Marubeni and Tokyo Electric Power (TEPCO) have completed the $3.43 billion acquisition of Mirant's independent power generation assets in the Philippines. In the process they have closed the first portfolio financing facility ever with Japan Bank for International Cooperation (JBIC).

The $2.7 billion debt financing consists of a 17-year $1.6 billion direct loan from JBIC and a 15-year $1.1 billion commercial loan that benefits from political risk insurance from JBIC. The Japanese export credit agency has advertised the benefits of the portfolio product to the country's risk-averse corporations, but suitable opportunities for its deployment have been rare.

Aside from Marubeni's Caribbean purchase, the only other previous opportunity was the purchase by Mitsui and International Power of the Edison Mission International portfolio. This included one Philippine asset, CBK, on which a joint venture partner exercised its pre-emption rights and flipped the plant to another Japanese operator, J-Power. CBK provided JBIC with its first opportunity to provide a mezzanine loan, but Mitsui decided not to use a portfolio loan for the IPM Eagle portfolio because the product was in its infancy and the terms the commercial banks were offering, on the predominantly developed assets, were too good.

But Mirant's Philippine assets are concentrated in one country, and its intention to sell was well-advertised. It filed for Chapter 11 bankruptcy protection in July 2003, and emerged in January 2006 promising to concentrate on its core business as a US generator. In the next six months it launched an abortive takeover bid for US producer NRG Energy and by July announced that it planned to sell all of its international operations.

According to Satoshi Yajima, general manager of business development group 3 at TEPCO, the company had been interested in the Philippines assets for several years and was ready to submit a bid almost as soon as Mirant decided to sell up. According to Yajima, the sponsor liked the fact that the plants' offtake agreements were well-structured and benefited from government support, their strong historical performance, their operating history and their size, which accounts for 20% of Luzon's generating capacity.

The portfolio consists of Pagbilao, a 735MW coal-fired plant located in Quezon, of which Crimson now owns 100%, Sual, a 1,218MW coal project located in Pangasinan, of which Crimson also owns 100%, and 20% of Ilijan, a 1,250MW gas-fired plant located in Batangas. The majority owner of Ilijan is Kepco, which is retaining its stake, but JBIC is the largest of the ECA lenders on its $475 construction financing, with a $255 million mixture of direct and covered loans (US Ex-Im and Kexim provide the remainder).

Mirant's decision to sell was almost entirely a strategic one, since the assets are producing strong cashflows and were excluded from the bankruptcy filing of its US parent. Mirant was even able to close a $700 million dividend B loan on the assets with ABN Amro and Credit Suisse just before selling.

The auction, run by Credit Suisse, attracted 30 expressions of interest, and four serious bidding groups emerged. Each of the four had a Japanese equity component, and all of the bidders looked set to take advantage of the JBIC funding. According to TEPCO's Yajima, the winning bidder would have made a bid for the assets even with JBIC acquisition debt off the table. But the fact that the bidders were all supported by roughly the same debt terms meant that the competition came down to which winner could accept the lowest returns on the assets.

Marubeni and TEPCO, an all-Japanese grouping, appointed Sumitomo Mitsui Banking Corporation and ING as advisers in September, and saw off bidders that consisted of a more diverse mix of nationalities. Its bid of $3.43 billion, submitted in November, was above the most optimistic forecast of $3 billion that the assets had commanded, and well above the consensus $2 billion. The two formed a holding company, in which they have an equal stake, Crimson Power, to bid for the assets.

The winning bidders signed an agreement with Mirant on 11 December 2006, and Calyon, ING, Mizuho and SMBC launched a $2.8 billion bridge financing in late December. For the long-term financing package, ANZ joined the group as a lead arranger. The loan is comfortably the largest ever in the Philippines, and is likely to be more attractive to Japanese lenders because of the favourable withholding tax treatment accorded to them by the Philippines.

But the terms are aggressive. Initial talk on the loan was that it would price at similar levels to the Credit Suisse B loan, or roughly 225bp over Libor. However, the sponsor has paid down the 90s construction debt on Pagbilao and Sual, and the portfolio credit, as well as JBIC's support, has produced a pricing level less than half that. According to sources familiar with the $1.1 billion commercial loan's syndication, which is presently underway, the loan is priced at 100bp over Libor, and subunderwriters are being offered 50bp fees.

The debt is secured at the level of a newly-formed operating company, TeaM Energy Corporation, which is capitalised through $750 million in shareholder equity and intercompany debt, and funded through the above facilities. Crimson Power has also raised a $230 million subordinated loan from Nomura to fund the purchase.

The JBIC political risk insurance should mitigate the continuing doubts that lenders have about the offtake agreements that power producers have with state power company NAPOCOR. While the Philippines' credit rating is not as strong as many of its peers, the country is experiencing power shortages, and has to date been reasonably scrupulous in observing is offtake obligations. A more time-consuming task for lenders was ensuring that the intercreditor and security arrangements on the assets were strong enough.

However, the deal serves as a limited template for clusters of IPP assets in emerging markets coming to market in coming months. EDF's portfolio in Mexico, for which it is soliciting bids, is set to be awarded shortly, and might be a good candidate. The political risk premium attached to Mexico, however, may not mean JBIC funding is as compelling an advantage.

Crimson Power
Status: Closed 22 June, in syndication
Size: $3.43 billion
Location: Luzon, Philippines
Description: 2,203MW (net) contracted power portfolio
Sponsors: Marubeni (50%), Tokyo Electric Power Corporation (50%)
Equity: $750 million
Subordinated debt: $230 million
Senior debt: $2.9 billion in direct and covered loans
Arrangers: ANZ, Calyon, ING, Mizuho, and SMBC
Sponsor legal adviser: Latham & Watkins
Bank and JBIC legal: Allen & Overy.
Sponsor technical adviser: Mott MacDonald
Lender technical adviser: RW Beck.