectation of substantial

recovery (for example, 70% to 90%) in the event of a default.

TENOR

In the traditional leveraged loan market, TLBs have longer tenors

than TLAs. TLBs generally mature within five to seven years while

TLAs mature within three to six years. However, these generalities

around tenor do not always hold true in the project finance market.

Commercial bank loans (TLAs) made in connection with a project

finance transaction often mature within seven to ten years, which is

sometimes expressed as construction plus five (or seven) years. Many

of these loans are structured as mini perm financings where there is

pressure on the project company to refinance the loans within a few

years of the completion of project construction. However, depending

on the project and the lending group, these loans can have maturities

as long as 15 to 18 years. For example, some banks have been willing

to provide long tenors to projects that have PPAs with 20 to 25 year

terms. While this was more common in projects that were financed in

the 1990s, it is not unheard of in recent years.

Project finance TLBs generally have tenors in the six to eight year

range, with seven years being the most common. While these loans

generally remain outstanding until they are refinanced or repaid at

maturity, they may be refinanced or repriced much earlier depending

on the state of the credit markets (and subject to compliance with

certain other requirements (see Call Protection)).

LOAN SIZE AND AMORTIZATION

TLB facilities are generally valued at a minimum of $250 million to

justify the additional costs of the loan process. For project finance

transactions, this includes the added expense of the ratings agencies

reviewing loan and project documents to furnish the required rating

(see Credit Ratings). Project finance TLBs can be significantly smaller

for certain projects, however. For example, TLBs for renewable

energy projects can be as low as $100 to $150 million.

TLBs have minimal scheduled amortization of about 1% annually

during the early years of these loans. Unless paid earlier with cash

sweeps or to maintain a target debt balance, most of the principal

does not become due until final maturity.

MARGIN AND ALL-IN YIELD

Interest rates on TLBs are usually higher than on traditional bank

term loans, although still lower than what would be typical on

mezzanine debt. For project financings, TLB loans are priced at

LIBOR plus 300 to 500 bps. That is compared to LIBOR plus 125 to

200 bps for commercial bank loans for fully contracted single asset

projects in operation. However, for projects with riskier profiles (for

example, projects with volatile revenue streams), the interest on the

TLB loans can be as high as LIBOR plus 600 bps. The higher rates

are intended to compensate Term B Lenders for the increased risk

ofnon-payment or default.

This is due to:

 The demand and revenue risk many of these projects present.

 Looser financial covenants that impose fewer restrictions on

project cash flows.

 In the case of some holdco loans, the structural subordination of

these loans to project-level debt which may increase the likelihood

of these loans not being repaid in the event of a bankruptcy of the

project company.

The margin on the loans is only one part of the TLB lenders’ return,

however. When analyzing their return, TLB lenders must consider the

all-in yield of these facilities. The all-in-yield takes into account the

following components:

 The loan’s original issue discount (OID). Although historically

a standard feature of high-yield debt, OID is now a standard

component of TLB pricing. Project finance TLBs typically have an

OID between 1% and 1.5%.

 LIBOR floors. In many cases, LIBOR may not accurately reflect a

lender’s cost of funds in the London interbank market. To minimize

the likelihood of funding loans at a loss, many loan agreements

provide that LIBOR cannot be lower than their actual cost of funds

or a certain percentage. This is typically 1% for TLBs. For more

information, see Practice Note, Finance Fundamentals: LIBOR

(2-622-0716) and Article, Current Trends in LIBOR Successor Rate

Provisions (W-013-6542).

 Prepayment premiums. TLB credit agreements typically require

the borrower to pay a prepayment premium or penalty (also known

as call protection) if it prepays or reprices all or a portion of the

loans within a specified time period after closing.

CALL PROTECTION

Typically, borrowers negotiate the right to prepay loans at par.

In a commercial bank loan, the borrower may be required to pay

breakage costs with a prepayment, but usually no penalties or

Sources of Available Project Financing: Term Loan B Facilities

premiums are otherwise payable. By contrast, in TLB transactions

borrowers are typically required to pay a premium to the lenders

if they prepay, refinance or reprice their loans. This is because

many TLB lenders expect to hold their loans long term and these

transactions reduce their overall returns.

