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Rating Action:

Moody's affirms Wolf Hollow's B2 1st Lien rating, downgrades 2nd Lien to Caa1

15 Jun 2010

Approximately $389 million in rated debt affected

New York, June 15, 2010 -- Moody's Investor's Service affirmed Wolf Hollow's B2 rating on its $279 million 1st lien credit facilities and downgraded Wolf Hollow's $110 million 2nd lien rating to Caa1. The outlook is negative.

The affirmation of the 1st lien ratings reflects sound operational performance over the last two years which has resulted in improved financial performance. Forced outage rates declined from 6% to less than 2% in the last two years largely through efforts by NAES who took over as plant operator. Financial improvement ensued with EBITDA increasing from $16 million and $21 million in 2007 and 2008, respectively, to nearly $28 million in 2009. Management forecasts EBITDA of close to $30 million for 2010.

Despite the operational and financial improvements in EBITDA, debt paydown has been considerably less than expected. The project's original forecasts included 1st lien debt declining from roughly $180/kw at financial close in 2005 to $92/kw by expiration of the J.Aron contract in December 2010. Given only a de minimus 1% mandatory amortization since the financing in 2005, first lien debt is only expected to be around $165/kw by contract expiration. Consolidated debt service coverage also remains weak at around 1.0x according to Moody's calculations. The project maintains compliance with its financial covenants requiring a minimum 1.20 times debt service coverage ratio since the credit agreement allows certain O&M and CAPEX costs to be excluded. The project is also in compliance with its leverage ratio covenant of 8.50x.

The downgrade of the 2nd lien and resultant wider notching incorporates greater refinancing risk to Wolf Hollow given the lower than expected delevering of 1st lien debt. This puts 2nd lien holders in a weaker recovery position in the event of a default. The ERCOT market continues to show weaker than expected power prices due to low gas prices and expectations that gas will remain depressed in 2011. Reserve margins are above 20%, well above the target reserve margin of 12.5% indicating plenty of excess generating capacity available to meet current load and therefore limiting upward pricing pressure that would benefit the project.

The negative outlook reflects Moody's expectations that 2011 EBITDA will be significantly less than 2010 EBITDA guidance of approximately $30 million. Barring significant improvement in power prices from their current level, the project is likely to face challenges meeting their covenant compliance tests over the next 18 month period. The project continues to benefit however from undrawn six-month debt service reserves at both the 1st and 2nd lien level as well as approximately $15 million remaining under the revolving credit facility.

Wolf Hollow is a 730 MW natural gas-fired combined-cycle power generation facility located in the Electric Reliability Council of Texas (ERCOT) North control area, approximately 30 miles southwest of Fort Worth, Texas. Wolf Hollow is wholly-owned by funds managed by Stark Investments.

The last rating action was on October 9, 2008 when Moody's downgraded Wolf Hollow's 1st and 2nd lien debt to B2 and B3, respectively and placed a negative outlook.

The principal methodology used in rating Wolf Hollow was Power Generation Projects, which can be found at www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

New York
Chee Mee Hu
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Charles Berckmann
Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms Wolf Hollow's B2 1st Lien rating, downgrades 2nd Lien to Caa1
No Related Data.
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