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Frontlines

NRG's bankruptcy is challenging creditors' resolve to back merchants until power prices rebound.
Fortnightly Magazine - June 15 2003

NRG's bankruptcy is challenging creditors' resolve to back merchants until power prices rebound.

A common complaint in the last few months by would-be buyers of merchant assets has been that all the choice power plants have been pledged as collateral to commercial banks in order to stave off bankruptcy. That's why not many transactions have taken place, merchant asset buyers say, as everything else in the market isn't worth the price being offered.

In fact, it has been commercial bankers' willingness to religiously believe power prices will rebound that has saved the merchant industry from total collapse. But that blind faith is now starting to be shaken. Some say billions in assets could hit the block this summer as bankers panic and call in merchant loans. Why?

At Infocast's 10th Annual Power Industry Forum (in association with King & Spalding), Goldman, Sachs & Co. Managing Director Larry Kellerman explained that many commercial bankers have not been able to quantify their losses because few of the more valuable assets have been bought and sold to establish a benchmark. Lenders can't foresee how much they will gain or lose on loans

Kellerman says, "Once the first merchant combined-cycle [turbine] is marked down, banks' reserves drop. They [the banks] are exposed to the merchant industry for $80 [billion] to $90 billion in loans to the merchant sector. If they get two-thirds of that, great; if they get 50 percent of that, they jump off bridges."

The bankruptcy announcement of merchant power developer NRG Energy Inc. has many wondering whether this is the first domino in the stack. While NRG in its March 2003 annual report suggested it wants reorganization, some say liquidation is just as likely, and assets are almost assuredly going to sell at marked-down prices.

"[Commercial] banks have to get into the reality business. They believe that despite forward curves in 2008 life gets a lot better. That's the religion business. Once banks reconcile that prices aren't there … they'll see that their religion won't disintermediate them," Kellerman says.

Kellerman believes it could take a few summers for bankers to come around to reality. Meanwhile, the NRG bankruptcy continues to splash cold water on lenders' expectations.

Power Plants: Like the Real Estate Market?

Bernays T. (Buz) Barclay, a partner in the law firm of King & Spalding, said at the Infocast conference that he did not believe commercial bankers would panic if assets more actively began to change hands. Having been a commercial banker, he believes bankers will look at assets with an eye to their individual, economic, and location-specific attributes.

Naturally, the real-estate approach doesn't deny that housing busts happen, experts say. Those who get squeezed in a housing bust are simply those who can no longer afford to keep paying their mortgages and so lose their homes to the bank. The question in the merchant sector is whether merchants will be able to make their principal and interest payments on corporate debt. NRG, in its annual report, provides a view on the trials and tribulations of being a merchant in this

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