Source: Bankruptcy Insider
 
For the lenders providing $2 billion in debtor-in-possession financing to Calpine Corp., the San Jose, Calif.-based owner and operator of power plants is Old Faithful, thanks to the geysers backing the loan.
 
In fact, the company's ownership of these geothermal steam fields in Northern California led just about every DIP lender to put a bid in on the financing in early December, with Deutsche Bank AG and Credit Suisse First Boston [now Credit Suisse Group], emerging as the winners.
 
"This is the biggest DIP that has been done in recent months," says one source familiar with the auction, noting that Delta Air Lines Inc. got its $2.2 billion DIP, 2005's largest, in September. "The Street has been following Calpine with interest for some time. It's a very large restructuring, and I think the collateral is so attractive that there was an ability to write a big check."
 
Geysers create electricity without using natural gas, instead using steam coming out of the ground. So when fuel costs rise, as they did in the second half of 2005, the value of these assets only rises, because they offer an alternative to oil- or gas-generated electricity.
 
In fact, by the time Calpine filed for Chapter 11 protection with the U.S. Bankruptcy Court for the Southern District of New York in Manhattan on Dec. 21, its financial adviser, Miller Buckfire & Co. LLC, had been working on the DIP situation for three weeks.
 
Calpine directors had advised Miller Buckfire at the beginning of the process to contact only potential lenders that understood geysers. The New York investment bank contacted five candidates--Deutsche Bank, CSFB, Citigroup Inc., Bear, Stearns & Co. and GE Capital Corp.--and gave them until Dec. 16 to submit their proposals.
 
"If you didn't know about the geysers, you couldn't have done this DIP," says Dan Toscano, head of loan syndication for Deutsche. "[Miller Buckfire] went out and asked for proposals from a number of firms, and they didn't have a lot of time."
 
Between Dec. 5 and Dec. 11, however, Miller Buckfire received written proposals from all five candidates as well as unsolicited ones from J.P. Morgan Chase & Co., Goldman, Sachs & Co., Lehman Brothers Inc. and Morgan Stanley.
 
The proposals from Lehman Brothers and Goldman Sachs weren't accepted because both lenders are second-lien debt holders, the source says, and that could have created a pricing conflict of interest in the eyes of the court. Especially since Calpine has run into some problems with its second-lien debt holders, who assert in court filings that Calpine's affiliates "ran roughshod over the second lien debt holders' rights" before they filed for Chapter 11.
 
GE Capital and Bear Stearns knew the collateral but didn't have the best pricing. So by Dec. 12, it was clear that Deutsche and CSFB had the better terms and pricing, the source says. The only sticking point: Each wanted to be sole manager on the deal.
 
In the end, though, the two proposals were merged into a joint venture in order to ensure the best terms and lowest syndication, the source says.
 
Industry pros said the pricing on the deal was attractive and were surprised that it was pulled together so quickly.
 
That's especially noteworthy given some of the financing's quirks.
 
For example, the DIP includes a "ticking" fee. This fee--2.5% of the $350 million tranche of a second-lien term loan that's part of the DIP, or $8.75 million--gets activated if this last portion of the loan is not drawn. Calpine will have about 60 days to use this piece of the loan before it has to pay the ticking fee.
 
Then there's the DIP's $25 million carve-out, which is so large because of the number of professionals involved with the case, says the source.
 
In addition, the DIP had to be structured so that Deutsche and CSFB didn't prime Calpine's secured lender, explains Deutsche's Toscano.
 
Calpine is highly leveraged, with few unencumbered assets, so the deal was created in a way that doesn't prime the existing secured debt, he says.
 
To be sure, there's no reason for Calpine's prepetition lenders to get steamed when it had geysers available to help bankroll its stay in Chapter 11.
 
DIP Dimensions
Calpine Corp.
 
Commitment: $2 billion  
Lenders:
• Deutsche Bank AG
• Credit Suisse First Boston   
 
Structure:
• $250 million first-lien term loan
• $650 million second-lien term loan
• $300 million of the revolver would be available for letters of credit   
 
Term:
October 2006, with day to be determined   
 
Pricing:
• All portions of the DIP would be priced using a Eurodollar rate or the higher of the federal funds plus 50 basis points and the prime rate
• On the second-lien loan, the rate is either the Eurodollar rate plus 225 basis points or one of the other base rates plus 350
• For the revolver and the first-lien loan, the rate would be either the federal funds or prime base rates, plus 125 basis points