The institutional debt market for energy projects is fired up, particularly for Term B Loan refinancing. But lately the temperature has fluctuated.

Term B Loans are high-yield, longer-maturity, syndicated loans that emerged in the early 1990s. They are private debt obligations negotiated between lenders and corporate borrowers—the investors in Term B Loans are mainly institutions rather than banks. The rate is higher than a traditional bank term loan, but less than mezzanine debt. The borrowers (usually rated below investment grade) issue syndicated Term B Loan offerings as a less expensive way to fund the business.

In the first two quarters of 2013, investors fell over themselves to be part of Term B Loan refinancing for energy projects. Part of the reason is the relatively small number of new projects to finance. Also, there is money to be made in the sale and refinancing (in particular) of natural gas-fired generation.

But price volatility has cooled things slightly. In June, the chairman of the Federal Reserve, Ben Bernanke, seemed to indicate that interest rates might fluctuate—which gave cold feet to many investors. Another explanation is that investors are just waiting—still—for the right terms.

Reworks

Sapphire Power Holdings, a subsidiary of Riverstone Holdings, operates 807 MW of natural gas-fired assets in Pennsylvania, New Jersey and Connecticut that Riverstone bought from Morris Energy Group in 2011. Riverstone wanted to refinance $350 million of an original $380 million loan for Sapphire Power and to provide for a one-time distribution to the company. The Term B Loan rate was for seven years at the London interbank offered rate plus 400 basis points. Investors balked and, in July, Riverstone had to revise its offer significantly, trimming the package to a five-year, $250 million Term B Loan at LIBOR plus 500 BPS and foregoing the distribution. Goldman Sachs and Deutsche Bank were the lead banks for the deal.

LS Power wanted to refinance subsidiary LSP Madison (which consists of 1,163 MW of natural gas-fired capacity and 421 MW of hydro) with a seven-year $450 million Term B Loan package at LIBOR plus 300 BPS. The original portfolio backing the $750 million Term B Loan (at LIBOR plus 425 BPS) had been reduced through sales of a natural gas-fired plant in California and pending sales of plants in Kentucky and Virginia. A primary purpose of the offer was to lock in the lower rate, but, in any event, LS Power had to pull the package in June, opting to wait for a less volatile environment. (The LSP Madison offer was arranged by Credit Suisse and Goldman Sachs.)

Sponsors may be holding off, waiting for price volatility to calm. And it is arguable that Bernanke's comments were disturbing enough to make investors tap on the brakes. For such a heretofore strong market, however, the fact that investors became jittery so easily points to the possibility that, despite the cash we hear is out there, they are still not sure how to price these deals and what the risk profile should be.