AES Gener closed the $988 million debt financing for the Angamos power project on 23 October 2008. The financing is one of the largest to close in Latin America this year, but took place before the credit crunch's most vicious phase. It benefited from a supportive contractual and financial structure, and AES' willingness to maintain goodwill in the banking community.

Angamos had to contend with appalling financing conditions for emerging markets borrowers, but benefited from the precedent that it set with 2007's Ventanas financing. Ventanas, a smaller financing, sparked widespread bank interest in Chile's power sector, and set pricing and tenor records in the country.

The project sells power to two subsidiaries of BHP Billiton, which operates the Escondida and Spence copper mines in the north of Chile. BHP issued a request for proposals for coal-fired capacity in mid-2007, and offered potential bidders a site for any project. AES responded to the bid in August, and was notified of its preliminary award in November 2007.

AES has an established presence in the Northern Interconnected System, and prepared a bid using its own site, located at Meijillones, in Chile's Region II. It was not required to include an underwritten bid, though according to Chad Canfield, AES' director of project finance, it had held informal discussions with banks during the bid stage.

The power purchase agreement, awarded formally in March 2008, was relatively generous, since it allowed for the passing-through to the offtaker of coal costs. Nevertheless, AES Gener was responsible for arranging interconnection – with its own transmission lines – and coal handling, for which it has a contract with port owners Belfi and Ultramar.

The most notable feature of the power purchase agreement is that does not benefit from a guarantee from the BHP Billiton corporate payment, and relies upon the two mining companies – Escondida and Spence – for payment. But Escondida is in its own right one of the largest copper producers in the world, and has BBB+-rated debt. Spence is smaller, and unrated, but like Escondida is a low-cost producer with strategic importance to its owner. AES Gener, which was the offtaker on Ventanas as well as sponsor, is rated BBB-.

Even before BHP accepted the bid, Gener lined up a fixed-price engineering, procurement and construction contract with South Korea's Posco, a boiler from Doosan, and steam turbines from Ansaldo. The 518MW (gross) plant operates in a similar configuration as the Ventanas plant, though it is twice as large.

The March award provided Angamos with agreements covering 310MW of capacity. Spence provided the plant with a 15-year PPA, and Escondida an 18-year contract. After the departure of another producer, BHP increased Angamos' contracted capacity to 430MW in April. Around this time, AES mandated BNP Paribas and ABN Amro, which was in the process of being acquired by Royal Bank of Scotland, as lead arrangers.

The mandate letter was signed when stresses in credit markets were already apparent, but emerging markets and commercial bank project finance activity were still robust. While bank enthusiasm for Chile was still evident, Gener lined up a substantial amount of cover from South Korean export credit agency Korea Export Insurance Corporation.

The deal is a first for KEIC, which is expanding its footprint rapidly in Latin America, on the back of its shipping, oil rig and power equipment construction capabilities. Ventanas attracted a participation from Korea Export Import Bank, almost as an afterthought during the syndication process. But KEIC's participation was much earlier, much more substantial, and marks a more defined milestone in Korean export finance.

The $675 million KEIC tranche, corresponding to its maximum allowed contribution, reduced, but did not eliminate, pricing pressure on the deal. For starters, the total financing package also included a $233 million commercial bank tranche and $80 million letter of credit facility to support Angamos' obligations under the power purchase agreement and other obligations.

The leads launched the financing in August, at pricing levels of 110bp over Libor for the KEIC tranche and 135bp for the commercial tranche. As financial markets deteriorated, Lehman Brothers went bankrupt and commercial interbank lending dried up, participants began to clamour for richer pricing on the deal. Angamos was far from alone in receiving such requests, and since it has closed, other emerging markets projects have experienced market disruptions even during bidding stages.

Rather than get into arguments over flex and market disruption, AES, says Canfield, moved to satisfy market demands, "The goal was not to cram the market with a billion in under-priced debt", he says. Gener has several more new projects and expansion deals set to come to market over the next few years, and AES corporate still more.

Maintaining lender enthusiasm for AES assets beyond the current crisis was a key consideration, and highlights how far this decade's newer, more disciplined AES has come. Once known for giving lenders short shrift when they came back with modifications, AES now moves ahead of its lead arrangers to respond to changing market circumstances. But the pricing increases were nonetheless substantial.

The KEIC-covered tranche is priced at 150bp over Libor initially, while the commercial bank tranche prices at 200bp, stepping up to 250bp over the debt's life. The debt has a tenor of 17 years – longer, in fact, than Ventanas' 15 – and avoids the hefty balloon payment that discomfited some of Ventanas' lenders. The length and higher rating of the BHP offtake has provided benefits above and beyond what Gener can offer, even in a disturbed financing environment.

Chile's dash for coal-fired power continues apace. The shine has come off the commodities boom, making gas, which is cleaner than coal, cheaper, and depressing the likely requirements of Chile's mining industry. But Chile's desire to reduce its dependence on its neighbours for fuel supply still looks sensible, as economic difficulties loom in Argentina. The Angamos financing, whose structure allowed it to close in the face of poor market conditions, maintains Gener's lead in the sector.

Energia Electrica Angamos
Status: Closed 23 October 2008
Size: $1.3 billion
Location: Mejillones, Region II, Chile
Description: 518MW coal-fired power plant
Sponsor: AES Gener
Debt: $988 million
Lead arrangers: ABN Amro, BNP Paribas
Tenor: 17 years
Project legal advisers: Vinson & Elkins (US), Claro y Cia. (Chile)
Lender legal adviser: Shearman & Sterling (US), Morales, Besa y Cia (Chile)
Independent engineer: RW Beck
Market consultant: Systep
Insurance advisers: Aon and Marsh