Atlantic Power (NYSE:AT) was able to refinance all of its near-term debt, and was able to do so at significantly lower rates. In this capital markets environment, the deal is about as good as could be expected. All shareholders should be unhappy that management chose this path, rather than selling the company to a larger, more efficient operator. But with that not in the cards, this deal brings the following advantages:
Interest expenses will go down substantially - about 100 bp for $415m of refinanced debt.
No new financing necessary until early 2017.
The current dividend level should be sustainable, especially for the preferred issues.
What remains to be seen is the one-time charge for the whole deal, which will be substantial. We will also find out what the terms of the tender for a portion of the 9% high-yield notes will be.
As for the dividend, in 2014 they are limited by covenants in the high-yield notes. The current payment level should be just underneath the cap. What limitations are in the covenants of the new financing is not clear.
We believe that the preferreds are significantly undervalued and should probably yield no more than 6-7%. The common should jump significantly from their current depressed level. If there will be a dividend cut, both may slide, although economically, the company is better off than a few weeks ago.
For management, the challenge will now move from financing to operations, and hopefully some long-term PPA.