Energy Company Case Study by Bricker & Eckler partner David Rogers, Chair of the Bricker & Eckler Investment & Structured Finance Group

Innovatively Combining Financing Techniques
To Achieve Capital Financing Solutions

This case study describes how Bricker & Eckler LLP helped an energy provider to successfully combine (1) the techniques employed in many securitization structures with (2) the low interest rates borne by variable rate demand taxable debt, and (3) credit enhancement with a bank letter of credit. As a result, the energy company prudently leveraged its assets in order to meet its capital requirements.

The Energy Company's Capital Needs

Engaged in the construction and management of energy delivery systems, the energy company entered into a significant number of agreements with a variety of end users. In consideration for its management services, the company received a steady stream of revenue (through-put revenue) from its end users. The company's goal was to access cash that would be available to meet its requirements for funds to undertake, among other things, new construction. The attorneys in Bricker & Eckler's Investment Banking and Structured Finance Group worked with the energy company to find a means to use the stream of through-put revenues to tap into the capital markets, thus obtaining lower interest rates than would typically be available with conventional financing.

Bricker & Eckler's Solution

The solution structured by Bricker & Eckler arose from the integrated application of three principal components: traditional securitization principles, variable rate demand taxable notes, and third-party credit and liquidity support. First, the energy company formed a special purpose, bankruptcy remote, limited liability company, (SPC) to act as a financing subsidiary, to which the energy company assigned its rights to receive the through-put revenues. Next, the SPC entered into a trust indenture for the purpose of issuing the variable rate demand notes. The notes bear interest at a taxable, capital markets-based rate that changes every seven days. Finally, the SPC obtained a letter of credit from a national banking association to provide both credit and liquidity enhancement for the notes. In order to induce the bank to issue its letter of credit, the SPC entered into a reimbursement agreement, pursuant to the terms of which the SPC agreed to assign a security interest in the through-put revenues. (The energy company did not secure the reimbursement obligations, this being a true revenue deal. The notes were sold in a private placement by McDonald Investments Inc.)

The energy company chose to preserve a measure of flexibility by issuing the notes under a master indenture structure, which permits the issuance of several separate, free standing series of notes as funding needs dictate. By so doing, it avoided the necessity of “taking down” an amount in excess of current requirements and being subject to the risk that the investment earnings on the unexpended balance would not cover the interest expense, the so-called “negative carry.” Further, the decision to have each series of notes secured separately from any other series allows for the use of different banks as issuers of the letters of credit should the need arise. Under other circumstances, the energy company might have wanted to cause the pledge or assignment of the through-put revenues to the trustee for the notes and issue additional notes from time to time on a parity basis with the original issue. In the case of certain extremely secure revenue streams, that credit support is not required, leaving only the need for less expensive liquidity support.

Ultimately, the innovative and flexible solution implemented by Bricker & Eckler provided a smooth, trouble-free method to address the company’s funding needs in a fashion that works now and in the future.

For more information, contact David A. Rogers at (614) 227-2367 or drogers@bricker.com.