A TLB transaction may include the following types of protections

forTLB lenders:

 Soft call. In transactions that have a “soft call”, the prepayment

premium is payable only with respect to repricings and

refinancings.

 Hard call. In transactions that have a “hard call”, the prepayment

premium is payable in connection with all prepayments whether

as a result of a refinancing, repricing, an initial public offering or

achange of control.

The call protection period is typically between 6 and 12 months

for a traditional commercial bank loan. This period is the same in

project finance TLB transactions, although this period may be longer

in limited cases (see No-Call Provisions). The premium is generally

equal to 1% to 2% of the outstanding principal amount of the loan

being repriced or refinanced.

For more information on call protection, see What’s Market: Current

Trends in Call Protection (as of August 2016) (W-003-1234).

Repricings

The TLB lending market is more liquid than the commercial bank

market with a wide and varied investor base interested in acquiring

project finance paper. Many borrowers take advantage of this

liquidity and the competition it creates to reprice their loans. This

may occur even within a few months of the initial closing of the

facility. Repricing refers to the prepayment or refinancing of all or

a portion of a TLB loan by incurring long-term debt financing that

has an effective interest cost or weighted average yield (excluding

any arrangement or commitment fees that may be payable) that is

less than the effective interest cost or weighted average yield of the

existing TLB loan. A repricing may be effected by either amending

the credit agreement or entering into a new loan transaction.

Depending on when the loan is being repriced, the borrower may

have to pay 1% to 2% of the amount being repriced as a penalty. The

new interest rate the borrower achieves following the repricing must,

therefore, be low enough to justify payment of this premium and the

transaction costs incurred to consummate the transaction.

While the ability to reprice or refinance is a benefit to borrowers—

enabling them to reduce their costs of financing and the overall

costs of the project—it is not as advantageous for lenders since it

reduces the return the investors can expect to earn on the loans. The

inclusion of a call protection provision gives investors some cover,

although limited, against this reduced return, ensuring some income

stream while still affording borrowers the flexibility they come to the

TLB market to secure.

The scope of the call protection provision and the exceptions tothe

payment of the premium are highly negotiated issues between

the borrower and its TLB lenders. But generally, the premium is

payable if the purpose of the transaction is to lower the interest

rate on the loans.

For more information on repricing project finance TLBs, see Article,

US Project Finance: Key Developments and Trends from 2017 and the

Outlook for 2018: Term Loan B Market (W-013-0120).

No-Call Provisions

TLB facilities incorporate many of the benefits of the high-yield

debt market (see Defining TLBs). One key attribute of the high-yield

debt market that has not been widely accepted in TLB transactions,

however, is the no-call period. The no-call period prohibits the

borrower from prepaying the loan for a specified amount of time.

However, some TLB credit agreements that were entered into when

the TLB market emerged as a major source of financing for power

projects did include this provision. In these transactions, after the

termination of the no-call period, the loans are typically callable

subject to the payment of the prepayment premium which decreases

in each successive year for which the premium is payable. The total

call protection period in these cases is typically two to three years.

For example, in:

 January 2015, M3 Midstream closed a $350 million TLB facility for

its Stonewall Gas Gathering project that was non-callable in the

first year and callable at 1% in the second year.

 January 2014, Panda Power Funds closed a $385 million TLB

facility to back its Moxie Patriot project that was non-callable for

2.5 years. After the no-call expired, the loan was callable at 2%

and 1% each succeeding year.

 November 2013, Northeast Wind Capital closed a $320 million

TLB facility to back a portfolio of operating wind assets. This loan

was non-callable in the first year and callable at 2% and 1% in the

next two years.

 November 2012, a Riverstone Holdings’ portfolio company closed

a $175 million TLB facility to finance the acquisition of three

coal-fired power plants which was non-callable in the first year and

callable at 2% in the second year.

