With a strong incentive to capitalize on low natural gas prices, as well as low interest rates, energy investors have been racing to close structured deals this year according to panelists at the recent Cadwalader Energy & Commodities conference in Houston. Not only has the number of these transactions increased this year, but the speed with which they have closed has accelerated to get the deals done.

Michael Niebruegge, partner at Cadwalader, Wickersham & Taft, noted at the conference that “we expect to see even more structured deals come to market,” involving some hedging or swap component along with a construction loan for the facility to be financed. As an example, the panel discussion emphasized the time-sensitive nature of a billion-dollar, fertilizer-facility deal with a large deferred premium payment on a swaption (option on a swap). The ultimate parent was a global nitrogen-based fertilizer producer, and the swaption covered anticipated production through 2022. In contrast to typical lender rights, this transaction only provided for termination of the swaption in the event of a failure to close or technical collateral failure, such as a tax event. With the primary credit protection of a parent guaranty of the premium payments, the lender’s rights and remedies were relatively limited, and the documentation was swiftly negotiated to capture the economic benefits.

Similarly, a recent 200-megawatt Texas wind project in the Panhandle obtained fairly favorable financing terms from its multiple capital investors to get the deal done. In fact, the agreement even anticipates the possible creation of a new capacity market in the Electric Reliability Council of Texas and allocates the benefits and burdens between the parties.

Panelists agreed that investors are locking in low rates, lenient terms and taking a flexible long-term view, given the regulatory uncertainties that may affect their investments.

The panelists noted, however, that recent Dodd-Frank regulations from the Commodities Futures Trading Commission (CFTC) may damper expectations, especially where upstream guarantees from subsidiaries are involved in the structured transaction. Robert Stephens, the panel moderator, cautioned that swap guarantees in connection with loan facilities may be unenforceable, if the subsidiary guarantors are not “eligible contract participants” or ECPs under the new CFTC rules issued in March. He recommended that clients carve-out the swap obligations from the underlying loan documents, if possible.

If not, another way to mitigate the enforceability risk under Dodd-Frank, and allow subsidiaries to qualify as an ECP, would be to insert a “keepwell” provision in the documentation. The keepwell provision to provide unconditional credit support by a related ECP borrower entity would confer ECP status on the affiliated subsidiary guarantor.

Lastly, the panel addressed cross-border guarantees in the context of Dodd-Frank, providing helpful examples of when it would apply to transactions with non-U.S. persons. Alternatively, substituted compliance with the foreign jurisdiction was noted as another option to comply with Dodd- Frank. As more is learned regarding the new CFTC rules, it looks as if Dodd-Frank may be simply a speed bump in the fast lane for structured energy transactions.

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