April’s Worst Bond Deal Shows Distress of U.S. Merchant Power

To understand just how distressed the U.S. merchant power business is getting, consider Talen Energy Corp.’s efforts to raise $500 million in the bond market last month.

The energy producer was forced to settle for $400 million and make up the difference through bank loans. The notes were also offered at a discount of several points in an effort to juice the yield. Still, the debt traded down. The notes lost 3 percent of their value in the past three weeks, making them the worst performer among all debt issued in April. 

Talen’s woes reflect a wider trend for merchant power generators, which are grappling with falling power prices. Cheap natural gas, wind and solar power have driven a generating glut, often pricing out coal-burning plants, nuclear plants or those less efficient at burning gas.

“The competitive power sector is in a period of unprecedented disruption,” Mauricio Gutierrez, chief executive officer of NRG Energy Inc., said in a February conference call to discuss his company’s earnings. NRG lost almost $900 million last year, partially due to lower gas prices. He said the independent power producer model “is now obsolete and unable to create value over the long term.”

To learn how flat-lining power demand is also hurting power generators and utilities, click here.

That claim is supported by a slew of debt restructurings under consideration at various merchant power companies — including his own.

NRG is in talks with bondholders of its merchant power subsidiary GenOn Energy to negotiate a possible debt deal. Exelon Corp. has hired PJT Partners Inc. to help it address liquidity concerns at its own unit, ExGen Texas Power, and FirstEnergy Corp. said it may have to restructure or seek bankruptcy protection for its independent power branch. In February, FirstEnergy took a $9.2 billion pretax write-off of the unit’s power plants.

A representative for Allentown, Pennsylvania-based Talen declined to comment on the debt offering.

Private Equity

Like an increasing share of merchant power assets in the U.S., Talen is owned by a private equity firm. It was created in 2015 through a merger of some of buyout firm Riverstone Holdings LLC’s power plants with the generating unit of utility owner PPL Corp. that, like FirstEnergy, had had enough of the competitive power business.

Natural gas prices subsequently sank to their lowest since 1999, and after Talen’s stock plunged, Riverstone took over the company last June by purchasing the 65 percent of the equity it didn’t already own, for $1.8 billion in cash.

Riverstone wasn’t alone in snapping up power plants from risk-averse public investors. Blackstone Group LP and ArcLight Capital Partners LLC in September announced a joint venture to buy four power plants in the Midwest from American Electric Power Co. for $2.2 billion. Energy Capital Partners LLC grabbed a 15 percent stake of Dynegy Inc. last year in helping it buy $3.3 billion of generators from Engie SA.

Less than three weeks after closing the Engie deal, Dynegy sold two of those generators for $480 million. And just last month, it announced plans to sell another two to pay down debt and appease investors.

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