Why Aren't Distressed Assets Selling

'First movers' will be positioned to extract the most value from the acquisition of generation infrastructure.

When it comes to the current climate for generation asset sales, a wide bid/ask spread has developed between the buyers' offer prices and sellers' target sales prices. We have dubbed this bid/ask spread the "distressed asset gap." Sellers are looking to maximize the liquidity generated from asset disposals, while opportunistic buyers are looking to capitalize on industry dislocation to acquire assets for a fraction of their original build or financing costs. Until this gap closes, transactions will not be widespread.

To gain an understanding of why there have been few sales or purchases of distressed assets, it is important to understand the perspective of each of the parties involved in this process and how the distressed asset gap was created.

IPPs

Despite highly leveraged balance sheets and poor liquidity positions, many independent power producers (IPPs) are reluctant sellers in the current depressed power market environment. These companies believe that the prices being bid for their assets reflect a temporary undervaluation of assets that have useful lives of several decades. These assets, they believe, should not be relinquished for bargain basement prices due to a sharp, temporary decline in power markets.

There generally are two classes of sellers in the market. In the first and healthiest category are the IPPs still in control of their own destiny and engaged in an orderly auction process. These companies have the larger liquidity cushion and some ability, although limited, to time the market (i.e. to wait for a price that, in their view, is more reflective of the intrinsic value of the asset.)