Credit-quality concerns join fuel and market factors to affect power-plant valuation
As the credit problems spread from sub-prime mortgage failures, financial investors have become more risk averse. This has caused a broader concern about credit quality and fears of loss of credit liquidity, hurting project financing which buyout firms rely on to fund their transactions. Banks are said to have a $300 billion backlog of deals. The list of hedge-fund casualties is growing. Highly leveraged funds also got into trouble as risk-averse investors sell off their investment positions indiscriminately.
Lenders know there are billions of dollars of weak financial assets in the market, such as securities backed by bad mortgages. The problem is no one knows who is exposed at what level to those weak financial assets. This causes a lack of confidence in the lending industry, and a credit crunch that — if unabated — could cause a recession.
As several recent plant auctions have been postponed or cancelled, investment banks have pulled back their stapled-financing packages, or “staples,” used by sellers’ banks to attract private-equity bidders. This seller-financing is called “stapled” because it is often physically stapled to offering documents. Staples have long been touted as a way to provide a floor price for potential buyers, in the absence of other financing sources.