U.S. Power-Project Loans Loosen Lender Protections, Moody’s Says

Loans financing U.S. power projects are coming with looser lender protections in exchange for extra yield in a trend similar to the rise in covenant-light corporate debt, according to Moody’s Investors Service.

Lenders are accepting weak or no financial covenants, broader asset sales and incremental debt provisions, Moody’s said today in a report. These changes ultimately benefit project sponsors, the majority being private-equity firms, according to the statement.

“As investors and lenders emphasize yield over risk, they appear willing to accept loosened covenants,” Charles Berckmann, an analyst with Moody’s, wrote in the report. “The tradeoff for this extra yield has been a loosening of project finance features that protect lenders, especially lenders in the Term Loan B market.”

TPF Generation Holdings LLC got a loan with no financial covenants, according to Moody’s. The special purpose entity is an indirect subsidiary of Tenaska Power Fund LP and was formed to acquire and operate power generation facilities in the U.S., Moody’s said in an April 22 report. EquiPower Resources Holdings LLC, whose Ba3 rating is on review for a downgrade by Moody’s, has eliminated all term-loan financial covenants under a proposed amendment being considered by lenders, the report shows. The company is owned by Energy Capital Partners.

Private-equity firms are “likely, and have demonstrated a willingness, to exploit the additional flexibility inherent in weaker structures, which could potentially increase the loss given default on project finance loans,” Berckmann wrote.

A term loan B is sold mainly to non-bank lenders such as collateralized loan obligations, bank loan mutual funds and hedge funds. Covenant-light loans don’t carry typical lender protection provisions such as financial-maintenance requirements.

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