Enel has completed the Eu450 million ($440 million) refinancing of the Maritza East III power project in Bulgaria. The financing benefits from the improvement in economic conditions in Bulgaria, including the country's imminent accession to the EU, to achieve better terms than the original loan.

In outline the new deal is relatively simple – a single Eu450 million term loan that replaces a series of multilateral, domestic and covered tranches. And Bulgaria's progress towards meeting the EU's accession criteria has been almost inexorable. But upgrading the units has proved to be a substantial technical challenge.

The 840MW Martiza East III unit is one of a number of plants located around the Maritza Iztok mine, a cheap source of dirty coal. The East III unit was the first generation asset to be tendered to the private sector, as a rehabilitation project designed to extend the plant's life and bring its emissions into compliance with EU air quality rules.

The sale of the Maritza projects involved a standard 15-year power purchase agreement, and this needed to be structured in such a way that lenders can take comfort that the contract will survive what happens to the country's power sector and the offtaker, the Natsionalna Elektricheska Kompania, or NEK, the state-owned power company.

In June 2001, the Bulgarian privatization ministry came to terms with Entergy for Maritza East III. They settled on a price of below $0.03 per kWh (it subsequently rose to Eu0.0357 per kWh at financial close). Entergy achieved financial close on a Eu348 million facility in March 2003.

That wait probably allowed the sponsors to raise better terms on the initial financing package than a 2001 deal would have allowed. The project raised Eu75 million of 12-year debt from Bulgarian lenders, to complement Eu132.1 million in European Bank for Reconstruction and Development debt (of which the Black Sea Trade and Development Bank funded Eu20 million), and a Eu140.7 million facility from SG and Calyon, the lead arrangers, BankAustria Creditanstalt and Banca Mediocredito.

This last featured political risk insurance from the Multilateral Investment Guarantee Agency, a necessary step at the time, since the path towards EU accession was at the time less clear. At the time that III closed, AES' Maritza East I, which was also awarded in 2001, was likely to use direct loans from US and German ECAs.

But the I station eventually secured Eu825 million in debt, of which only the EBRD's Eu114 million was a direct loan. The remainder, however, benefited from cover of varying types from MIGA, Coface, Hermes and the EBRD. Moreover, the leads BNP Paribas, Calyon and ING took some time to syndicate down their commitments.

The two projects both suffered from the inability of their US sponsors to provide sufficient attention and resources during the development process. AES spent the first part of the decade walking very slowly back from a financial crisis caused by its overextension. Entergy had already started its retreat from global power markets in 2003, when it agreed to sell a majority stake of 60% in the 73% owner of the project to Enel (NEK owns the remaining 23% of the station).

The agreement allowed Enel to buy up the remainder of the stake in increments, and the Italian producer took control of the project earlier in 2006. Entergy's difficulties, meanwhile, multiplied, since Katrina devastated its US territory.

The EPC contract at financial close in 2003 was shared between DSD Dillinger and RWE. DSD Dillinger was at the time a subsidiary of MAN Ferrostaal, but has experienced difficulties in carrying out the contract, and the scope of the necessary work is understood to be much broader than the sponsors had assumed in 2003. Enel was forced to take on responsibility for the contract, which involves refurbishing each of the four units that make up the plant, and installing two flue-gas desulfurization units.

The delays in the installation meant that the plant was in danger of breaching its completion date of three years from financial close, and of not meeting the agreed 70% availability threshold during rehabilitation and 82% thereafter. Moreover, the project's power purchase agreement, under which it had to meet the availability levels specified to receive availability payments, and its lignite supply agreement with Mini Maritza Iztok run back to back.

While this delay could have been extremely costly to Enel, as it looked to renegotiate the completion date it had two key factors in its favour. The first was that NEK was unlikely to walk away from the project, since the mine supplying the project employed a politically influential constituency. The second was that the improvement in macroeconomic conditions allowed the sponsor to carry out a refinancing whose benefits would be passed on to the offtaker in the form of lower availability payments.

The added role for Enel as contractor and its 77% ownership allowed the sponsor to secure comprehensive commercial and political cover from Sace in the form of its unconditional first demand guarantee product. The deal is not the first instance in which Sace has provided such cover – it has done so for trade financings since at least 2004, and also covered $316 million of the SIPP petrochemicals deal in Saudi Arabia (at a margin of 15bp).

But according to the debt underwriter on the Martiza refinancing, SG, the speed of the process was unprecedented, the more so given how much of the due diligence was shifted to the shoulders of Sace. SG is not likely to syndicate the debt on in the immediate future, according to sources at the bank.

The arranger has been wary of specifying the exact tenor (believed to be 16 years) and pricing benefits of the refinancing, but the new package will allow for a sufficient reduction in tariff to persuade NEK to accept a final in service date of 2009, and a PPA running to 2023. The first unit is already in service, and the second is far advanced, and will come online in 2007.

The deal is a fair one, since progress elsewhere in privatising Bulgaria's generation sector has been slow and the country faces looming supply shortages in the future if nuclear capacity is phased out as the government envisages. Bulgaria's economic progress, and the willingness of NEK, which may soon undergo restructuring, to be flexible, bode well for its ability to attract further foreign investment. Indeed, Enel is believed to be interested in building further capacity in the country.

Maritza East III Refinancing
Status: Closed 2 October 2006
Location: Bulgaria
Description: Eu350 million refinancing for rehabilitation of 840MW lignite-fired project
Sponsors: Enel and NEK
Debt/equity split: 80:20
Lead arranger: Societe Generale
ECA: Sace
Legal adviser to sponsor: Skadden Arps
Legal adviser to lenders: Linklaters