Winner: NRG Energy

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New Jersey-based power producer NRG Energy tapped the securities markets in January with a jumbo four-part financing solution to complete its acquisition of Houston-based power generator Texas Genco and refinance more than $2 billion of NRG Energy and Texas Genco debt.

At $3.6 billion, the bond portion of the deal was the second largest high-yield bond sale since Kohlberg Kravis Roberts' leveraged buyout of RJR Nabisco in 1989; and the $4.6 billion senior secured loan was the second largest ever institutional deal in the leveraged loan market. The final two parts of the financing were $500 million of 5.75% mandatory convertible preferred stock and $1 billion of common stock.

With more than $10 billion to raise, George Schaefer (pictured), treasurer at NRG Energy, says it was important for the company to successfully access all four pools of capital, crediting joint underwriters Citigroup and Morgan Stanley for their "brilliant execution" on the deal. "The proof of the pudding is in the eating," says Schaefer. "We closed the deal on time at attractive rates and it was oversubscribed for every tranche, all of which have performed well in the aftermarket."

The bond deal was sold in two tranches: $1.2 billion of 7.25% notes due 2014 priced at 277bp over Treasuries and $2.4 billion of 7.375% notes due 2016 priced at 290bp over Treasuries. Schaefer says NRG had initially planned an eight-year floating-rate tranche for the bond issue which was later dropped due to overwhelming interest in the fixed-rate tranches and because the company had access to ample floating-rate debt in the bank deal, which was upsized by $375 million.

Both the bond and the loan portions of the deal traded consistently in the week after issue, with all tranches within an eighth of a point off the issue price. Gene Martin, global head of loan syndications at Morgan Stanley, says: "For a large deal like this which is going to be a bellwether for the market, this is exactly where you want to go with pricing and I think investors are very happy."

Steven Seltzer, global head of high-yield syndications at Morgan Stanley, says that interest in the deal was largely due to NRG's attractive credit story. "This is a very strong credit in a great sector issuing at a time when there is a fair amount of liquidity in the high-yield market. People felt the name was defensive, asset-rich and the market perceives the sector as one whose troubles are for the most part behind it," he says.

NRG Energy was the first of the independent power producers to emerge from bankruptcy protection after the collapse of Enron in 2001. After reducing debt by more than $5 billion in bankruptcy, NRG has generated strong cashflow thanks to its low-cost coal-based plants. The Texas Genco acquisition is viewed as a positive because its fleet of plants is also coal-based, providing cross-company synergies, and the merger will give NRG entry to the growing Texas wholesale electricity market. Analysts say the merged company is therefore well positioned to generate substantial future earnings and cashflow.

NRG Energy's Schaefer says that the deal also benefited from the fact that a portion of the proceeds went to refinance more than $2 billion of existing NRG Energy and Texas Genco debt that was being retired. "A good deal of interest was rollover money from the retired debt, money that was coming from investors that were already familiar with either or both companies," he says.

On the deal's reception in the loan market, Martin says: "Loan investors also knew both NRG and Texas Genco quite well since both companies have successfully syndicated loan transactions in the last couple of years." The loan portion of the deal saw participation from a total of 215 investors, and order sizes ranging from $2 million to $300 million. Seltzer adds: "There were also a lot of investors that played both the bond and loan portions of the deal."

Both Seltzer and Martin say that the deal is remarkable for its size and its strong reception from investors, breaking new ground for future deals and proving that there is abundant liquidity in the market. Martin says: "I think it has really opened people's eyes as to what is the art of the possible in the leveraged finance markets."

Issuer: NRG Energy Inc.
Date of issue: January 26, 2006
Underwriters: Citigroup, Morgan Stanley
Total size of bond issue: $3.6 billion
First tranche: $1.2 billion of 7.25% senior notes due 2014 priced at 277bp over Treasuries Second tranche: $2.4 billion of 7.375% notes due 2016 priced at 290bp over Treasuries
Senior secured credit facility: $3.58 billion term loan facility, $1 billion revolving credit facility and $1 billion synthetic letter of credit facility
Rating: Bond, B1; loan, Ba2

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BUYERS' VERDICT

Kevin Akioka, Payden & Rygel

Investors attribute the success of NRG Energy's jumbo debt issuance to the confluence of a healthy appetite for new issuance in a cash-rich environment with NRG Energy's compelling credit story.

Kevin Akioka, high-yield portfolio manager at Payden & Rygel, who bought the bond portion of the deal at issue and participated in the loan in the secondary market, says: "The real attraction was that NRG Energy and Texas Genco are solid credits with a track record in the high-yield market, which allowed us to get a good handle on historical performance. Putting the two together gives investors access to a diversified company with stable cashflows and good management in a cyclically defensive sector."

Pricing on both the bond and loan portions of the deal was widely regarded as fair. One high-yield portfolio manager who bought both parts of the debt issue says: "The bonds came in with just enough coupon to make it pretty attractive for a solid single-B credit and the deal has performed well after issue despite some volatility in the broader market. It helped that it was such a large deal, of course, because there's real value in liquidity."

Investors also credited joint bookrunners Citigroup and Morgan Stanley with commendable allocation of the deal. One portfolio manager from a Boston-based firm says: "Allocation was more than fair. This was a true joint book between Morgan Stanley and Citigroup, so took tremendous coordination to determine allocations for both the bond and the loan. I think they did a really good job."

CREDIT SAYS... NRG Energy's blockbuster debt offering took the high-yield markets by storm, with the sale of the largest high-yield bond in 17 years, together with the second-largest leveraged loan on record. Both Morgan Stanley and Citigroup won well-deserved plaudits from the issuer and investors for excellent deal execution.

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RATING AGENCY COMMENT

A few weeks before NRG Energy tapped the capital markets for its acquisition financing, Moody's upgraded the power producer's corporate family rating to Ba3 from B1. The rating outlook was also changed from stable to developing. The agency said the upgrade reflects the strong financial performance at NRG, relatively predictable cashflow and the expectation of continued strong performance following the completion of its $8.3 billion acquisition of Texas Genco, which was completed on February 2.

A.J. Sabatelle, credit analyst at Moody's in New York, says: "Over the next three years, 65% to 80% of the company's consolidated revenues are expected to be derived from existing contractual or hedge arrangements thereby providing a high degree of comfort around cashflow predictability."

Although Sabatelle says that NRG paid a substantial premium for the Texas Genco assets and consolidated leverage has increased by around $2.5 billion, the ratings take into account NRG's issuance of $1 billion of equity and $500 million of mandatory convertible preferred stock to help finance the transaction. "We expect a reasonably rapid decline in leverage over the next few years due to scheduled amortisation of recourse and non-recourse debt as well as the application of excess cashflow to term loan debt."

Moody's assigned a Ba2 rating for the $5.2 billion of first-lien bank credit facilities, one notch above the corporate family rating. This is based on the strong collateral coverage for this asset class. The B1 rating for the $3.6 billion of senior secured notes recognises the creation of a second-lien security structure that will be offered to NRG counterparties for satisfying mark-to-market collateral requirements, a structure previously used by Texas Genco.

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