Frontlines

NRG's bankruptcy is challenging creditors' resolve to back merchants until power prices rebound.

A common complaint in the last few months by would-be buyers of merchant assets has been that all the choice power plants have been pledged as collateral to commercial banks in order to stave off bankruptcy. That's why not many transactions have taken place, merchant asset buyers say, as everything else in the market isn't worth the price being offered.

In fact, it has been commercial bankers' willingness to religiously believe power prices will rebound that has saved the merchant industry from total collapse. But that blind faith is now starting to be shaken. Some say billions in assets could hit the block this summer as bankers panic and call in merchant loans. Why?

At Infocast's 10th Annual Power Industry Forum (in association with King & Spalding), Goldman, Sachs & Co. Managing Director Larry Kellerman explained that many commercial bankers have not been able to quantify their losses because few of the more valuable assets have been bought and sold to establish a benchmark. Lenders can't foresee how much they will gain or lose on loans

Kellerman says, "Once the first merchant combined-cycle [turbine] is marked down, banks' reserves drop. They [the banks] are exposed to the merchant industry for $80 [billion] to $90 billion in loans to the merchant sector. If they get two-thirds of that, great; if they get 50 percent of that, they jump off bridges."