 September 2012, Panda Power Funds closed a $350 million TLB

facility for its Sherman natural gas project which was non-callable

for the first two years, and callable at 2% in the third year and 1%

in the fourth year.

Again, recent deals have not included no-call provisions.

OTHER NOTABLE PROVISIONS

COLLATERAL

Loans in the TLB market are generally secured. In the case of non-

project finance TLBs, the collateral is typically the assets and equity

interests of the borrower and its subsidiaries. In a project finance TLB

transaction, however, the collateral may vary depending on the type

of financing:

 In the case of single asset and portfolio financings, the collateral

typically consists of equity interests in the project company and all

the project company’s rights under the contracts for the project

(including, the offtake agreements, the engineering, procurement

and construction contract, the operation and maintenance

agreement, and any hedge contracts).

 In the case of holdco loans (for portfolios with project level debt),

the collateral usually consists of the holdco’s equity interest in the

Sources of Available Project Financing: Term Loan B Facilities

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projects, including its rights to receive any dividend distributions

from the project companies under the terms of the waterfalls set

out in the project companies’ loan documents.

MANDATORY PREPAYMENTS

Project finance transactions tend to include waterfall provisions that

set out how revenues generated by the project will be applied to

meet the project company’s obligations (including debt service). In a

commercial bank loan agreement the amount the project company

is required to pay is fixed and, provided that no event of default

has occurred, any amounts remaining once the project company’s

operating costs and debt service are paid can be distributed to the

project sponsor (see Project Finance Waterfall Provision Flowchart).

TLB credit agreements operate differently.

TLB agreements have minimal amortization. As a result, depending

on the project’s cash flows, the project company may have significant

cash in its accounts after paying scheduled debt service and operating

costs. To address this issue, these credit agreements typically include

a cash sweep that requires the borrower to use all or some percentage

of this cash to pay down loans. The specified percentage is a matter to

be agreed by the parties, but this provision may be fairly non-restrictive

in more liquid credit markets when borrowers can negotiate looser

covenants and more borrower-friendly financial terms.

In addition to prepaying loans with the excess cash generated from

normal business operations, the borrower may also be required to

prepay the loans if it:

 Sells or otherwise disposes of certain assets. This obligation is not

absolute, however. The requirement to prepay the TLB with the

net proceeds of these dispositions is subject to many carve-outs,

including per-transaction and aggregate materiality thresholds

(below which the prepayment requirement does not apply) and

permissive reinvestment rights during 12 to 18 month periods

following the receipt of the relevant net proceeds.

 Issues additional equity.

 Receives insurance proceeds from the loss of assets, subject to

reinvestment provisions.

 Is required to achieve a target debt balance. For example, a target

debt balance may be lower if the market price for capacity drops.

EFFECT OF TLBS ON TRADITIONAL PROJECT FINANCE

Traditional project finance credit agreements typically include

several provisions that are intended to protect the project’s revenue

flow and ensure it is available to pay debt service. TLB loans are far

less restrictive on these issues.

The increased involvement of private equity investors as owners

ofpower and other energy projects has brought to the project

finance market terms that may be standard in the leveraged loan

market but which are relatively new to project finance. These new

terms include:

 Looser or no financial covenants.

 Dividend distribution flexibility.

 Relaxed defaults.

 Broader asset sales permissions.

 Incremental debt provisions.

In the quest for yield in a tight market for deals, many Term

B Lenders are willing to accept these provisions for certain

transactions.

OTHER ASPECTS OF TLB FINANCINGS

DOCUMENTATION

TLBs are documented largely like bank loans, but the broader

investor pool may make it harder to get consent from investors than

from a bank syndicate. As a result, the documents tend to be more

sponsor-friendly, affording more running room before amendments

are required to the loan documents than what might be typical in a

more closely-held loan.

TIMING

TLB transactions close fairly quickly once they go to market. Unlike

traditional project finance commercial bank loans that can take

months to negotiate and close, a TLB transaction can close in three

months or less, with most of the time spent producing the materials

needed to secure a rating. After the rating is received, these loans

typically close within 10 to 14 days.