Iberdrola Mexico: Portfolio power

Iberdrola ended another drowsy year in Latin America's power sector with a large portfolio refinancing of its independent power projects in Mexico. The $1.7 billion four-tranche loan is the largest for generating assets in Latin America to date, and brings structures and covenants to the Mexico market that have normally been the preserve of the US borrower. With it, Iberdrola has created a non-recourse vehicle for its operations in the country, one that can access funding at only a small premium to the corporate parent.

The financing satisfies a long-term goal of Iberdrola, establishes a corporate finance basis for the funding of the assets, and was completed in the teeth of uncertainty in the Mexican market related to the country's presidential elections. It includes both operational flexibility, in the form of sizeable working capital facilities, and the ability for the borrower to refinance some of the debt with a later bond issue.

The financing, for Iberdrola Mexico, or Ibermex for short, is the first portfolio deal for generating assets on the continent. There have been larger deals for utility assets in Brazil, and AES Gener's Chilean and Venezuelan assets were almost as large, but Ibermex resembles a US generating company, or GenCo, as much as anything else.

The debt refinances intercompany loans from Iberdrola in Spain to its almost 5,000MW of Mexican power projects, as well as some corporate-guaranteed debt from the Inter-American Development Bank. Iberdrola has recently begun to build its own projects, and thus is exposed to the cost of a project during construction. Given the expense involved in structuring a financing, as well as the depth of the developer's balance sheet, it was difficult to justify a non-recourse deal.

Post construction, however, the attraction of taking the debt off balance sheet is stronger, and rumours have abounded in the New York bank market that Iberdrola was looking at a bank or bond refinancing of the assets. Many of the sponsor's relationship banks had made a pitch for the business, and a scarcity of power assets in the market made pricing promising.

Iberdrola is by far the largest IPP operator in Mexico, and has a 36% share of the contracts that the Comision Federal de Electricidad, the country's power monopoly, has awarded. The CFE is central to the credit of the portfolio, since it buys most of the capacity (4,239MW out of 4,947MW) under agreements of up to 25 years. Pemex supplies many of the projects, although its costs are passed through to the offtaker.

This concentration on a single offtaker might be viewed as a minus for a US portfolio, but the arrangers have been able to present the deal as a structured blend of Iberdrola operating (and, in the case of Tamazunchale, construction) risk and CFE offtake risk. Both of these credits are well understood, and lenders have proved themselves willing to take on exposure to both in the past.

The debt breaks down into a $1.2 billion permanent tranche and a $500 million tranche which is set to be refinanced with a bond offering within a year. The permanent piece consists of an $853 million 10-year term loan and a $347 million five-year revolving credit, while the bridge debt breaks down into a $200 million, 10-year term loan and $300 million revolver. The joint lead arrangers and bookrunners for the permanent debt are BBVA, Citigroup and Calyon, joined by mandated lead arrangers Caixa Galicia, Banco Santander, ICO and ABN Amro. The bridge loan's providers are Citigroup and BBVA, which will be the bookrunners on the forthcoming bond refinancing of this bridge.

The bond element is probably the most promising element of the deal, since it demonstrates that the appetite of the capital markets in Mexico has a real effect on deal structures. Indeed, the sponsor looked at the potential for a bond issue in Mexican pesos, swapped back into dollars, for the entire portfolio. Time, and the flexibility afforded by bank debt, swung the choice back in the bank deal's favour, but the partial bond refinancing should provide a convincing demonstration of the liquidity in the Mexican market. There is an irony, with luck not lost on the CFE, that IPP assets, whose revenues have typically been denominated in dollars to interest offshore lenders, might be financed using a dollar swap in the Mexican market.

The debt is currently in syndication, with commitments due as Project Finance went to press. It is priced at a mere 60bp over Libor for the 10-year debt and 35bp for the revolver, not much over what Iberdrola borrows at. By the end of the term loans' life, only 50% of the term facility will have amortized, a balloon payment that was also relatively novel to non-recourse lenders in Mexico. Between the pricing and the covenant package, which sets out debt to Ebitda ratios as a corporate loan would, the deal demonstrates clearly that Mexican borrowers have arrived.

Iberdrola Mexico S.A. de C.V.
Status: Closed 27 December 2006
Size: $2.4 billion
Location: Mexico
Description: Refinancing of 5,000MW IPP fleet
Sponsor: Iberdrola
Debt: $1.7 billion
Bookrunners: Citigroup, BBVA, Calyon
Mandated lead arrangers:
Caixa Galicia, Banco Santander, ICO and ABN Amro
Sponsor legal counsel: Hogan & Hartson; Quintana & Arouesty Abogados
Lender legal counsel: White & Case, Ritch Mueller