The CBK project, first conceived in 1994 to pursue the development of the Caliraya-Botocan-Kalayaan power complex in Laguna, Philippines, continues to attract innovative financing. Just as the original project loan broke new ground with the scale of its political risk insurance, the latest twist in the project's colourful history sees the new sponsors become the first to benefit from an entirely new product from the Japan Bank for International Cooperation (JBIC).

Put simply, a joint venture between J-Power and Sumitomo has replaced Edison Mission Energy and Industrias Metalurgicas Pescarmona SA (IMPSA) as sponsors of the CBK 792MW pump storage hydro power facility.

However, the acquisition loan raised by the two Japanese corporates is no ordinary facility. The participation of JBIC in any kind of acquisition financing is itself unheard of – but the fact that an export credit agency is acting as a structurally subordinated lender makes the deal doubly unusual.

JBIC lead arranged the $100 million loan to CBK Netherlands Holdings BV, the borrowing vehicle set up with equal equity stakes from J-Power and Sumitomo. The Japanese export agency is lending $60 million, with the remaining portion shared between Mizuho (agent bank) and ING. The two commercial lenders also benefit from political risk insurance from JBIC, which in this case also covers the long-term offtake agreement between CBK and the Philippines' National Power Corporation (NPC). NPC is contracted to purchase electricity produced by the power complex for a period of 25 years, and any non-payment under the PPA contract has been explicitly covered by JBIC.

JBIC, Mizuho and ING rank pari passu in the facility, but all are structurally subordinated to the senior lenders on the existing project financing, which was signed in early 2001. BNP Paribas, Dai-Ichi Kangyo Bank, Industrial Bank of Japan, and SG Asia acted as co-ordinating lead arrangers on the $383 million financing, which stands out for its $351 million PRI-backed term loan – then the largest ever.

Going forward, revenues from the power project will first be used to repay the senior lenders in this facility, while the new lenders will be repaid using dividends paid out periodically by the project company and only just ahead of the sponsors. As such the acquisition facility effectively consists of mezzanine debt – the first time any export credit agency has taken on such a role. Bankers point out that there are certain covenants protecting the lenders from true mezzanine status and no inter-creditor agreement has been signed with the senior project lenders, as in a traditional mezzanine loan. Nonetheless, JBIC itself is marketing the product as mezzanine debt.

Pricing and tenor on the transaction have not been disclosed. One source quotes a spread of 250bp over Libor, and while a precise figure has not been released by the lenders, those familiar with the deal maintain that this is a realistic margin. The affordable rate reflects JBIC's status as a government agency rather than a profit-driven lender, and can be taken as further proof of the bank's commitment to support Japanese firms abroad.

This facility is not a one-off, but a genuine shift in strategy for the agency and further deals are already in the pipeline. Indeed J-Power has looked at the structure before, when the firm was contemplating the acquisition of a stake in the Titan II petrochemicals project in 2004. JBIC also denies that its participation as a subordinated lender is contingent on an exit refinancing, although this is surely a likely outcome. Around $300 million remains outstanding of the original project debt, with pricing set at a margin over Libor – now that the project is 100% Japanese-owned, a Japanese refinancing would generate significant savings with current interest rates near zero. Lenders familiar with the deal expect a refinancing to follow shortly.

Securing the participation of JBIC, however, was only one of the challenges that the CBK financing had to overcome. The acquisition depended on the almost simultaneous transfer of both stakes to the new sponsors, and the timing of this raised a number of complex issues.

It is no secret that the two original sponsors have suffered – IMPSA through Argentina's economic meltdown, and Edison Mission Energy (EME) with California's energy crisis – but the project itself has performed well, being completed ahead of schedule and at a higher capacity.

When EME announced in early 2004 that it intended to auction its stakes in all 10 of its international energy projects, IMPSA saw an opportunity. If it could sell its stake in CBK alongside that belonging to EME, then the new investor could be persuaded to pay a premium for 100% control of the project.

IMPSA knew that the terms of the joint venture with EME included a right-of-first-offer for its partner's stake in the project. The Argentinean group thus negotiated the sale of its stake to J-Power and Sumitomo on the basis that it would also sell on the EME portion, but did not announce this to EME until its own contract with J-Power was secure and Edison had agreed terms with IPM Eagle, a consortium of Mitsui and International Power.

IMPSA's exercise of its right to first refusal placed EME in a difficult situation, as the US group had by that time agreed to sell its stake in CBK to IPM Eagle as part of its global portfolio and had little choice but to accept the same price. EME had to renegotiate its portfolio deal and separate out CBK, eventually selling its stake to IMPSA on 10 January, 2005. IMPSA sold this portion on to J-Power and Sumitomo on the same day – without the need for a bridge financing.

IMPSA then found it needed to return to the projects' counterparties before it could sell its own participation. The group had committed to retain a stake in CBK for the full 25-year concession, and had to obtain waivers from NPC and the original project lenders before completing its own disposal. A further waiver was needed, however, when AIG – the principal political risk insurer in the CBK project financing – was downgraded from AAA at the end of March, leaving the project in technical default.

IMPSA completed the sale of its stake in CBK on 22 April.

CBK acquisition financing
Status: Closed 22 April
Size: $100 million
Location: Philippines
Description: Facility to support the acquisition of equity stakes in existing IPP project
Buyers: J-Power; Sumitomo
Vendors: Edison Mission Energy; IMPSA
Lead arranger and PRI provider: JBIC
Lenders: JBIC; Mizuho (agent); ING
Legal counsel to lenders: Milbank, Tweed, Hadley & McCloy
Legal counsel to buyers: Latham & Watkins
Legal counsel to vendors: Coudert Brothers; SyCip Salazar; Hernandez & Gatmaitan (IMPSA); Munger, Tolles & Olson (EME)