Sorgenia Power's Eu600 million ($848 million) CCGT expansion financing was a tough one to structure in the credit climate that prevailed at the time, as it concerned a three-piece portfolio comprising one operational plant and two in different stages of development.

The complexity of the deal was compounded by the sponsors' need to keep an existing corporate facility in place for the operational plant, Termoli, for tax purposes, albeit with amendments to effectively turn a loose, unsecured debt into a pari passu facility.

Sorgenia, Sorgenia Power's parent company, provided a direct guarantee to cover the construction of the 800MW Lodi plant, which is close to completion, and the 770MW Aprilia plant, which is in the early stages of construction. The EPC contract is with Ansaldo Energia, which is also responsible for the maintenance of the gas turbines and related generators. The project benefits from the operational leverage of the 750MW Termoli plant – completed in 2006 – which is providing solid cash flows.

Sorgenia's guarantees for the construction period fall away incrementally after a successful technical due diligence post-construction of the Lodi plant, with all guarantees removed when all three plants are fully operational and when technical, insurance and legal due diligence has been performed.

The banks took a dilute form of merchant risk beyond the construction period. The risk is limited to quasi-market price risk, not volume risk, as Sorgenia is committed to offtake the entire output of the captive plants, as well as advising Sorgenia Power on its production model.

The lending group also took comfort from no spark-spread risk. The price of electricity from the plants is set on an annual basis under a business service contract with Sorgenia's end-users. The mechanism is based on a price formulated with reference to the market price and is re-gauged by changes in various inputs such as gas supply price.

However, a condition of the discharge of the guarantee from Sorgenia is that it secures long-term gas supply contracts that fit with the base case model. Sorgenia has supply agreements lined up with Eni.

The Eu600 million financing was provided by Mediobanca, Banca IMI (previously Intesa), WestLB, MPS, Unicredit and Banca Popolare di Lodi. The debt has a 10-year tenor, and there is an 18% balloon payment. The debt is priced at 300bp over Euribor during the three-year construction period. The margin then steps up in 25bp increments to reach 450bp in year seven. The upfront fee is 200bp with hedging provided by all the banks at 15bp. ADSCR is 1.4x and the debt-equity ratio is 66/34.

The corporate refinancing was fully underwritten by MPS in June 2007, and there is around Eu178 million outstanding of the Eu222 million facility. The corporate debt has been amended to exactly the same pricing and repayment profile as the new facility. It also shares the same events of default, DSCR triggers, mandatory payment clauses, and the same security, including a pledge over the shares of the operating company, Sorgenia Power.

Although the two facilities can be accelerated separately, the intercreditor agreements include a 10-day standstill provision in the case of payment default (and 15 days in the case of other defaults), so that lenders can seek a remedy or all seek acceleration on an equal footing.

By amending rather than novating the corporate facility, Sorgenia is able to amortise the debt for tax purposes along the same tenor and repayment profile as the original five-year corporate deal. Had the deal been refinanced, Sorgenia would have forfeited the accounting benefit of amortising the debt over five years.

The ADSCR is 1.4x, and if the debt service falls below 1.4x at cash checks every six months, an automatic 20% cash sweep is effected. Also, should the contract between Sorgenia and Sorgenia Power be terminated, Sorgenia is liable for a penalty of up to six months of Sorgenia Power's projected EBITDA. The debt service cover trigger for default is 1.15x.

This complex deal was not what Sorgenia had in mind when it sounded out the bank market in 2008, but it is one that has worked well for the company. Sergio Ferraris, finance director at Sorgenia, says of the deal: "This is a transaction whose features have been influenced by bad times for the financial community. Of course, the cost has come out higher than our original plans envisaged, but seen from above it's really a good product – it's very well tailored to our needs and the assets and risk profile it covers, and our expansion plans are being realised."

Sorgenia CCGTs
Status: Financial close 15 July 2009; first drawdown end of August 2009
Description: Hybrid project/corporate debt
Sponsors: Sorgenia shareholders: CIR (51.85%); Verbund (44.77%)
Mandated lead arrangers: Mediobanca (documentation); Banca IMI; WestLB; MPS; Unicredit; Banca Popolare di Lodi (co-arranger)
Lender legal counsel: Latham & Watkins
Sponsor legal counsel: Chiomenti
EPC contractor: Ansaldo Energia