Trinergy: Exit the Matrix

International Power's Eu1.839 billion purchase of Trinergy is the largest project financed acquisition of a wind portfolio ever. It marked the entry of International Power, already an emerging market, US and European thermal developer, into the top rank of renewables producers. Royal Bank of Scotland's Eu302 million subordinated acquisition loan for the buyer could be adapted to other entrants without the balance sheet of a European ultra-utility.
Trinergy is not the largest financing that International Power has ever signed, nor even its largest acquisition. Other European utilities have completed larger acquisitions of wind portfolios in the US and elsewhere, as they deploy the profits from protected home markets in low-carbon technologies.

But International Power applied the smart structuring that it applied to financings such as 2004's Normanglade deal – for the Edison Mission International portfolio – to a sector where brute financial muscle usually dominates M&A-related financing. The subordinated loan asks lenders to take on a greater amount of risk than would be typical in the sector, but could be refinanced or converted into a long-term mezzanine loan.

Trinergy is a 648MW portfolio, of which 581MW is in operation and 67MW is under construction, of which the majority is in Italy, and 86MW of operating capacity is German. Trinergy's sellers are Matrix Group and CJS Capital Partners, and they decided to shop the portfolio to buyers in June 2007.

Trinergy was the subject of a Eu1.13 billion refinancing that RBS closed on 6 December. That deal simplified Trinergy's capital structure after a series of acquisitions from IVPC. It benefited from portfolio pricing and cross-collateralisation, and served as a model for leveraged portfolio wind financings.

International Power is a rare strategic sponsor that shares with private equity a fondness for non-recourse debt. It agreed to buy Trinergy from Matrix and CJS in early August 2007, offering to pay Eu868 million in cash for the portfolio's equity, with the debt staying, for the time being, in place.

International Power funded the cash component with Eu568 million from its own resources, and a Eu302 million non-recourse subordinated loan from Royal Bank of Scotland. RBS, was familiar with the assets and offered to roll the subordinated loan into a new senior refinancing of the assets.

The Eu302 million subordinated financing is, then, the mayfly of the project finance market: intricate, engaging and very short-lived. It is designed, should the cashflows justify it, to be replaced with cheaper senior debt, but is structured to cope with the possibility that this cannot be completed.

As such, it is one of the first crunch-era financings to confront the very real presence of refinancing risk. Closed in August, it converted from a three-month bridge into a 12-year permanent mezzanine loan. The mezzanine loan features minimal amortization, and a cashflow-sharing mechanism that exposes lenders to both upside and downside risk.

Like many small intricate objects, changing the bridge to a permanent mezzanine does not come cheap. It embodies the new received wisdom in credit markets that difficult credits need to be priced accordingly. Refinancing risk, and leverage, is a greater concern than the performance of the assets.

The two host jurisdictions are fairly friendly to renewables developers, particularly Germany, with its generous feed-in tariff mechanism. Germany has been a favoured hunting ground for utilities looking to build mass in renewables. Italy, on the other hand is slightly less well-known, and it relies upon a green certificate regime, which take s longer amount of time for credit committees to analyse.

Indeed, just as RBS brought the Eu1.4 billion refinancing of the senior and subordinated debt to market, the Italian government made some changes to the length of the green certificates that the capacity under construction would receive. Some of these will be longer than the developer and buyer assumed, and thus more attractive to lenders, and a new set of figures is now in front of potential participants.

According to sources familiar with the refinancing, the deal is set close in three to four weeks, extinguishing the subordinated loan, and bringing margins in the 90bp over Euribor range to the entire financing. But the subordinated loan has already proved its value, and sponsors wanting to compete for assets in the overheated European wind market have taken note.

IP Indonesia Investments Ltd
Status: Closed August 2007
Size: £1.24 billion
Location: Italy and Germany
Description: Acquisition financing for 648MW wind portfolio
Sponsor: International Power
Subordinated debt: Eu302 million
Lead arranger: Royal Bank of Scotland
Legal adviser to the sponsor: Clifford Chance
Legal adviser to the lenders: Linklaters
Legal adviser to the seller: Allen & Overy
Technical adviser to the seller: Garrad Hassan