K&M International Power has completed a second refinancing of the Termovalle power project in Colombia. The most recent deal – a $69 million loan led by Lehman Brothers – cements K&M's control of the project. It also marks the return of the team behind 90s sponsor KMR Power to the developer fold.

Termovalle is a 200MW combined-cycle gas-fired power project located near Cali, in Colombia. KMR Power, controlled by K&M Engineering and Consulting and Rockefeller & Co, won the bid from Empresa de Energia del Pacifico (EPSA) to build the plant in mid-1996, and closed a construction financing for the project in 1996. This deal consisted of a $35 million A loan from the Inter-American Development Bank, a $67 million B loan from Chase Manhattan, $37 million in equity from KMR (56%), Scudder Power (now Conduit Capital, 14%) and Marubeni (30%), and roughly $15 million from government agency FEN.

The project stumbled after Marubeni, which was the turnkey engineering, procurement and construction contractor, experienced delays in bringing the plant online, and a problem with the plant's Westinghouse 501F turbine. Marubeni dealt with the delay by contributing $24 million in subordinated debt and deferring some of its billing under the contract.

The settlement, however, was too late to prevent two further side-effects. Even though the plant came online in 1998, missing its completion date meant that the offtaker, after a renegotiation of the power purchase agreement (PPA) in 1998-9, only committed to buying 140MW of the plant's output. Moreover, the IDB declared a default in 2000 and began trapping the project's cashflow for prepayment.

The project's ability to generate cash, however, was still strong, since the 21-year PPA with EPSA provided for pass-through of gas costs, a rarity in the deregulated Colombian market, where many generators dispatch onto the merchant market, the Bolsa, and have to make their own gas supply arrangements.

The IDB and the sponsor could not come to an agreement on the restructuring of the debt, even though the project was operating at high levels of availability. The continuing political violence in the country, as well as the teething troubles of the country's electricity sector, meant that the IDB had little incentive to work out a loan that was being paid down so rapidly. Termovalle was excluded from KMR's 2000 sale of its portfolio to AES, and only Termovalle Power Holdings remained.

The commercial B loan lenders to the project experienced impairment on their commitments, and began selling their portions of the debt. By 2005, Deutsche Bank's Latin American debt trading desk had built up a sizeable position in the debt, and K&M, which had hired Jefferies to evaluate a restructuring, began negotiating a refinancing with Deutsche by early the following year.

K&M's timing was fortunate, since in the intervening years Colombia's economy and electricity sector picked up, and Union Fenosa had taken control of EPSA in 2000. Moreover, a combination of the accelerated prepayment of the debt and the fact that so many investors had bought into the project's debt at below par made it easy for Deutsche to put together an attractive refinancing.

The $55 million loan refinancing had a tenor of 10 years and an all-in interest rate of roughly 12.25%. The pricing reflected the speed at which the deal was completed and lingering political risk perceptions. But the refinancing eliminated the Marubeni subordinated loan, which had grown in size to $34 million because interest was capitalized, and refinanced the A loan, B loan, and FEN financing.

The refinancing also provided for Deutsche to be granted a 30% equity stake, essentially Marubeni's former shareholding, which had been bought out with the refinancing. K&M separately bought out Conduit Capital's stake from its own resources, and while Marubeni has not disclosed what fraction of its outstanding debt it settled for, Conduit says it recorded a capital loss of 7.7% on its investment.

By early 2007, K&M wanted to buy out Deutsche and make the project a wholly-owned subsidiary of a revived independent power plant developer, K&M International Power. Several members of the Deutsche bank team that worked on the first refinancing, had subsequently moved to Lehman Brothers. In July 2007 Lehman provided the project with a $14 million bridge loan to buy out Deutsche Bank's equity stake and that of the remaining outside investors in Termovalle.

In December 2007, Lehman Brothers closed a $69 million regulation S refinancing, which had a fixed rate of 10.5%, a maturity of late 2018, and refinanced both the 2006 financing and the $14 million bridge loan. To reflect the larger loan, the project's distribution of cash is slightly different to the 2006 version. The 2006 deal allowed for a low mandatory principal amortization (equivalent to 20 years in a straight line), and, provided the project met a 1x debt service coverage, the owner would enjoy access a percentage of cash above this level, and this percentage increased over time.

Under the 2007 deal, the project not only has to meet a minimum principal repayment, but also a target balance, after which the sponsor is entitled to all of the cash flow. This arrangement provides lender access to cashflow under low revenue cases, but maintains the benefits of average or good performance for the sponsor. The target balance is sized, roughly, to provide lenders with the benefit of cashflows from the EPSA PPA, while the sponsor's revenues come from sales on the Bolsa.

The disparate group of specialist investors and hedge funds are a markedly different group to the emerging markets project finance lenders that predominated in the late 1990s. For more far-flung jurisdictions, and outside the oil and gas and mining sectors, bank lenders have been wary of returning to offtake-driven deals.

But what happened to Termovalle parallels the appetite that investment banks and their clients demonstrated for Latin American transport debt in 2007. For sure, distressed projects with strong fundamentals are rare, and the opportunities for such a restructuring are not plentiful, but reviving troubled credits has traditionally been the preserve of the multilaterals.

Termovalle Investment Company
Status: Closed 14 December 2007
Size: $69 million
Location: Cali, Colombia
Description: Refinancing of the refinancing of a 200MW power project
Sponsor: K&M International Power
Debt: $69 million
Tenor: 11 years
Interest rate: 10.5%
Sponsor legal adviser: Baker & McKenzie
Lender legal advisers: Dewey Leboeuf (Lehman Brothers), Bingham (Deutsche), White & Case (IDB)
Market consultant: Pace Global
Independent engineer: RW Beck