In a lease transaction considered similar to an asset-backed deal, PPL Montana LLC, a subsidiary of Pennsylvania Power and Light Corp. (PPL Corp.), recently sold $338 million worth of pass-through trust certificates.
The deal, which closed on July 20 and was a Rule144A with future registration rights, was given a Baa3 rating by Moody's Investors Service and a BBB rating by Standard & Poor's Ratings Service and Fitch. Chase Securites was sole lead manager and Credit Suisse First Boston and UBS Warburg were senior co-managers on the offering. Toronto Dominion Securities was junior co-manager.
The $338 million in certificates represents the debt portion of a $410 million lease of PPL Montana's interests in four coal-fired Colstrip units, which are power-generating facilites acquired by PPL Montana about a year ago from The Montana Power Co.
The purchase also included interests in Montana Power's coal-fired J.E. Corette unit as well as eleven hydroelectric dams.
According to a pre-sale report by Moody's, PPL Montana initially financed the purchase through equity and a bridge loan. It is currently refinancing the bridge loan and a portion of the equity with the $410 million lease transaction.
In this recently concluded lease transaction, financial institutions who provide lease equity took the $410 million - $338 million of which they borrowed through the bonds - and paid it to PPL Montana thus acquiring PPL's Montana's interest in the Colstrip units. The financial institutions would consequently, in turn, lease these interests to PPL Montana.
If there is a payment default by the firm, the bond holders can foreclose on the Colstrip interests. To the extent that the investors could not realize enough money by foreclosing on the Colstrip interests, the bond holders have an unsecured corporate claim against PPL Montana.
Experts predict there will be more lease transactions going forward as issuers benefit from an earnings perspective.
The value of a lease to companies which choose this method of financing, aside from the attractive rates, is the fact that it provides a way for them to essentially have "smoothly increasing earnings over time," said Andy Jacobyansky, a vice president and senior analyst at Moody's. "Some of these companies may actually be trading off the best economic deal for something that would look best in the long-term from an earnings perspective."
Deals like this are also gaining ground with greater investor comfort.
"Investors are increasingly understanding the nuances of these structures," said a source familiar with the transaction.
He added that this transaction was relatively unique because of its diverse pool of assets, which consisted of not just coal-fired plants but also hydroelectric facilities.
