Like a physician with her stethoscope at the outset of a check-up, astute shareholders and directors should use the level and trend of a utility’s market-to-book ratio (MtB) as one of the first...
Why Aren't Distressed Assets Selling
'First movers' will be positioned to extract the most value from the acquisition of generation infrastructure.
When it comes to the current climate for generation asset sales, a wide bid/ask spread has developed between the buyers' offer prices and sellers' target sales prices. We have dubbed this bid/ask spread the "distressed asset gap." Sellers are looking to maximize the liquidity generated from asset disposals, while opportunistic buyers are looking to capitalize on industry dislocation to acquire assets for a fraction of their original build or financing costs. Until this gap closes, transactions will not be widespread.
To gain an understanding of why there have been few sales or purchases of distressed assets, it is important to understand the perspective of each of the parties involved in this process and how the distressed asset gap was created.
Despite highly leveraged balance sheets and poor liquidity positions, many independent power producers (IPPs) are reluctant sellers in the current depressed power market environment. These companies believe that the prices being bid for their assets reflect a temporary undervaluation of assets that have useful lives of several decades. These assets, they believe, should not be relinquished for bargain basement prices due to a sharp, temporary decline in power markets.
There generally are two classes of sellers in the market. In the first and healthiest category are the IPPs still in control of their own destiny and engaged in an orderly auction process. These companies have the larger liquidity cushion and some ability, although limited, to time the market (i.e. to wait for a price that, in their view, is more reflective of the intrinsic value of the asset.)
In the second category are the IPPs with senior lenders and bondholders (as a result of both technical and substantive defaults by the borrower) leading an involuntary restructuring. In the cases where creditors are in control of the asset disposal process there is a growing awareness that a messy and chaotic liquidation of billions of dollars of assets is not in the interest of either the IPPs or creditors.
Those IPPs that retain some measure of control over their destiny and therefore remain reluctant sellers believe that tomorrow is likely to be better than today. The only question is, when will tomorrow come?
For most of these companies, only the sale of the best and most valuable assets will generate enough cash flow to materially improve their liquidity position and de-leverage their balance sheets to more prudent levels, but if these companies are going to have any chance of remaining viable independent entities, these are precisely the assets they need to hold on to. Consequently, these IPPs have tried to defer the sale of their crown jewels and have focused on selling their more marginal assets that have been of little interest to potential acquirers.
Project Finance and Corporate Lenders
The lenders that have funded the explosion in IPP capacity have found themselves caught in a classic maturity mismatch-long-lived assets were funded with short-term financial structures. Most distressed assets were financed with highly leveraged three- to seven-year